The country’s financial market dealers have been asked to be creative and develop new products which could help deepen the money market rather than over-relying on Treasury Bills.
Reserve Bank of Malawi (RBM) Financial Market Department Senior Analysts Franklyn Khoza and Innocent Mwandila were speaking in Mangochi on Saturday during the 2012 Financial Market Dealers Association (Fimda) Annual Lake Conference.
Presenting a paper on ‘Money Markets and Alternative Instruments’, Khoza said there are many instruments that can be introduced to deepen the market.
He cited negotiable certificates of deposit, promissory notes and debentures as some of the instruments which can be introduced.
A negotiable certificate of deposit is a financial savings vehicle offered by a financial institution such as a bank that usually requires a high minimum deposit of at least US$100,000.
A promissory note, according to Wikipedia, is a negotiable instrument, wherein one party (the maker or issuer) makes an unconditional promise in writing to pay a determinate sum of money to the other (the payee), either at a fixed or determinable future time or on demand of the payee, under specific terms.
A debenture on the other hand is a document that either creates a debt or acknowledges it, and it is a debt without collateral. In corporate finance, the term is used for a medium- to long-term debt instrument used by large companies to borrow money.
“The more instruments you have trading on the market, the deeper the market is. We should provide alternative sources for financial market players to be able to effectively channel resources from those with surpluses to those with deficits so you need a wide range of instruments,” said Khoza.
He said by over-relying on Treasury Bills the market players are limiting their sources of collateral.
“The effect we have seen is that the depth of the market is lacking because of lack of instruments for the market to trade. You know the instruments are used as collateral for various transactions so if you are only relying on one instrument then you are limiting the sources of collateral and sources of funds for market dealers,” said Khoza.
Presenting a paper on ‘Derivatives’, Mwandila said they are a very powerful tool of hedging against financial risks.
A derivative, according to Wikipedia, is a financial instrument whose value is based on one or more underlying assets. In practice, it is a contract between two parties that specifies conditions (especially the dates, resulting values of the underlying variables, and notional amounts) under which payments are to be made between the parties.
“As you know, we are living in a situation of uncertainty with the liberalised foreign exchange market. Financial managers have the task of hedging against risks because of this uncertainty. Derivatives are one way of hedging against risks at the same time managers can also earn some income through this product,” said Mwandila.
He added that derivatives are very helpful in the deepening of a financial market because apart from being used to hedge against financial losses, they can also be used as a tool for price discoveries because they direct the regulator and all the market players on what they think the direction of prices is like.
For example, in the foreign exchange market, derivatives can give directions on what rate people think the foreign exchange could be traded.
“We have very few banks who applied for an approval from the regulator to start trading in these derivatives especially options and they were granted the approval to trade and they are trading although the volumes are very low.
“But to a larger extent most banks do trade in swaps. Swaps are exchanging of different currencies. A contract which binds two parties to exchange different inflows of currencies at a later date,” said Mwandila.