BoB reins in banks'cash cow

Brian Benza
Staff Writer | Friday October 29, 2010 00:00

Primary reserves are commercial banks' non-interest earning balances maintained at the Bank of Botswana (BoB).

In a statement released by BoB this week, the new policy development will see commercial banks' primary reserve requirement raised from five percent to 6.5 percent with effect from November 1, 2010.

'This decision is intended to reduce the amount of liquidity that is mopped up through Bank of Botswana Certificates,' says the statement issued by BoB's Head of communications, Andrew Sesinyi.

Fierce criticism has been levelled against the central bank from home and abroad for the continued use by commercial banks of BoBCs as the main tool in mopping liquidity with accusations that this was enriching only a few commercial banks, most of which are owned by super-rich multinationals. Critics said BoBCs had become commercial banks' cash cow, at the expense of taxpayers who finance and are impacted by the central bank's activities.

The recent policy development will now see some of the deposits that commercial banks were earning interest from through investment in BoBCs kept by the central bank at zero interest rates through the statutory requirement.

Sought for comment on the likely effectiveness of the policy change in mopping excess liquidity from the market, economist Dr Keith Jefferis said although it is not viable to use PRR as the main instrument of mopping excess liquidity, the increment will reduce reliance on BoBCs to a certain extent.

'The PRR will go some way in cutting down the deposits which the banks would have invested in BoBcs, thereby cutting down the interest bill,' Jefferis said. 'But it will not be feasible to increase the PRR to the extent that you will not need BoBcs.'

According to BoB's Botswana Financial Statistics (BFS) document, the banks have been sitting on P32 billion worth of pula-denominated deposits as of July 2010. Of this, only P1.6 billion is due to the central bank in the form of PRR. The 1.5 percentage points increment in PRR will see only a further P500 million being kept by the central bank at zero percent interest, a figure that compares little to the huge P18 billion in BoBCs which will attract a 7 percent interest rate.

The upping of PRR is set to further squeeze banks' earnings that are already dwindling in due to weakening interest rates.

Using the July BFS figures, the PRR adjustment will take away P500 million away from the commercial banks, which could have earned the 7 percent interest through BoBCs. Although weakening interest rates have led to a significant decline in the interest bill in BoBCs over the last few years - from 13 percent in 2002 to 7 percent in 2010 - the central bank has come under heavy criticism for the amount paid out to banks, which stood at P1.6 billion last year.

A recent report by the IMF and the World Bank says BoB is enriching the already super-rich banks through the issuance of its high-yielding BoBCs while the banks themselves are impoverishing borrowers through high lending rates.

IMF researchers say the dominance of BoBCs as the chief instrument in open market operations has also prevented further development of Botswana's financial sector. There has also been calls for the government to boost its private sector growth, which will in turn leave banks with more asset growth opportunities and re-balance their holdings of BoBCs accordingly.