Liquidity and agricultural lending in Malawi

Lombe, Felix Benson

Liquidity and agricultural lending in Malawi

Master Thesis

2019

Abstract

Malawi’s agricultural sector has remained the mainstay of Malawi’s economy since independence. Ironically, agricultural production and productivity are observantly below 50% of their respective potentials. This is partly explained by low lending levels towards the agricultural sector by financial institutions. However, just as elsewhere, commercial banks in Malawi are under international obligations of ensuring financial stability by undertaking liquidity management framework and measures. One such liquidity management intervention is the liquidity reserve requirements (LRR). This study departed on the theoretical understanding that quantitative tightening through LRR affects the liquidity position (and funding needs) of the banking system which consequently affect lending levels towards the economy (Alper et al., 2016) and by induction, the agricultural sector. It is on these premises that this study sought to examine the impact of liquidity on agricultural lending levels in Malawi. The study employed secondary data from 6 commercial banks that have been in operation in the opted data period of between 2007 and 2017. Besides estimating total liquidity creation, three sets of relations were tested: the impact of LRR on Total Liquidity Creation (TLC); the impact of liquidity levels on Agricultural Lending Levels (ALL); and, the determinants of Total Credit (TC) in Malawi. To test the relationship between liquidity and lending the Malawian Banking sector, the study adopted the panel regression framework while fixed effects and random effects models were using in the estimations. The control variables included bank capital, bank asset growth, bank deposit growth and loan to deposit ratio. From the empirical analysis, the study shows that banks created liquidity of about 1.2% of total industry assets over the study period. For the period under observation, LRR positively affected TLC. Similarly, the impact of liquidity levels on ALL was positive. In general, TC was positively determined by Bank Deposit Growth and Loan Deposit ratios while LRR, TLC and Bank Capital affected TC negatively. This could imply that an increase in TLC does not automatically result into an increase of TC. The findings further indicate that LRR had a negative effect on ALL. In periods where LRR went up, ALL went down, possibly implying that banks shift to other sectors considered less risky even amidst rising liquidity levels.

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