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Malawi-

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                               Reserve Bank of Malawi



Reserve Bank of Malawi
PO Box 30063
Capital City Lilongwe 3,
Malawi
Fax: +265 1 772752/1 or +265 1 772289
Tel: +265 1 770600

1.     History

       The Reserve Bank of Malawi was established by an Act of Parliament passed on 23
       July 1964. It commenced operations in Blantyre in June 1965. The Bank's
       headquarters moved to Lilongwe in 1981, and the Blantyre office became the first
       branch.


2.     Relationship with government

       The Reserve Bank of Malawi Act of 1989 provides for full independence of the Bank in
       the areas of monetary policy and the issuance of Malawi currency.

       The Governor and the Deputy Governor are each appointed by the President of the
       Republic of Malawi for a term of five years and are eligible for reappointment upon the
       expiry of their term. The Board consists of the Governor, Deputy Governor, and five
       other Directors, two of whom must come from the business community. Every Director
       is appointed by the President of the Republic of Malawi for a period of two years and is
       eligible for reappointment. The Bank has its own budget approved annually by the
       Board.

       The Central Bank and Treasury consult on a regular basis about the formulation and
       implementation of fiscal policy. At his discretion, the Governor may inform the Ministry
       of Finance about developments in monetary policy.

       The Bank conducts the following activities on behalf of the Government:
       -    the issue and management of government securities;
       -    the facilitation and development of money and capital markets;
       -    the guaranteeing of the repayment of the principal and the repayment of interest
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           and charges of any external borrowing by the Government;
      -    acting as agent of the Government as may be agreed by the Minister of Finance
           and the Bank;
      -    managing and implementation of exchange control;
      -    making payments to, and receiving moneys from, the International Monetary
           Fund on behalf of the Government; and
      -    the supervision of banks and other financial institutions.

      The Bank may make short-term advances to the Government in respect of temporary
      shortfalls in budget revenues, provided that the total amount of advances shall not
      exceed twenty per cent of the annual budgeted domestic revenues. All advances are
      payable within four months of the end of the government's financial year in which the
      advances were made, and if after the end of the financial year such advances remain
      outstanding, the power of the Bank to grant further such advances shall not be
      exercisable until the outstanding advances have been repaid. If at any time the Bank
      has any Government loans and advances outstanding, irrespective of maturity, the
      Bank may require the Government to issue to it Treasury bills or promissory notes and
      other instruments as the Bank may deem fit for open market policy purposes. All
      advances are at the ruling Bank rate.


      The capital of the Bank can be increased by such amounts as the Board may resolve
      with the consent of the Minister of Finance. From time to time, the Bank has provided
      export development finance. The Bank recently supported the development of a small
      and medium enterprise fund.

3.    Structure

      The head office of the Bank is in Lilongwe, and the Bank has one branch in Blantyre.
      The head office is charged with all the functions of a central bank. The main function of
      the branch in Blantyre is currency issue and recently supervision of financial
      institutions.

4.    Design and Conduct of Monetary policy

4.1   Main objectives of Monetary Policy

      The main objectives of monetary policy are to promote economic growth, employment,

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      stability in prices and to maintain a sustainable balance of payments position. The
      Reserve Bank of Malawi seeks to influence the growth of the M2 money aggregate and
      market interest rates to attain these objectives.

4.2   Instruments of Monetary Policy

      The main instruments used by the Reserve Bank of Malawi are liquidity reserve
      requirements (LRR), open market operations (OMO) and the bank rate.

4.3   Types of refinancing as well as collateral used

      The commonly used type of refinancing is the repurchase agreement collateralised by
      short-term government and central bank securities. However, liquidity reserve
      requirements may be drawn upon for domestic cheque clearing, provided that the
      weekly average reserve requirement is within the required ratio. Violation of the
      average weekly reserve requirements attracts a penalty charge.


4.4   The money supply aggregate that plays the main role in monetary policy

      The main money supply aggregate which plays a role in Malawi's monetary policy is
      the M2 aggregate. The components of M2 are the following:
      -    Currency outside banks
      -    Demand deposits
      -    Time and savings deposits
      -    Foreign currency denominated deposits


4.5   Reserve requirements on financial institutions

      Reserve requirements are applicable to any depository institution licensed under the
      Banking Act, 1989, and which accepts demand, savings or time deposits or any
      substantial equivalent thereof. For the time being, these institutions are banks and
      discount houses. The eligible liquid assets consist of:
      - Balances on deposit with the Reserve Bank of Malawi.
      Reserves are required to be in domestic currency as the underlying deposit liabilities.
      Required reserves are currently non-interest bearing.




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5.    Structure of the financial markets

5.1   Organisation of the money and capital markets

      The domestic money market includes all commercial banks, finance houses, savings
      and credit institutions, institutional investors and discount houses.
      The capital market in Malawi is in a nascent stage of development with five
      stockbrokers operating on the Malawi Stock Exchange (MSE). There are fifteen listed
      companies.

5.2   Instruments used in both these markets

      The major money market instruments are:
      -    Treasury bills;
      -    Promissory notes;
      -    Reserve Bank, monetary policy bills;
      -    Local Registered Stocks; and
      -    Bankers Acceptances.

      Instruments used in the capital market are shares and Government of Malawi Local
      Registered Stocks (LRS).

5.3   Legal frameworks existing for the money and capital markets

      The money and capital markets players in Malawi operate within the
      following legal framework:
      -      The Banking Act, 1989
      -      The Capital Market Development Act, 1990
      -      The Trustees Incorporation Act, 1962
      -      The Insurance Act, 1957
      -     The Cooperative Societies Act



5.4   Type of financial intermediaries operating in these markets
      -     Central bank :           Reserve Bank of Malawi
      -     Commercial banks :       National Bank of Malawi
                                     Standard Bank
                                     First Merchant Bank

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                               Ecobank
                               INDEBank
                               NEDBANK
                               NBS Bank Ltd
                               Malawi Savings Bank Ltd
                               Opportunity International Bank of Malawi
                               FDH Bank
                               International Commercial Bank
-   Finance houses and Merchant Banks: Leasing and Finance Company
-   Savings and Credit institutions: Malawi Union of Savings and Credit Cooperatives
                                     (MUSCCO), Savings and Credit Cooperatives
                                     (SACCOs)
-   Development finance institutions: INDEfund
-   Insurance institutions
    General Insurers:
    NICO General Insurance Co Ltd
    Charter Insurance Company Ltd
    Citizen Insurance Co Ltd
    General Alliance Insurance Co Ltd
    Prime Insurance Co Ltd
    Reunion Insurance Co Ltd
    Real Insurance Co Mw Ltd
    United General Insurance Co

    Re-Insurers:
    Malawi Re Reinsurance Co Ltd

    Life-Insurers:
    Vanguard Life Assurance Co Ltd
    Old Mutual Life Assurance Co Mw Ltd
    NICO Life Assurance Co Ltd

-   Stock Exchange
    Malawi Stock Exchange

-   Stock brokers

    African Alliance Securities Ltd
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           CDH Stockbrokers Ltd
           FDH Stockbrokers Ltd
           Stockbrokers Malawi Ltd
           Trust Securities Limited

      -    Discount houses

           Continental Discount House Ltd
           First Discount House Ltd

      -    Pension Funds

6.    External payment arrangements

6.1   Determination of the exchange rate policy

      The Reserve Bank of Malawi has the responsibility to determine the country's
      exchange rate policy.

6.2   The present exchange rate system

      The Malawi kwacha was floated on 7 February 1994. The official exchange rate is
      based on the mid rate of the average buying and selling rates as reported by the
      banks.

6.3   Organising the exchange market

      The foreign exchange market in Malawi is organised as follows:
      -    The Interbank Market: Reserve Bank of Malawi, commercial banks and finance
           houses (ADBs).
      -    Forex bureau market specialises in spot cash transactions
      -    Residents may maintain foreign currency denominated accounts (FCDAs) with
           local banks
      -    Non-residents may maintain FCDAs or non-resident local currency deposit
           accounts
      -    Forex interbank marketing system based on the Reuters System




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6.4   The central bank's involvement in managing foreign exchange reserves

      The Reserve Bank is mandated under the Reserve Bank of Malawi Act to manage the
      country's foreign exchange reserves.

7.    Currency convertibility and exchange control



7.1   Current state of currency convertibility

      Currency is convertible with respect to current account transactions. Given that capital
      account controls still exist, the currency is not convertible internationally.

7.2   Exchange control restrictions on current account

      No exchange controls exist on the current account.

7.3   Restrictions on capital account

      Both inward and outward direct and portfolio investments require prior approval.

7.4   Retention rules for foreign exchange earned or owned by residents

      Sixty per cent of export proceeds must be sold to an authorised dealer bank upon
      receipt. The exporter may hold the balance in a foreign currency denominated account
      for as long as required.

8.    The central bank and external debt

8.1   The role of the central bank in managing the country's external debt

      The Central Bank of Malawi is responsible for the following issues relating to the
      country's external debt:
      -     maintaining a comprehensive database on all public sector external debt;
      -     processing various external debt aggregates and updating the records on
            Malawi's external debt position;
      -     processing the debt servicing instructions from the Ministry of Finance;
      -     currently creating a database on private sector external debt;
      -     assisting the Treasury with debt management and negotiations on new
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             multilateral and bilateral loans; and
        -    managing the local debt of the Government and issues and trades in
             Government paper under directives from the Treasury.

8.2     The role of Treasury in this respect

        Acting on behalf of the Malawi Government, the Treasury is responsible for borrowing,
        debt management and servicing.
9.      Supervision of financial institutions

9.1     Banking institutions

9.1.1   Authority responsible for banking supervision
        The Reserve Bank of Malawi.

9.1.2   Licensing procedures for establishing a new bank

        -   The initial step is for the prospective investor to contact the Reserve Bank and
            provide a synopsis of the nature of business to be conducted.


        -   When the Reserve Bank has determined that the proposal has potential and is
            compatible with the interest of the national economy and public interest, the
            prospective applicant is provided with a set of application forms. If the Reserve
            Bank determines at the outset that the proposal is incompatible, the prospective
            applicant is advised accordingly.

        -   Applications for a licence to conduct banking business are made to the Minister of
            Finance through the Reserve Bank, which conducts the necessary evaluation and
            assessment of the application before making recommendations to the Minister.
            An application processing fee of US$1,250 or the Kwacha equivalent is payable
            when submitting the application documentation.


        -   Before granting a licence the following factors are considered:
            i)      the validity and accuracy of the documents and information submitted;
            ii)     the financial condition and history of the applicant;
            iii)    the reputation of the executive officers as well as their competence and
                    expertise in conducting the proposed business;
            iv)     the capacity of the applicant to maintain an adequate capital base at all
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                      times;
             v)       the nature, scope and legality of these proposed business operations with
                      regard to soundness, solvency and liquidity;
             vi)     the ability of the proposed business to meet the needs and convenience
                     of the communities and sectors within which it will operate;
             vii)    the impact of the proposed bank’s business operations on prospective
                     depositors, creditors, the national economy and the general public;
            viii)    the ability of the proposed bank to hire at least two persons as executive
                     officers;
            ix)      the capacity of the proposed bank to commence its business operations
                     within 12 months from the day an operating licence is granted;
             x)      the adequacy of the capital base and earning prospects resulting from the
                     intended business;
             xi)      the structure of its organisation; and
             xii)     the capacity of the applicant to comply with all conditions
                      of the licence, provisions of the Act and any other Act relevant to its
                      business.

9.1.3   Types of licences that exist

        Licences issued so far reflect whether the institutions conduct retail, wholesale banking
        or specialised banking business.

9.1.4   Minimum capital requirements for the different types of banks

        The minimum capital requirement for retail commercial banking has been set at US$
        1.5 million or the Malawi Kwacha equivalent thereof on the basis of the ruling exchange
        rates. Half the amount applies to other financial institutions.

9.1.5   Regulations governing current activities of banks

        -    Large credit exposure: There is currently a limit of 25 per cent of core capital on
             lending to one single borrower or group of related borrowers. This is referred to as
             the Prudential Lending Limit. Waivers on compliance may however be granted on
             exceptional facilities of national interest.
        -    Capital adequacy: A risk-weighted capital requirement of 8 per cent for
             commercial banks and 6 per cent for other financial institutions is applied (Basle
             Recommendation).

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        -    Liquidity ratio: Banks are required to institute a liquidity policy statement which
             serves as the basis for monitoring funds and liquidity management. However, an
             indicative ratio of 30 per cent of liquid assets to total deposits is observed.
        -    Open foreign exchange position: An overall foreign exchange exposure limit of 35
             per cent of qualifying capital is in force.

        -    Provision for bad debts: There is an Asset Classification Directive which stipulates
             suspension of interest and provision for bad debts in liaison with requirements of
             IAS39.
        -    Restricted lending: Over and above the 25 per cent limit on lending to an
             individual borrower, there are some guidelines on lending to shareholders,
             executive officers, staff and their relatives. This is guided by the Directive on
             Transactions with related persons.
        -    Deposit insurance: Mechanism on how the scheme should operate is being
             worked out at the moment.

9.1.6   Main supervisory practices

        Supervision is conducted through both off-site analysis and on-site examinations.
        Routine on-site visits are made at least once a year to each institution. However,
        special visits may be arranged whenever necessary. In order to facilitate off-site
        analysis, financial institutions submit balance sheets as well as profit and loss accounts
        on a monthly basis. Other prudential returns (computation of capital adequacy,
        suspension of interest and provisioning) are also submitted on a quarterly basis.
        External auditors are required to submit a full management audit report after every
        financial year audit.

        As required by the Directive on Audit Committees, Annual Independent Audit and
        Publication of Financial Statements for Licensed Institutions, financial institutions, are
        also obliged to publish within six months after the close of their financial year, their
        audited annual accounts in at least one of the widely circulated daily newspapers.

9.1.7   Measures to remedy deficiencies as well as penalties utilised

        The Banking Act empowers the Reserve Bank to (i) impose administrative and
        monetary penalties, (ii) remove from office any executive officer (iii) appoint a care-
        taking officer (iv) add new conditions to a licence and (v) revoke a licence.


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9.2     Non-banking institutions

9.2.1   Responsibility for supervision of non-banking financial institutions

        The Reserve Bank is responsible for all deposit-taking financial institutions, irrespective
        of the law under which they are licensed. Under delegated powers from the Ministry of
        Finance, the Reserve Bank is charged with the responsibility for supervising insurance
        businesses.

9.2.2   Categories of non-bank financial institutions and their licensing procedures

        There are seven broad groups of non-banking financial institutions, namely:
        -    Insurance and assurance companies
        -    Pension funds
        -    Leasing and hire purchase companies
        -    Building societies
        -    Microfinance institutions
        -    Savings and credit co-operatives
        -    Development finance institutions

        Licensing procedures are laid down in respective laws. The Central Bank is only
        responsible for the licensing of leasing and hire purchase companies. In the latter
        case, procedures described under 9.1.2 are generally applicable.

9.2.3   Information as requested under 9.1 which applies to non-banking institutions
        Category                     Law                         Licensing Authority
        Insurance and assurance      Insurance Act               Reserve      Bank     of
        Malawi
        Pension funds            Trustees Incorporation Act     Ministry of Finance
                                 Taxation Act                    Malawi        Revenue
                                                                 Authority
        Building societies       Building Societies Act          Ministry of Finance


        Development finance institutions Companies Act Registrar General
        Microfinance institutions (for profit) Companies Act        Registrar General
        Microfinance institutions (non-profit) Trustees Incorporation Act Ministry of Finance
        Savings and credit industry Cooperative Societies Act Ministry of Trade

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9.3     Capital Market

        Under the Reserve Bank of Malawi Act (1989) and the Capital Market Development Act
        (1990), the Bank is charged with duty of promoting the establishment and maintenance
        of adequate money and capital markets by establishing and monitoring the regulatory
        frameworks of such markets for the maintenance of orderly market conditions.
        Specifically, the Capital Market Development Act provides for the development of a
        capital market; expansion of access by companies in Malawi to term financing for
        development purposes; utilisation of savings and excess liquidity in domestic
        development; adequate regulation of the capital market and self regulatory
        organisations and to foster development of fair and orderly market.


9.3.1   Categories of Capital Market Professionals

        The Malawi Stock Exchange (MSE) is a registered self regulatory organisation (SRO)
        which is itself supervised by the Reserve Bank.
        Other market professionals include the following players:
        -     brokers/dealers;
        -     portfolio/fund managers;
        -     investment advisers;
        -    Investment institutions namely unit trusts, mutual funds and/or collective
             investment schemes.

        Licensing requirements are laid down in respective regulations and guidelines.

10.     National payment, clearing and settlement system

10.1    How is the payment, clearing and settlement system organised?

        On 19th March 2002, the Reserve Bank of Malawi introduced the real time gross
        settlement system (RTGS) which is known as MITASS (short for Malawi Interbank
        Transfers and Settlement System). The MITASS software was installed by Perago, a
        South African based company. MITASS links all commercial banks and two discount
        houses to the Reserve Bank of Malawi through a secure proprietary network which is
        owned by the Malawi Switch Centre (MALSWITCH). The system settles both individual
        and concurrently batched funds settlement instructions (FSIs). MITASS is owned by


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       the Reserve Bank of Malawi but the technical administration was outsourced to
       MALSWITCH under a service level agreement (SLA).
       In addition, MITASS facilitates settlement of transactions from the following systems:
       the smart card, Electronic Bidding (used by the Treasury Department of the Reserve
       Bank of Malawi) Government Credit Ceiling Authority system (CCA) and the Electronic
       Cheque Clearing House (ECCH).
       The ECCH which is based on cheque imaging and truncation was commissioned on 1
       August 2005. The introduction of the ECCH reduced the clearing period from seven
       days to less than three days. Bankers Association of Malawi owns the ECCH but
       technical administration was outsourced to MALSWITCH under SLA.

10.2   What is the role of the central bank in the system?

       The Reserve Bank of Malawi is entrusted with the responsibility of promoting,
       maintaining and regulating the efficient operation of the payment, clearing and
       settlement system. In this regard, the Reserve Bank of Malawi plays a leading role in
       major payment systems reform initiatives.

       While acting as a settlement provider through the MITASS and a participant in the
       ECCH, the Reserve Bank of Malawi conducts oversight activities of these systems and
       other payment systems related products and services to ensure that their operations
       conform to internationally acceptable best practices.

10.3   Give a short description of the processing of payment instructions

       In the MITASS, participants use source documents to raise an FSI that is transmitted to
       the beneficiary bank after observing all the necessary validation procedures within the
       system. Once effected, settlement is final and irrevocable. The FSI is accompanied by
       payment information which banks use to credit accounts of the appropriate beneficiary
       customers. The MITASS opens at 08:00 hours and squares off at 17:00 hours.
       The introduction of the ECCH significantly changed the clearing procedures. At
       designated bank branches, cheques are scanned through the transport scanners to
       capture the MICR code line and images back and front. Amounts are however
       manually entered. After conducting all validation checks, electronic files comprising
       cheque images and code line data are created and transmitted through banks’ head
       offices to the ECCH throughout the day. The cut-off time for receiving all electronic
       journal files and images data files at the ECCH is 15:00 hours. After the cut-off time,
       the ECCH exchanges electronic images and data and creates a settlement file
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       (concurrent batch) based on gross bilateral obligations. At 15:30 hours, the ECCH
       transmits the concurrent batch to the MITASS for settlement. The MITASS settles the
       batch at 16:10 hours. Since settlement takes place at 16:10 hours and that the MITASS
       squares off at 17:00 hours on the same day, this implies that settlement of payment
       obligations presented to the ECCH before the cut-off time occurs on the day of value.
       Transactions from the Smart Card Clearing House are however scheduled for
       settlement at 09:00 hours of the following business day.

10.4   How are non-funded positions settled in the system?

       Non-funded positions do not arise since settlement in the MITASS is on a pre-funded
       basis. The system discards any instruction that is not sufficiently covered by funds in
       the settlement account. If a participant has insufficient funds in its settlement account, it
       can resort to collateralized intra-day borrowing from the central bank.

11.    Currency in use

11.1   List of legal tender notes and coins currently issued and in use in the economy

       Currency: -Kwacha (notes) and Tambala (coin) Notes: -K500, K200,
       K100, K50, K20 Coins: -K10, K5, K1, 50t, 20t, 10t, 5t, 2t, 1t (100t =
       K1)

12.    Other activities of the central bank not covered above

       None.

13.    The position of the central bank in SADC

13.1   Special relationships with other central banks in SADC (CMA excluded)

       -     Currency repatriation arrangements with the South African Reserve Bank;
       -     Training for central bankers with the South African Reserve Bank.
       -     Membership of:
             MEFMI
             AACB
             COMESA
             SADC

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14.    Publications

14.1   Regularly published publications

       Quarterly Financial and Economic Review
       Annual Report and Statement of Accounts
       Monthly Economic Review
       Mid-year Economic Report
       Bank Supervision Annual Report
       The Central Banker

14.2   Occasional/special publications published since 1990

       -   Official inauguration of the new Blantyre Branch, 26 November 1998
       -   Several occasional papers written by staff in the Research Department




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