As the year 2019 is coming to an end, Our contributor Christopher JIMU caught up with the Reserve Bank of Malawi (RBM) Governor, Dr Dalitso Kabambe to explain how the bank has performed in the just ended year.
The year 2019 is coming to an end and soon we will be heading into 2020.
1.Briefly, can you explain how 2019 has been from the Reserve Bank of Malawi’s perspective?
2019 was a very good year to RBM and will go down in history as the second year only to 2009, since we became a multi-party democracy, that we went and came out of the polls with a stable economy.
The economy rebounded from 4.0 percent growth in 2018 to 5.0 percent in 2019, higher than the regional average of 3.4 percent and global growth of 3.0 percent.
The rebound was explained in part by the recovery of agriculture and a generally stable macroeconomic environment.
Inflation remained muted in single digit throughout the year except for November and is projected to average 9.2 percent for 2019. Notably, non-food inflation recorded its historically low level of 4.3 percent in October 2019, a feat last achieved in 1981.
The exchange rate remained broadly stable despite a modest movement in June and July.
The policy rate was revised twice downwards in January and May 2019 from 16.0 percent to 14.5 percent and 13.5 percent, respectively.
We also introduced the Reference Rate which is used by Commercial Banks as their base lending rate and at 12.5 percent for November 2019, base lending rates in Malawi are at their lowest levels since 1981.
With moral suasion, we also managed to bring down interest rate spread to 7.5 percent from a peak of 31 percent in 2016 and the current spread is better than many of the peers in the region.
Lending rates for Microfinance institutions were also brought down from a peak of 30 percent per month for some loan products to a maximum of 5-6 percent.
The banking system also remained well capitalized, liquid with Non-Performing Loans (NPLs) dropping down to a record low level of 4.3 percent which is within the 5 percent minimum regulatory requirement, something last achieved in 2012.
Based on the constitutional mandate of maintaining price and financial stability therefore, 2019 was indeed a very successful year for RBM in many respects.
2- If you can point out successes that RBM has achieved what can you say are they and if there were hurdles what are they?
As highlighted above, based on our mandate of price and financial stability, the key successes for RBM in 2019 were as follows: (i) we maintained inflation in single digit throughout the year except November and inflation will average 9.2 percent for 2019 with non-food inflation recording a remarkably historically low level of 4.3 percent in October 2019; (ii) we continued with a track record of stable exchange rate which we established in August 2016 and maintained throughout 2019 despite a blip of June and July; (iii) We eased monetary policy stance to 13.5 percent down from 16 percent at the beginning of the year and successfully introduced the Reference Rate as the base lending rate for Commercial Banks.
At 12.5 percent, not only is the base lending rate the lowest in decades, it has also assisted in pulling down interest rate spread from 31 percent in 2016 down to 7.5 percent which is much better than regional peers and this has led to private sector credit expanding by an average of 15 percent for the year to date up from an average of 4 percent during the comparable period in 2018.
Private sector credit has remained positive in 2019 while it was mostly negative in the previous year; (iv) Interest rates for Microfinance institutions have also come down to their lowest levels in decades to no more than 6 percent per month down from 30 percent for some products and this has led to growth in micro and small scale loans from MK32 billion at the beginning of the year to MK49 billion by November 2019; (v) Non-performing loans at 4.3 percent, have decreased to their minimum regulatory requirement levels of less than 5 percent; (vi) The banking sector has become more liquid and profitable. (vii) and together with Treasury, we managed to successfully see through the second and third reviews of the Extended Credit Facility Program with the IMF.
Ultimately, it is expected that these improvements will support further growth of the macro-economy in the medium to long term.
From a regulatory view point, in 2019, the RBM Act was enacted, giving complete autonomy and protection of the Central Bank in the discharge of its duties. This was another important milestone.
This law specifically stipulates that the primary objective of the RBM is price and financial stability and that where there may be conflict between the two, price stability shall take precedence.
The new RBM Act has also enhanced the sanctions regime for offences relating to banknotes and coins. For instance, those who willfully deface or damage banknotes would face a maximum fine of MK5 million upon conviction while counterfeiters would be liable to pay a maximum fine of MK15 million or face imprisonment for 7 years upon conviction. This should help contain the costs of printing new bank notes and will therefore save a lot of money and foreign exchange.
On the national payments front, major successes included: (a) two regulatory instruments issued governing management of the National Payment System, thus the E-Money Regulations and the Business Licensing (Deployment and Usage of Electronic Payment Channels) Regulations. The latter was jointly prepared with the Ministry of Trade, Industry and Tourism; (b) increased cooperation not only with banks but also mobile money operators as well as Government Ministries and Departments (in particular, the Ministries of Finance; and Trade, Industry, and Tourism); (c) Increase in the activity rate (90-days active users) on the mobile money platforms from 32% to 62%; and (d) Growth in digital financial services both in terms of volume (over 38%) and value (over 79%) over 2018 figures.
Our major challenge in 2019 has been food price developments particularly maize. Maize prices increased strongly during the year causing persistent high food inflation.
This is a challenge for monetary policy because it creates negative inflation expectations despite the fact that the source of inflation is from the supply side. As repeatedly explained in the past year, the modern monetary policy that the RBM adopted, requires that the expectations should be well anchored.
But food prices will collapse and converge towards non-food inflation, assuming there will be no any serious supply shock in 2020, hence, this challenge is considered temporary.
3- The year 2019 has been one which business captains have described as volatile following the disagreements from the political divide, do
you think this will negatively affect the performance of the economy in the long term?
No. Our macro economy is strong and has demonstrated remarkable resilience throughout 2019 based on numbers already shared above and our projections are that in 2020 and beyond, the economy may grow strongly by 6-7 percent or more.
4- As RBM Governor you have always exuded confidence that Malawi has a bright future, but with the current political bickering and anarchy in
some areas in the country don’t you think we are scaring away investors who could have helped in job creation?
In 1994, we voted for democracy and throughout, we have experienced different facets of our democracy and the experiences in 2019 in Malawi are no much different from peers in the region and beyond.
Obviously, investors will look at the way we are running our democracy as it evolves and in my view and in all fairness, we are much better than many of our peers.
Malawi has always been known for its peace and tranquility and we have always been ranked highly by many international and independent institutions of repute. Am sure experiences in some months of 2019 alone would not dislodge us from our respected position.
And the good thing is that this time around we have remarkably improved our macro economy and maintained a program with the IMF even in a year of general elections. This should be attractive to foreign investors.
5-When you were appointed Governor you set targets for your senior managers, have all the targets been met and if not which ones are still outstanding?
Yes, they are all being met. In line with the Constitutional mandate and all other relevant legislation governing the work of RBM, we set out on a six-point plan which was elaborated into twelve strategic objectives and fifty key performance targets for Directors in the Bank. In the six-point plan, the first was to quickly bring down inflation to single digit and maintain it there. This was one of the targets given to the Director of Economic Policy and Research and it was achieved in August 2017 when inflation sharply decelerated from 18.2 percent in January 2017 to 9.3 percent in August 2017 and since then, we have maintained it in single digit except for November 2019.
The second target was to ensure stability in the exchange rate and this was one of the targets given to the Director of Financial Markets. This too was achieved as for three years running since August 2016, the Malawi kwacha has been stable except for June and July 2019 when the kwacha slightly moved but was quickly restored.
The third was to ensure that the country has a robust and resilient financial system with Commercial Banks that are well capitalized with low Non Performing Loans and this was a target given to the Director of Bank Supervision. This too was achieved as all Commercial Banks are well capitalized with NPL’s that are within the minimum regulatory requirements of 5 percent.
The fourth was to ensure that, consistent with the slow-down of inflation, monetary policy stance should be eased to support growth and this was a target given to the Director of Economic Policy and Research. This too was achieved as the Policy Rate has been eased from 24 percent in January 2017 to 13.5 percent in May 2019 and a Reference Rate was also introduced to further bring down base lending rates for Commercial Banks to their record low level of 12.5 percent. This has sharply contracted interest rate spread from 31 percent in 2016 to 7.5 percent in 2019 and led to an increase in private sector credit expansion to 15 percent up from 4 percent in 2018.
The fifth was to eliminate issues of transfer pricing and illegal externalization of the country’s hard earned foreign exchange and this was a target given to the Director of Financial Flows Monitoring and this is an all-out war which we are doing on daily basis to eliminate the vice.
In this vein, we signed an MOU with the Malawi Police Service, the Immigration Department, the Anti-Corruption Bureau, the Malawi Revenue Authority, the Director of Public Prosecutions, and the Financial Intelligence Authority and we are sharing intelligence on daily basis and following through all leads and we have several cases as detailed in question 8 below which we are pursuing at different levels and we also established a completely new unit in the Bank staffed with investigators to deal with this vice.
We are also winning every single case we take to the Courts and funds are being forfeited to the Malawi Government.
Finally, the sixth target was to support supply side efforts of generating more foreign exchange for the country so that we continue with the stability in the exchange rate and this was a target given to the Director of Financial Flows Monitoring especially one on promoting inward foreign remittances and the Chief Executive Officer of Export Development Fund (EDF) on export revenue generation. Currently, inward remittances have sharply gone up from US$30 million in 2017 to US$250 million in 2019 and the EDF is implementing a number of initiatives which will help the country realize around US$80 million in 2019 up from US$17 million in 2018.
This is remarkable progress and more is expected especially if the key projects they are currently working on with Afreximbank on the Cape Maclear project and others start to bear fruits. All in all, therefore, the level of achievements of Directors based on their targets have been between 79 percent and 95 percent and as a result, all have maintained their positions.
6-When you had set up the targets you said that those who will not perform will be reprimanded has anybody faced disciplinary actions because of not meeting the targets?
As demonstrated above, all departments performed exceptionally well during the year, as such, no Director was sanctioned because all of them performed well above the 50 percent minimum threshold for the Bank’ sanctions.
7- What has been the RBM relationship with local banks and insurance companies as a regulator in the past year?
During the year 2019, there was strong collaboration between the Registrar of Financial Institutions and financial institutions (i.e insurance companies, banks, microfinance institutions).
In terms of insurance companies, the two (the Registrar and insurance companies) worked together to hold two insurance awareness weeks, co-funded by both the Registrar and insurance companies. The objective of the awareness weeks was to basically make the public more aware of the importance of insurance in our day to day lives, types of insurance available and some of the processes involved, including claims for compensation. These initiatives were also being done with the objective of increasing insurance penetration for the country. The Registrar also held quarterly meetings with CEOs of insurance companies, microfinance institutions and banks separately to discuss matters of interest and policy issues affecting the financial industry.
Apart from the quarterly meetings, the Registrar also held meetings with banks on adoption of reference rate by banks. In case of the insurers, the meetings were to discuss their expected role in championing development of infrastructure in Malawi given the resources that have accumulated through life insurance and pension funds, which are now in excess of one trillion kwacha.
The initiatives will result in commencement of construction of various infrastructure of public interest from the first half of 2020. The meeting with Microfinance institutions was on reduction of interest rates.
The Registrar also played a role in lobbying with the government on behalf of the insurance industry on some of the issues affecting the insurance industry. All commission based insurance businesses are now eligible to apply for a withholding tax exemption. The Registrar also engaged the insurance industry in consultations on the amendment bills for both the Insurance Act and the Pension Act.
Once promulgated, the insurance bill is expected to improve the protection of policyholders’ interests as well as protecting insurers from fraud. In terms of the compliance with regulations, the Registrar worked together with banks on the level of Non-Performing Loans and capitalization.
As a result, the level of NPL ratio improved to below 5 percent regulatory benchmark and all banks are complying with capital adequacy requirements. The Registrar also worked hand in hand with insurers that were facing challenges in meeting capital and solvency requirements to achieve 100 percent compliance.
All insurers are now meeting minimum capital requirements while a few are remaining to restore solvency to the desired levels. The financial strength of insurers is critical in raising public confidence, increasing capacity of insurers to underwrite large risks and also important in improving the resilience of Malawi’s financial system. All these are testimony to the fact that the Registrar’s relationship with financial institutions is cordial.
8- One of the problems that you are grappling with as RBM is on externalization of forex how big is this problem and what are you doing to contain it?
Illegal foreign exchange externalization is enormous and rampant in the country as it involves millions of dollars. In order to decisively fight this vice, in 2019, RBM established a fully-fledged foreign exchange Investigations Unit which was adequately capacitated with experienced investigators both from existing RBM staff and through new recruitments. This will assist in both speedy and thorough investigations of these matters.
In addition, RBM executed an MOU on information sharing, investigations and prosecution with several law enforcement Agencies and other public institutions as alluded to above. The collaboration under the MOU with other public institutions stated above is working well and has led to conclusion of several investigations mainly involving Malawians of Asian origin, Chinese nationals, and some Malawian nationals who were using some banks, such as Nedbank to illegally externalise the forex from Malawi. Cases which were successfully prosecuted include the following: Rep vs Moinuddian Mohamed Iqbar Sodagar.
The accused was found with US$622,820, 15,860 Euros and £2,015 and 15 pieces of bullion weighing 13.747 kgs in total valued at MK371,938.694.53 at Kamuzu International Airport without permission of Minister of Finance.
In February, 2019, the court convicted the accused and ordered forfeiture of the foreign currency and bullion to the Malawi Government; and owing to the magnitude of the offence also imposed a custodial sentence of 4 months. Republic vs Mwendanayo Muyaba, and 7 others. The accused persons obtained foreign exchange currency from different banks under the pretext of travel.
The accused persons used several travellers to achieve this. The Court sentenced the accused persons and ordered them to pay fines while Dennis Thindwa, Andrew Henjewere, Kondwani Kayombo, Mwendanayo Muyaba and Poly Andy Kayuni were also given a custodial sentences of not less than 14 months.
The figure involved was around US$7.0 million. Another 10 cases are currently in court involving illegal foreign exchange externalization and can therefore not be commented upon under the sub judice rule.
Through the MOU, the Bank has also successfully investigated and prosecuted cases on quoting in foreign currency for goods and services provided in Malawi contrary to the 2006 Exchange Control Regulations.
These cases include: Republic vs Broll Malawi Limited and Republic vs Shoprite Broll Malawi Limited was charged with the offence of quoting tenancy agreements in foreign currency contrary to the 2006 (Exchange Control us of Forex in Local Transactions) Regulations. Broll Malawi Limited was convicted and sentenced to pay a fine of MK3 million and was also ordered to pay MK1 million to the Bank. Shoprite was also charged with quoting of rental agreements in foreign currency.
The matter was heard on 18th November, 2019 in Blantyre. Shoprite pleaded guilty and was sentenced to pay a fine of MK2 million and was also ordered to pay Reserve Bank of Malawi K3 million.
The Bank has also concluded investigations involving several landlords who quoted tenancy agreements in Malawi in foreign currency and will soon prosecute them. It can be observed from this explanation that in 2019, the RBM has tirelessly worked in fighting against illegal foreign exchange externalization in the country.
9- What can you describe as your success so far since you became Governor?
The successes for the Bank are the ones highlighted in questions 1 and 2 above and are attributed to team work. No single person in the Bank can claim sole responsibility of the successes registered by the Bank.
We have inculcated a culture of collective responsibility in the Bank from the top to the bottom and we all equally share the success.
As a matter of fact, based on the 2019 performance targets, out of the 735 staff compliment of the Reserve Bank of Malawi in 2019, 85 percent scored 80 percent and above in their Performance Assessment Reports for 2019. This shows you how much hard working is taking place at the Bank and RBM may be the only institution in the country where staff are reprimanded for coming late or knocking off early as we seriously enforce our biometric clock-in and clock-out system.
10- Has RBM sealed all loopholes that led to the siphoning of millions if not billions of Malawi Kwacha from government coffers dubbed cash-gate, if yes what were the measures and if not which are challenges.
Yes, RBM sealed off all the loopholes from its side and that if something happen today that takes the form of cash-gate, it will be easily detected and dealt with immediately.
RBM also went further to introduce measures such as the high value alert system where any transaction from a certain threshold is reported to relevant authorities connected to Government payment system by SMS and email for easy tracking and vetting.
Furthermore, within RBM, compliance Officers have been placed in all payment points and have been empowered to review all transactions effected the previous business day so that early detection of any suspicious transaction is done by morning of the following business day. Segregation of duties have also been introduced where no single officer can originate and authorize a transaction and staffing has been properly placed in all areas where such controls are needed. Daily reconciliation of accounts has also been intensified as a control measure to ensure early identification, investigation and resolution of reconciling items.
CATALOGUE OF POST CASHGATE CONTROL MEASURES IN PLACE
Reserve Bank and Government placed measures to improve the control environment in processing of Government payments to avoid recurrence of Cashgate.
The measures are as follows:
Implementation of Positive Pay solution.
This solution was developed to automatically validate cheques against a vote account before clearing. Among other things, the validation includes: No overdrawing of accounts i.e. cheques drawn on accounts with insufficient funds are “Referred to Drawer”. Checking if the cheque is on the cheque list
Introduction of the cheque list in processing of Government cheque payments.
The cheque list is a listing of all cheques issued by Government. The list is generated by Accountant General and transmitted to RBM for distribution to all commercial banks to ensure that only the listed cheques are processed for payment. Once a bank processes a cheque, the system updates the status so that no other bank can honour that cheque again. In the event that a commercial bank honours a cheque that is not on the cheque list, the commercial bank bears the risk.
Decentralisation of accounts:
Further, Government and RBM have modified the Central Payment Systems (CPS) so that funding and expenditure is done at Vote level. Cheques are cleared through vote accounts – no longer spending from pool accounts. This ensures that ministries are not allowed to spend from other Ministries’ budget. This also ensures that controlling officers are responsible for reconciliation at Vote level.
E-Statements: RBM prepares and submits electronic account statements to the Accountant General for automated reconciliation in IFMIS.This means that Government timely identifies and investigates suspicious transactions. This is a major improvement as previously account statements were prepared and submitted in hard copies to Accountant General for reconciliation and distribution to Ministries, Departments and Agencies.
Cheque signing arrangements:
After cash gate cheques above MK2 million are supposed to bear three signatures while cheques below MK2 million bear two signatures.
Confirmation of cheques valued above MK100, 000,000.
Cheques above MK100,000,000 are confirmed with senior officers at Accountant General’s Department from the rank of Assistant Accountant General to Accountant General. At Reserve Bank officers at Supervisory and Managerial levels do clearing of these high value cheques.
Issuance of Government open cheques:
The Bank and the Office of the Accountant General established a threshold of MK500,000 for encashment of open Government cheques. Cheques above MK500,000 are closed and deposited to beneficiary accounts at commercial banks.
Clearing of Government cheques:
All Government cheques are first cleared by the Reserve Bank before value is given by commercial banks to beneficiaries. Unlike in the past where a Government cheque was considered as cash. A bank that provides value to a customer before the cheque is cleared by Reserve Bank is held liable for any loss of funds.
Security Enhanced cheques:
RBM introduced new Government cheques with enhanced security features effective 1 April 2015.
Capacity Building of Staff:
RBM conducts training on Fraud and Forgeries detection and prevention for all staff involved in processing Government payments. This is a regular exercise.
Enhanced coordination in reconciliation of Government Accounts between RBM and Accountant General’s office.
Introduction of High value alerts to alert senior Government officers and the Reserve Bank of any payment above a set threshold. These alerts come before a payment is made.
Quarterly Internal audits and annual external audits.
The Internal Audit Department in the Reserve Bank assesses effectiveness of controls on Government accounts and raise findings and provide recommendations to Board Audit Committee.
In addition, external auditors conduct yearly audits to assess the same and their report is submitted to the Board Audit Committee. Both Internal and External auditors conduct regular follow-ups on implementation of their audit recommendations.
IMF safeguard assessment.
In a bid to ensure that controls are adhered to IMF conducts yearly assessment of the control environment surrounding processing of Government transactions.
Authorization of transactions
RBM officers are required to ensure that all transactions from Government are properly authorized and have necessary supporting documentation before processing.
RBM officers check that only duly authorised officers in Government are complying with authorisation thresholds. Similarly, in the Reserve Bank authorisation thresholds are observed when processing Government transactions.
Closure of Dormant Accounts
All inactive accounts are reviewed and dormant accounts closed after approval from Accountant General. The process is ongoing.
Government EFT project
The Government in conjunction with the Reserve Bank is implementing new IFMIS system and upgraded core banking system of the Reserve Bank that will facilitate electronic funds transfers.The new IFMIS will have enhanced controls that will prevent fraud
As the year 2019 is coming to an end, Our contributor Christopher JIMU caught up with the Reserve Bank of Malawi (RBM) Governor, Dr Dalitso Kabambe to explain how the bank has performed in the just ended year.