MALAWI REOPENS FINANCE BANK

UNCLAS LILONGWE 000496

SIPDIS

SENSITIVE

STATE FOR AF/S ADRIENNE GALANEK AND BRUCE NEULING
STATE FOR EB/IFD/OMA FRANCES CHISHOLM
STATE FOR EB/IFD/ODF LINDA SPECHT
TREASURY FOR INTERNATIONAL AFFAIRS/AFRICA/BEN CUSHMAN
JOHANNESBURG FOR FCS
MCC FOR KEVIN SABA

E.O. 12958: N/A
TAGS: EFIN ETTC EINV ECON MI BUD FIN
SUBJECT: MALAWI REOPENS FINANCE BANK

REF: LILONGWE 448


1. (SBU) SUMMARY: Finance Bank of Malawi was allowed to
reopen under Reserve Bank curatorship. The bank is
experiencing a mild run, as Reserve Bank imposed restrictions
curb withdrawals for the moment. With Finance Bank's shady
customer base, liquidation seems a more likely outcome than a
recovery or buyout. While the GOM intervention was clumsy at
best, it does at least show some determination to react to
corrupt and illegal practices. End summary.


2. (U) At the beginning of this week, the GOM negotiated a
deal to allow Finance Bank of Malawi to reopen after being
closed for over two weeks for illegally externalizing foreign
currency (reftel). The deal allows the Reserve Bank of
Malawi (RBM) to place a director within the bank, plus staff
for information technology and accounting, as a condition of
their opening. The bank will also operate, at least for the
moment, without a foreign exchange license. Meanwhile, a
forensic audit is being conducted by the fiscal police,
Anti-Corruption Bureau, and RBM.


3. (SBU) Members of the financial services industry here, as
well as several senior officials at RBM, have told us that
RBM went too far in revoking the license and closing Finance
Bank with no intermediate measures beforehand. This is said
to be the result of political-level involvement with the
case. For the moment, the refusal of other banks to honor
Finance Bank's checks is preventing a severe run. (RBM has
imposed a "no value date" requirement on other banks'
handling of Finance Bank checks, which prevents other banks
from assuming clearance three days after deposit. Instead,
banks must await confirmation of clearance.) However,
depositors are said to be making large cash withdrawals. The
customer flight is strong enough--and Finance Bank's customer
base is suspect enough--that other banks have reported that
they are tightening their "Know Your Customer" rules to avoid
inheriting Finance Bank's shady customers.


4. (SBU) Beyond the short term, though, no one holds out much
hope for the bank's future. Banking sources expect a
considerable run and report that the bank is actively
searching for a buyer. At this point, a buyout looks
unlikely, since buying Finance Bank could damage established
brands and contaminate a good customer base. The reasoning
is that the customers most motivated to stay with Finance
Bank through the next few months would be the worst.
Liquidation appears to be the most likely outcome.


5. (SBU) COMMENT: Though the Finance Bank saga has not ended,
it already offers a few lessons. First is the further
demonstration of the administration's tendency toward hasty,
ham-handed interventions, as has been the case with other
issues as diverse as dealing with news media criticism,
reforming government salaries, and ensuring food security.
On the other hand, the country's political leadership is
plainly capable of taking action, if perhaps overly drastic
action, when it is plainly needed. Finally, it seems clear
that the GOM is trying to draw a brighter line between legal
and illegal activities in the financial world. In the net,
this is a step forward that the previous government was
unwilling to take.
GILMOUR