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Banks liquidity level squeeze

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Cosmas Chigwe

Liquidity challenges persist in the banking sector evidenced by a surge in interbank borrowing as commercial banks also desperately look up to the central bank-as lender of last resort-through the Lombard facility.

Figures from the Reserve Bank of Malawi (RBM), as quoted by management and advisory firm Nico Asset Managers in its Weekly Market Update for the week ending November 5, show that funds tapped through Lombard averaged K117.61 billion at an average rate of 12.20 percent.

This was an increase from the preceding week’s K88.82 billion at the same average rate while liquidity levels— excess reserves- shrank to a daily average of K7.04 billion from K14.86 billion recorded in the previous week.

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The volume on interbank overnight borrowing increased to a daily average of K11.94 billion from K9.30 billion the previous week at an average rate of 11.98 percent for both weeks.

Market analyst Cosmas Chigwe said the borrowing level, which was five times above normal, usually emanate from liquidity challenges facing commercial banks.

He said the situation clearly points to structural issues in the banking sector liquidity and relatively poor liquidity risk management both by the banks and, to an extent, the regulator.

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“Interest rates should likely start trending upwards and this can have an impact on people’s real incomes as loan repayments start to go up and higher interest rates might mean a lot of people being deterred from obtaining credit from the banking system,” he said.

Another market analyst Thokozani Saulosi concurred with Chigwe in a separate interview that the borrowing is as a result of tight liquidity levels which can be attributed to internal factors including bank size and quality of assets that individual banks were holding including non-performing loans.

He added that tight liquidity affects the private sector’s access to credit in the short to medium term and with the current inflation pressure, slow economic growth, increased appetite for debt by government, the private sector’s access to finance, which has huge impact on economic growth, has been choked further.

“The outlook is a bit sketchy as we have a troubled Kwacha coupled with a floating fuel pricing system and a pressurised inflation. This will lead to more non-performing loans and low liquidity levels in banks with an increasing pressure on interest rate in the short run,” Saulosi said.

In a bid to cushion the banking sector and stabilise the cost of borrowing, the Reserve Bank of Malawi maintained the policy rate at 12 percent at its Monetary Policy Committee this month.

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