US embassy cable - 05LILONGWE496

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, Economic 
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