‘RBM needs to decolonise the model of defining of interest rate it lends to commercial banks on short-term loans’

* The history of Lombard rate originated from a region in Italy where most banks were headquartered

* And because of that, the Central Bank in Italy decided to call the rate to the commercial banks based in the Lombardy region

* We need to decolonise the models in Malawi which are based on the British system—Chifipa Mhango

By Duncan Mlanjira

Some policies of the colonial times have not been reviewed since independence, including the term, Lombard rate that the Reserve Bank of Malawi (RBM) uses to define interest rate it lends to commercial banks on short-term loans.

This has been observed by Chief Economist for South Africa-based Don Consultancy Group, Chifipa Mhango, saying the RBM uses the term Lombard rate — a model which colonialists brought in Malawi.

“If you ask anyone what the Lombard rate is, most may only share its meaning, which is the interest rate at which the RBM lends to Commercial Banks on short-term loans.

“However, why did the RBM use this term Lombard rate and not come up with their own definition? The history of Lombard rate originated from a region in Italy where most banks were headquartered and because of that, the Central Bank in Italy decided to call the rate which it lends to these commercial banks based in the Lombardy region, the Lombard rate.

“Now we must ask ourselves, do we have Lombardy region in Malawi? So what choices do we reflect when we define our own lending rates based another country’s region in Europe?

“Can’t we find a better name to define such? My answer would simply be we just follow theory irregardless — that is a true reflection of an imposed policy direction which is outdated and needs a review.”

Mhango, who is revered in South Africa further said before 1994, his host country had a dual exchange rate system — “one was commercial and then the retail banking one but all that was scrapped to one system of exchange rate in 1994”. 

“Let’s think around these rates, policy lending rare vs ‘Lombard rate’ — what necessitated this within Reserve Bank of Malawi to which the other one is 20 basis points above the main Policy rate currently at 26%?

“We need to decolonise the models in Malawi which are based on the British system.”

Mhango also advised the RBM that its Monetary Policy Committee (MPC) — headed by Governor Wilson T. Banda as chairperson — should be strictly RBM staff and not having representatives from private sector,  academics and others, “who are not involved in the daily operations of monetary policy, they cannot be part to the interest rates decision”.

“The RBM must create a quarterly Economic Policy Forum where key economist from outside must then be invited on topical issues with agenda set by RBM and then open the floor for engagement on other matters related to Monetary Policy and its impact on the economy.”

In its resolution in the report issued on February 1, the MPC resolved to raise the Policy rate by 200 basis points to 26% while resolving to maintain the ‘Lombard rate’ at 20 basis points above the Policy rate.

The Liquidity Reserve Requirement (LRR) ratio is at 7.75% for domestic currency deposits and 3.75% for foreign currency deposits.

The MPC also announced that they noted that “inflation pressures have intensified, and the inflation path is set to remain elevated above the 5.0% medium-term target”.

“The outturn reflects the materialisation of most risks identified during the October 2023 MPC meeting. The Committee observed that the high inflation environment is not conducive for growth and therefore resolved that a monetary policy response is required to contain inflationary pressures and restore price stability.”