By Benadetta Chiwanda Mia:
Malawi’s banking sector has seen a significant decline in liquidity level, dropping by 54 percent to a daily average of K109.50 billion from K241.49 billion the previous week.
This is according to a Weekly Market Update by Nico Asset Managers. It was published on Monday.
Concurrently, interbank overnight borrowing volumes decreased to an average of K67.3 billion at 23.18 percent, down from K145.76 billion at 23.19 percent the prior week.
Meanwhile, the Lombard facility usage surged, with banks accessing K401 billion at an average rate of 26.2 percent, compared to K222.03 billion at 26.13 percent previously.
Lyness Nkungula
Bankers Association of Malawi Chief Executive Officer Lyness Nkungula said the significant drop in excess reserves meant that commercial banks had less liquidity available.
“This could lead to tighter borrowing and lending conditions, as banks may become more cautious in extending credit to other banks and borrowers to maintain their liquidity positions,” she said.
Financial Market Dealers Association of Malawi (Fimda) President Leslie Fatch attributed the reduced liquidity levels to the Reserve Bank of Malawi (RBM)’s tight monetary policy.
“We believe the reduced liquidity levels reflect the tight monetary policy implemented by the central bank,” Fatch said.
Economic expert Marvin Banda said RBM’s tightening through an increased Domestic Liquidity Reserve Ratio (LRR) aimed to reduce M2 money supply by discouraging excess reserves and demand deposits.
“When the liquidity levels drop, it is a sign that the monetary pass-through mechanism is, indeed, having an effect on the targeted monetary aggregates,” Banda said.
However, Banda said the effectiveness of raising LRR depended on complementary measures.
Banda also pointed out the complex dynamics at play, including banks’ appetite for government debt through development bonds and Treasury notes, further squeezing liquidity through open market operations.
Economics Association of Malawi President Bertha Chikadza described the decrease in liquidity levels and interbank borrowing volumes as not surprising, attributing it to the effects of RBM’s open market operations.
“If you follow through developments on the market, RBM has been conducting operations that reduced the amount of excess reserves in the banking system, especially open market operations—where RBM sells securities to absorb liquidity “Therefore, this means the withdrawals outweighed the injections during the concerned period. As such, this could interplay open market operations,” Chikadza said.
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