RESERVE BANK OF MALAWI ISSUES A MK5 BILLION 3 YEAR FIXED COUPON BOND

The Reserve bank of Malawi yesterday, the 26th of June 2008, issued a MK5 billion 3 year fixed coupon bond as a monetary policy instrument. Recently Malawi has been experiencing increasing inflationary pressures mainly as a result of both rising oil prices on the international scene as well as the build up of Money supply in the economy. In order to sterilize the increasing levels of inflation, the central bank decided to issue a 3 year bond.

The auction for the bond was conducted on a multiple price bid basis, where each successful bidder paid the price quoted for the price tendered. Winners were then listed from the highest bidder to the lowest until the entire face value was exhausted. The minimum bid amount for the auction was K100, 000.00.

One interesting thing about the bond is that it has been developed with the aim of promoting the capital market. The bond will be listed on the Malawi Stock Exchange(MSE) and will be governed by the rules of the MSE. Trading will commence in a weeks time at which the listing price of the bond will be set according to the weighted average price from the primary auction. Trading of the bond on the MSE may be in multiples of K10, 000.00. This should attract smaller investors to participate and hence increase the liquidity of the instrument.

The bond will also promote the capital market since it will increase the number of products available to investors. Any viable capital market needs a considerable amount of investment opportunities. As such the listing of the bond should help the capital market deal with the problems of diversity, liquidity and investor lethargy that are associated with inadequate listings.

The benefits of the bond not only extend to the capital market but to the money market as well. One other interesting feature of this newly issued bond is that it can be pledged as collateral. This will allow investors to borrow short term funds from the money market using the bond as security for the loan.

If the public responds well to this new development a vibrant secondary market can be created setting stage for further development of the Malawian capital market.