Liquidity in Banking Not Tight

| November 26, 2014 | 0 Comments

Liquidity in the banking system is not tight as there is excess liquidity which currently stands at approximately P3 billion, says Bank of Botswana governor, Ms Linah Mohohlo.

Welcoming participants at the BOCCIM National Business Conference cocktail in Maun on November 23, Ms Mohohlo said this meant that banks continued to hold excess investable funds over and above the statutory liquid assets requirement.

She dispelled the perception that the banking system was experiencing an overall tight liquidity situation and corrected the misconception that in order to alleviate the perceived liquidity shortage, Bank of Botswana needed to inject liquidity into banking system more or less right away.

She said there had been a significant decrease in excess liquidity in the last two to three years due to a combination of factors noting that excess liquidity declined as banks increased their lending while at the same time the Bank of Botswana decreased the amount of Bank of Botswana Certificates (BoBCs) issued for liquidity absorption.

In addition, Ms Mohohlo observed that excess funds were further sterilised by increasing the Primary Reserve Requirements in stages from 3.25 per cent to 10 per cent over the five-year period of 2011.

She said the laudable efforts by the government to streamline the disbursement of funds to parastatals and local authorities also helped to reduce excess liquidity.

Ms Mohohlo said in the past, some of the funds disbursed by the government to parastatals and local authorities remained unspent for some time and the funds were passively held on deposit at banks and ultimately funding their way into BoBCs. “This is no longer the case at least not on the scale of yester-years.

The efficiency achieved in remitting tax revenues through the Real Times Gross Settlement (RTGS) system and electronic funds transfers (EFTs) has also reduced the period of time funds stay in customer deposit accounts before being credited to government accounts at Bank of Botswana,” she added.

Ms Mohohlo said that moreover, the sluggish growth in personal incomes in the last few years also contributed to the muted expansion in banks deposits which when matched against the faster increase in credit, resulted in a decline in excess liquidity.

She said there has been also a substantial externalisation of funds by institutional investors such as fund managers and pension funds.

She also noted that all the mentioned factors have contributed to the overall reduction of BoBCs from a peak of P20 billion in October 2010 to the current level of about P6 billion.

Bank of Botswana Governor said correspondingly, the proportion of deposits that were on lent increased markedly as reflected in the intermediation ratio which increased from 45 per cent in 2007 to about 80 per cent currently.

She said given the overall excess liquidity of approximately P3 billion in the banking system, any temporary liquidity shortages experienced by individual banks should initially be dealt with through inter-bank borrowing and ultimately if need be through recourse to Bank of Botswana facilities.

“There will of course be occasions when the banking system as a whole could face relatively tight liquidity.

Whenever such circumstances arise, the bank will as part of its mandate of lender of last resort, readily provide such liquidity to the banking system but only on terms that make inter-bank funding the preferred alternative,” she added.

Source : BOPA

Source : Botswana Daily News

Category: Business & Finance

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