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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.

The Network Structure of the Malawi Interbank Market: Implications for Liquidity Distribution and Contagion around the Banking System