Banks minimum capital set at $5 million

Post was last updated: January 31, 2019

By Taonga Sabola:

A latest directive on capital adequacy for banks has set $5 million as the minimum amount players in the banking industry are supposed to maintain at all times.

The Financial Services (Capital Adequacy for Banks) Directive 2018, published on the Reserve Bank of Malawi website, says a bank shall maintain a minimum core capital of Malawi kwacha equivalent of $5 million or such a higher amount as determined by the Registrar of Financial Institutions.

The directive, signed by RBM Governor Dalitso Kabambe, has set a minimum core capital of a Malawi kwacha equivalent of $1.5 million for a leasing company or a discount house.

RBM says the directive is designed to ensure that banks have an adequate cushion of capital to absorb losses.

The directive also seeks to protect the interest of depositors, creditors and the general public in addition to ensuring that banks maintain internationally recognised prudent capital requirements.

The directive also aims at promoting self-discipline in management of banks.

According to the directive, the Registrar of Financial Institutions may raise capital requirements for a specific bank where the supervisory review process reveals existing risks in bank warranting the increase.

It adds that the Registrar shall prescribe higher capital requirements for domestic systematically important banks.

“The criteria for determining systematically important banks shall be prescribed by the Registrar through a directive,” the law reads.

The directive also restricts a bank from investing in or holding publicly traded shares of another bank.

It also stipulates that the amount of shares held by the public in a bank shall not exceed 10 percent of the bank’s paid up capital at all times.

The directive also restricts a bank from owning or holding shares in any non-profit institution whose aggregate value exceeds 10 percent of the bank’s core capital.

According to the directive, where the capital ratios of a bank fall below prescribed levels, shareholders shall inject additional capital in the amount prescribed by the Registrar within the prescribed timeframe.

It further notes a bank that fails to comply with the comply with the capital requirements shall be subjected to directions, administrative penalties and enforcement action as provided for under the Prompt Corrective Action Directive, the Banking Act and the Act.

The directive also empowers the Registrar of Financial Institutions to impose the monetary penalties to the banks as well as directors and senior management of the institution of up to K10 million.

Bankers Association of Malawi (Bam) President, Paul Guta, referred the matter to Bam Executive Director, Violet Santhe, when contacted to comment on the impact of the directive on industry players.

Santhe was not immediately available for comment Wednesday.

Malawi in 2014 embraced Basel II, a second of the Basel Accords, which aims at ensuring that the more significant the risk a bank is exposed to, the greater the amount of capital the bank needs to hold to safeguard its solvency and overall economic stability.

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