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BPOPF shake -up boosts banks liquidity

Cash deposits into the banking system reached a record high of P61 billion in March after a colossal P7 billion injection as fund managers, that recently lost Botswana Public Officers Pension Fund (BPOPF) mandates, brought back home offshore funds.

Earlier in the year, the Bank of Botswana was forced to release P2.3 billion into the banking system, following a liquidity crunch caused by years of unsustainably high credit growth set against stagnant deposits growth.

The BPOPF, which holds a larger part of its P54 billion war chest offshore, recently shook up the local capital markets by withdrawing mandates from some local managers and reallocating them to new clients.

This has seen billions of cash flowing into the local banking system in recent months from investments held in bonds and equities on global markets. 

 According to figures released by the Bank of Botswana this week, commercial banks’ deposits rose to an all time high of P61 billion in March from P54 billion the previous month.

As a result of the reallocations of offshore funds, excess liquidity, as measured by the outstanding funds held by Banks in Bank of Botswana Certificates (BoBCs) reached P10 billion in April.

“ The largest contributor to the large rise on commercial bank deposits was private businesses, reflecting the continuing adjustment in pension fund asset portfolios,” said the central bank.

Figures contained in the Botswana Financial Statistics (BFS) report show that the quantum leap in bank deposits followed a P5 billion reduction in Botswana pension funds held in offshore equities in the preceding month of February.

Offshore funds held in bonds also declined by P1 billion from P6.1 billion to P5.1 billion in February, as disenfranchised managers redeemed their investments.  As a result of divestments, pension funds held as cash rose to P7.5 billion in February from P2.1 billion. Analysts however say that the cash deposits are however expected to withdraw soon as the newly mandated managers allocate the funds to new offshore investments.

“ The excess liquidity position will soon be wiped out the new managers have to investment the funds back offshore again,” said an analyst with a local fund manager who declined to be named.

The ‘temporary parking’ of funds by the BPOPF is however a treasured boost for the local banking system, that has seen a significant drying up of excess liquidity in the past eight months as banks ran out of loanable funds.

In the past five years, excess liquidity

in the banking system as represented by the outstanding Banking of Botswana Certificates (BOBCs) has declined from P17.7 billion at the end of 2010 to P4.6 billion in February 2015. Contributing to the reduction of excess liquidity in the banking sector was a mismatch in the growth rate of deposits against credit.

Since December 2010 to date, deposits have grown by a much slower rate of 37 percent while credit has grown by 104 percent. This resulted in a sharp increase in the intermediation ratio, which is a ratio of bank loans to deposits, from 53.1 percent at the end of 2010 to 87.6 percent in a four-year period to the end of 2014.

The P2.3 billion unlocked by the Bank of Botswana (BoB) in April through halving of the Primary Reserve Requirements (PRR) has helped some commercial banks to move back above minimum regulatory liquidity thresholds.

The Banking Act prescribes that commercial banks are required to keep at least 10 percent of the assets in cash or near cash local instruments to meet short-term depositor obligations.

Director of Banking Supervision, Andrew Motsumi recently revealed that the P2.3 billion released into the market proved to be a timely injection for some banks that have now bounced back to healthy liquidity levels. “After the reduction of the primary reserve requirements we have seen all banks shore up their liquidity assets to meet the regulatory thresholds. At the peak of the liquidity challenges, some banks had transgressed the thresholds and the violations were accordingly penalised as prescribed by the banking regulations,” he revealed.

According to the Banking Act, violation of the liquid asset ratios attracts a penalty of not more than 0.1 percent of the shortfall amount although the BoB can use its discretion to trigger related penalties and increase the amount, particularly for repeat offenders. The liquidity challenges faced by the banks was part of sweeping changes in the sector that was previously characterised by excess liquidity, super normal profits and low deposits rates.

The PRR reduction marked a ‘new normal’ in the banking industry where the central bank’s role has been reversed from liquidity absorption to provision as excess liquidity dried up.


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