THE ROLE OF BANK RELATIONSHIPS IN INTERBANK LIQUIDITY DISTRIBUTION AND PRICING IN MALAWI
Date
2026
Authors
Esmie Koriheya Kanyumbu (PhD)
Journal Title
Journal ISSN
Volume Title
Publisher
AERC
Abstract
Interbank markets are classified as unique markets because, unlike in other financial markets, trading in these markets depends heavily on the trust that market players have for one another. Consequently, interbank markets are associated with strong relationships between banks. Such relationships are expected to affect pricing of liquidity in these markets. Along these lines, this study aimed to investigate price determination in interbank market by precisely paying attention to the role played by bank relationships. The strength of relationships is proxied by the frequency of borrowing and lending by specific banks in this market. The study investigates how relationships affect the rate at which such loans are provided. The study uses the structure of the Malawi interbank market as a case study for interbank markets in low-income countries. It applies quarterly bank-level data spanning from 2010:1 to 2024:4. Results of the study show that building borrowing relationships (where a bank is a borrower) is associated with higher borrowing costs. Unlike frequent borrowers, who are punished by borrowing at higher rates, the study finds out that this market favours frequent lenders. Precisely, frequent lenders get higher rates when lending liquidity in this market. In addition, in line with outstanding literature on interbank markets, it is found that risky banks are charged higher rates when borrowing from the interbank market, confirming the market disciplining role of this market. However, risky banks also demand higher rates when lending liquidity in this market. It is therefore concluded that interbank market relationships affect pricing of banking system liquidity. This implies that such relationships could hinder the effectiveness of monetary policy by limiting the impact of central banks’ efforts aiming at managing the market-wide interbank rates. The results of this study, therefore, provide guidance to central banks, especially in low-income countries, in their interbank monitoring role, especially in line with the assessment of the transmission of monetary policy.