Malawi banks risk shrinking forex business

Malawi’s commercial banks are risking a reduction in foreign exchange business due to the prevailing global liquidity shortages, the Reserve Bank of Malawi (RBM) has said.

“Another risk facing the banking sector in Malawi emanates from unavailability of foreign exchange. The prevailing global liquidity constraints could likely curtail credit lines by correspondent banks thereby reducing letters of credit and foreign exchange business in general,” says the RBM in its financial stability report covering the period March to end October 2012.

The observation by the central bank is coming at a time foreign exchange availability continues to be a challenge to most importers as evidenced by the low levels of import cover.

It also comes at a time revenue from tobacco, Malawi’s major export crop, has been declining in recent years.

Income from foreign exchange transactions contributed 64 percent during the period under review which confirms that foreign exchange business significantly contributes to commercial banks business in Malawi.

According to RBM, low foreign exchange reserves for Malawi could deny commercial banks an important source of funding, thereby, affecting their profitability.

The RBM has also acknowledged in the report that unavailability of foreign exchange can be attributed to poor performance of tobacco sales at the auction floors.

“To counter this challenge, the Malawi Government has established the Export Development Fund (EDF) and the National Export Strategy which are geared towards raising foreign exchange for the country through the financing of non-traditional exports and prioritising of agricultural products such as soya beans and sugar,” reads the RBM report.

The RBM has observed that although the banking sector ratio was above the minimum regulatory benchmark, some banks failed to meet, on a consistent basis, the minimum liquidity ratio over the six months period to September 2012.

The liquidity ratio of the banking industry was at 40.7 percent, which according to the central bank, was above the regulatory requirement ratio of 30 percent.

It says in the wake of ‘unprecedented’ levels of liquidity shortages in the banking sector, the average discount window accommodation increased to K14.32 billion in September 2012 from K450 million in March 2012.

At the same time, the interbank market rates rose to 21.8 percent in September 2012 from 5.7 percent in March, the same year.

An analysis of earnings of the banking sector by RBM indicates that the sector still relies strongly on income from non-traditional banking business, with non-interest income constituting 46 percent of the total income, as at September 2012, and 48 percent as at March 2012.

“The banking sector remained exposed to significant risks over the review period. Notably, liquidity risk persisted as some banks failed to meet the minimum liquidity ratio,” says the RBM.

It says risks to the stability of the domestic financial system could also arise from a number of potential sources including spillovers from the global economy, including the stagnation of the euro area and world growth, a substantial fall in non-oil commodity prices and a reduction in aid flows from major donors such as the European Union (EU) whose countries are currently shrinking aid budgets.