Liquidity tightens in banking system
Brian Benza | Friday February 10, 2017 12:09
A bank’s liquidity refers to its ability to meet all anticipated obligations such as funding loans or debt payments using available funds without having to liquidate other assets.
Although consolidated data on recent months’ banking system liquidity have not yet been released by the Bank of Botswana (BoB), analysts say liquidity in the overnight inter-bank money market dropped to very low levels in late 2016 and early 2017. “There could be several drivers of this, including expenditure by parastatals prior to the end of the government fiscal year, and capital outflows. In view of the emerging interest rate differential between Botswana and South Africa (where rates have been rising), and the strengthening South African rand, such outflows are to be expected,” reads a market report from Econsult.
At the peak of the liquidity squeeze in 2014, loan deposit ratios for some banks reached a high of 90% leading to some banks being penalised by the central bank after falling below the minimum liquidity threshold.
The Banking Act prescribes that commercial banks are required to keep at least 10% of the assets in cash or near cash local instruments to meet short-term depositor obligations.
Following the last rate cut by the BoB in August last year, some banks have been dropping their deposit rates to very low levels, which could have forced depositors to take their funds elsewhere.
“There is some level of tightness although it hasn’t reached the levels of two years ago. Banks have been dropping their rates to very low levels since the last rate cut by the central bank. Most banks were paying close to zero percent on call accounts and a maximum 2.5% on three months deposits,” said a banking executive, who declined to be named for professional reasons.
According to Econsult, the declining returns on the Botswana Stock Exchange where the market fell 11% in 2016, coupled with perceptions of a deteriorating business environment and economic growth prospects, may also be driving capital outflows.
“There are also indications that government is delaying or deferring payment due to firms for the procurement of goods and services. This means less money deposited in the banking system, and greater use of loans and overdrafts, which further reduces liquidity. While there are no major liquidity related concerns in the banking system yet, it will be necessary to monitor developments closely,” reads the report.
Outflows to Botswana Unified Revenue Service in December as well as companies paying dividends could also have added to the drying up of liquidity in the banking system.
In the last liquidity squeeze of two years ago, banks resorted to tightening of credit applications while interest rates on loans also spiraled.
“While there is some level of tightness it hasn’t reached a stage where pricing has got out of hand yet,” said the executive.
The last liquidity squeeze was blamed on a mismatch between growths in deposits against rise in credit. Between December 2010 and December 2014 deposits grew by a much slower rate of 37% while credit went up by 104% resulting in a sharp increase in the intermediation ratio.