THE IMPACT OF CRYPTOCURRENCIES ON

THE ECONOMY OF MALAWI

Focus on Interest Rates, domestic savings and reserve ratio
requirement

A. Likangala
M. Susuwele
T. Mdokhwe
What are cryptocurrencies?

A cryptocurrency is money that is only stored on a computer, it is paperless, virtual or

digitized. Bitcoin is the world’s first digital currency, built on complex arithmetic
techniques to control the generation of units of the currency, to verify the transfer of
funds from one person to another, and to operate independently of a central bank. To
check how much cryptocurrency, you own you will need a computer with an active
internet connection. This article will focus on the cryptocurrency that is called Bitcoin.
Bitcoin is a cryptocurrency among the many other cryptocurrencies that are out there.
Here in Malawi people have invested in Bitcoin, Litecoin and Ether.

Cryptocurrencies and savings.

So exactly what is the effect of cryptocurrency on domestic savings? This is the

question that the section will try to answer concisely. Domestic Savings play such an
important role in the economic growth of a country. Savings are used to finance
investments, which then improve the level of productivity in a country and also create
jobs. Savings promote economic growth as they increase capital formation and also
investment which attracts foreign investment into the country and thereby promotes
growth. This works when actual money is used and when people keep their money in
banks where interest is earned however this will not be the case when cryptocurrency is
used.

Cryptocurrencies don’t require any entity such as banks to hold your money in order for
you to carry out transactions but rather the money is stored on the cloud using
blockchain technology, more like virtual money. Therefore, assuming that the coming in
of this digital money becomes increasingly popular, it means that essentially banks
become useless as people don’t require them to store their money, thereby disrupting
the financial industry and reducing the total amount of savings held by banks in the
country. This would then have an effect on the debt that can be created by banks to
give out to people as loans and this would then mean that there would be less money in
circulation and as a result also the consumption level would reduce. But in Malawi
careful attention should be given to this trade as it does have the potential for growth in
Malawi and if it does grow, definitely savings will be heavily affected. Increase in
cryptos decrease in savings deposits.

Cryptocurrencies and reserve ratio requirement.

The Reserve Ratio which also known as Cash Reserve Ratio, is the percentage of
deposits which commercial banks are required to keep as cash according to the
directions of the Reserve Bank of Malawi (the central bank). The reserve ratio is an
important tool of the monetary policy of an economy and plays an essential role in
regulating the money supply. The Reserve Bank of Malawi lowers the reserve ratio
when it wants to increase money supply. As a result, commercial banks have higher
funds to disburse as loans, thereby increasing the money supply in an economy. The
reserve requirement is the amount of funds a bank must have on hand at the end of
each day. The Central bank sets the percentage rate. The reserve requirement applies
to commercial banks, savings banks, savings and loan associations, and credit unions.

Cryptocurrencies are decentralized and self-managed and so there is no need for a

central banking institution to actually govern the cryptocurrencies. There is no need for
a banking institution to facilitate or intermediate transactions over great distances, or in
large volume. And there is no need for a deposit to be done at any bank. Personal
crypto security measures are potentially sufficient to secure a small amount or a large
amount of cryptocurrency (for example, bitcoin), equally as well, making the security of
a bank unnecessary (T. W. Robinson, T Willenberg). With cryptocurrency, citizens of a
nation will be able to keep their money on their own in form of cryptocurrency or in other
words they will be able to invest paper currency in to cryptocurrency direct on their own
without national boundaries, which means fewer people will be using the commercial
banks as a means of keeping their funds or a means of transacting with fellow players
or a means of investing. This will negatively affect Reserve Ratio Requirement in
the Central bank due to the reduction in citizen’s deposits to the commercial
banks.
Cryptocurrencies and Interest rate.

Interest rates whether you like them or not and whether you understand them or not
they affect your life one way or the other. Interest rates help us calculate how much we
are going to pay back on top of the money we borrowed and they also help an individual
saving income calculate how much they are going to earn.

Interest rates are a very interesting and complicated topic so for simplicity we will omit
some attributes but readings will be provided at the end of this article if one wants a
more in-depth explanation on the topic. Now Cryptocurrencies as defined in the
introduction will eventually impact interest rate, but the question is how and which ones?
As the adaptation of Cryptocurrencies increases individuals will start changing
preference from paper currency to virtual ones, to make paper currency more attractive
interest rate of short-term saving will have to go up. And the interest rate on long term
investment assets will have to go down.

Because of its high value the most popular cryptocurrency is not being used as money
but rather an investment tool. Individuals buy bitcoins and sell them at a later date for
profit. The value of one bitcoin as of 2nd August 2019 is $10,439 which is equivalent to
7.9 million Kwacha. Now one can see how such an expensive thing to earn cannot be
used as money to buy everyday things or to make everyday investments. But as an
attractive investment asset with high reward it has the potential of disrupting the
financial market by affecting interest rates. If the returns of an investment are really high
people will demand or put more money in that investment. In this case cryptocurrency
called Bitcoin has more return than most investment in the country of Malawi. If an
individual has a lot of money, they will have more return if the put their monies in
Bitcoins, the problem is that Bitcoin is a high-risk asset. And the returns are very
unpredictable is a real gamble at this point really. In the long-term cryptocurrencies
will lead to a fall in interest rates and in the short-term they will cause a rise in
interest rates.

In the real-world things are always a bit more complicated than this, so always consider
all other factors that might come into play, but for the purpose of the article that is those
are the conclusions on domestic savings, reserve ration requirement and interest rates.
The market of bitcoin remains volatile, which brings about a lot of instability and
uncertainty when it comes to investment. With total of 21 million bitcoins currently
available for purchase we still a lot to talk about in the upcoming articles.