Banks scrap around for deposits

There is an extensive hunt for deposits in the commercial banking industry as banks have run out of loanable funds due to a prolonged period of over-extended lending without a commensurate growth in deposits.

A snap survey of the banks’ deposits rates shows that the liquidity crunch has pushed up the cost of funds for the banks as deposits rates have risen, a development that will further squeeze profit margins in the prevailing low lending rates environment.

In the past six months, deposits rates for smaller depositors have slightly gone up from an average of about 3.75 percent to 4.10 percent for six months fixed deposits. For 12-months fixed deposits have gone up   from 4.15 percent to 4.75 while two-year deposits has gone up from 4,5 percent to five percent. 

 However, bigger institutions holding larger deposits for longer periods of time are able to negotiate higher deposits rates, which have gone up to as much as   eight percent for a two year-period. “ Deposits rate have been gradually going up as banks now have to compete for funds due to the liquidity tightening.  But, while the costs of attracting funds for the banks is going up, they cannot increase the rate at which they lend out the funds as it is regulated due to its link to the declining bank rate. The low interest rates regime has also forced some institutions with larger pools of funds to look beyond Botswana   for higher returns,” said a banking industry executive.

 As at December 2014, total deposits held by commercial banks declined by P2.1 billion to P51.5 billion from P53.6 in November 2014. On the other hand, total credit extended by commercial banks increased by P236 million to P45.12 billion in December last from P44.88 billion in November 2014. Due to the lack of a corresponding growth in deposits, the industry’s loan to deposit ratio has risen from 47 percent in 2007 to 88 percent in 2014, leaving some banks fully lent. 

Reflecting the drying up of liquidity in the market is the steep fall in the excess funds invested by the banks in the central bank, with outstanding Bank of Botswana Certificates (BoBCs) falling from P17.5 billion in 2008 to P4.2 billion at the end of 2014. Adding to the industry’s woes is oversaturation in the residential property market coupled with individuals’ dwindling purchasing power, which has contributed to a sharp fall in the growth of mortgages and personal loans, respectively.

According to Bank of Botswana statistics, credit growth rose at a slower rate of 13.5 percent in 2014 from the previous year’s growth

rate of 15.1 percent mainly due to household borrowing, which slowed sharply from 24.2 percent in 2013 to 9.4 percent in 2014.  This was attributable to a significant decrease in mortgage lending from 40.1 percent to 18.4 percent and a steep fall in the growth of personal loans from 19.6 percent to 5.3 percent between 2013 and 2014.  “The sharp decline in household credit expansion augured well for the maintenance of financial stability. “Nevertheless, household debt remains a concern in an environment of slow growth in incomes.  The Bank will, of course, continue to monitor household credit even though current default risk indicators provide some reassurance,” said BoB governor Linah Mohohlo, this week when launching the 2015 monetary policy statement.  According to Mohohlo, externalisation of funds by institutional investors as well as government’s initiative to rationalise disbursements of funds to parastatals and local authorities has also contributed to the decreases in excess liquidity in the market.

Last year alone, the Botswana Public Officers Pension Fund (BPOPF) is reported to have liquidated investments close to P2 billion in local bonds and invested the funds into the South African bond market, contributing to the liquidity woes in the banking industry.

To restore liquidity in the market, analysts believe that the central bank will have to abandon its past role of mopping up liquidity through various open market operations and become a provider of liquidity.  According to analysts at Econsult, the central bank may consider reducing the current high primary reserve requirements (PRR), which is akin to a tight monetary policy stance, in order to free up some funds for the banks to lend out.

The central bank increased the PRR, which are non interest bearing funds required to be kept at the central bank, in 2011 to 10 percent as it sought to mop up excess liquidity.  The BoB’s role at the margin would change from absorbing liquidity to providing liquidity to the banking system. It may be time to reduce the PRR to make it consistent with the general, more accommodating, monetary policy stance, said the analysts in a report.

Other measures suggested by the analysts to encourage more deposit inflows into the banking system include encouraging deposits from non-residents, or stimulating the transfer of resident deposits from foreign currency accounts (FCAs) – which account for around 15% of total deposits - to Pula accounts.




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