Banks increase lending rates on liquidity crunch

Mbongeni Mguni | Monday May 12, 2025 09:04

Mercury rising: The pressure is increasing on households, from the slowdown in the economy, to banks raising their lending rates PIC: MORERI SEJAKGOMO

Absa Bank Botswana, Stanbic Bank Botswana, and BBS Bank raised their lending rates by between 75 and 100 basis points, as the impact of a long-running liquidity crunch in the local capital market came to bear.

Since April 2023, banks have been able to raise their lending rates independently from the central bank’s Monetary Policy Rate (MoPR), as part of interest rate reforms aimed at better transmitting monetary policy.

Leading economist and former Bank of Botswana deputy governor, Keith Jefferis, told BusinessWeek that the latest movements were directly linked to government’s higher appetite for debt on the local capital market, which is fuelling the liquidity crunch.

“Banks are really in a squeeze because government has been sucking up all the liquidity through the bond auctions and there have been significantly higher rates on deposits,” he said. “There has been a drop in the amount of deposits and that’s unusual. “The banks have to pay higher and higher interest rates on deposits and that means their margins are tighter, requiring them to find a way to recoup that through the higher rates on loans.”

Government has been ramping up its borrowings from the local capital market under the P55 billion domestic note issuance programme, in order to plug a deficit that officially is expected to reach P22 billion this year. Researchers expect that the deficit could actually climb to P29 billion, as the expected recovery in the prolonged diamond slump remains out of sight, worsened by the US’ planned global tariffs.

Every month, government, through the BoB, floats bonds and treasury bills at auctions and the debt has increasingly been supporting government’s day-to-day funding requirements. The debt appetite has reduced the excess liquidity available in the market for other lending activities, whilst government has seen its costs increase as bidders demand higher returns. Even as it has accommodated demands for higher returns by the market, government has still failed to raise the quantum of debt it has sought at auctions covering the last 11 months.

Jefferis said the phenomenon of “crowding out” was occurring in the local market, as evidenced by higher government borrowing limiting the space available for other players.

The BoB liberalised the country’s interest rate regime in April 2023 saying the move would foster the development of a competitive financial sector.

Prior to last week, all commercial banks had maintained the spread between their prime lending rates and the MoPR.

“None of the banks wanted to be the first mover because the danger was that if one bank moved first, whether up or down, maybe no other would follow and it would be left on its own,” Jefferis said. “I think conditions have changed now such that the banks are really in a squeeze.”

The BoB, which since 2022 has only eased interest rates, released about P2 billion to banks in December to ease what it called “structural liquidity” rooted in lower government revenues as a result of the prolonged diamond slump.