The study aimed to understand the network structure of the Malawi
interbank market, a relatively small but active market. To do this, we
constructed a network of banks using aggregated interbank loan amounts. We then
analyzed the topological characteristics of the interbank market network structure
and discussed the implications of such characteristics in terms of liquidity
distribution and contagion in the Malawi banking system. We establish that the
Malawi’s interbank network is fairly dense with a significantly high clustering
and a small average path length. This implies that liquidity is able to flow in
a fairly efficient manner within the network. Due to the relatively high
connectivity of the network, entry or exit of a bank, on average, is likely to
have little impact on the ability of other banks to lend and borrow from each
other. The high connectivity further implies that banks are able to monitor
each other’s behaviour. This may result into liquidity hoarding and may force
some banks to get liquidity at a higher cost than the one prevailing on the
market. The relatively high clustering and a small average path length further
implies that the interbank participants are more vulnerable to contagion than
in random networks. We further argue that because of the strong connectivity,
the network may not be resilient to an operational shock affecting one or more
of the banks. In this case, the impact of an operational shock may be felt not
just on the connectivity of the network but rather on the availability of
liquidity within the banking system.
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