Wednesday, May 25, 2022

BoB hikes banks statutory reserves requirement

The central bank responded to the rising uproar┬áover the money it is losing through┬á Bank of Botswana Certificates (Bobcs) by┬á lifting up the commercial bank’s┬ácapital requirement┬á reserve from┬áfive percent to P 2.6 billion, the Bank┬áhas said.

In a statement, it said it has decided to leave the Bank Rate on hold at 10 percent, but added that it has considered to increase the capital requirement reserve from five percent to 6.5 percent or P 2.6 billion in an attempt to rein in inflation.
The new measure became effective on Monday.

 The capital requirement reserve is a percentage of the total deposits, which commercial banks have to place with the central bank. The money does not earn interest.

The move coincides with the publication of Botswana Financial Statistics that  indicated   deposits  to all  commercial  banks  stood at P 40 billion  as at  August this year while  loans and advances spiked  to P 21 billion largely driven by  household debt.

However, the report indicated that value of Bobcs was steadily increasing, hitting slightly above P 19 billion at the same period.

Interest generated from Bobcs┬á┬á ÔÇö an instrument used for mopping up excess liquidity in the marketÔÇö has turned into the mainstay of the local commercial banks compared to their┬ácore business.┬á The┬ádevelopment has┬árecently┬áled to a scathing attack on the┬áBank of Botswana Monetary policy, which seems to favour┬ácommercial banks┬áthan the interest of the country.

The bank has heavily relied on the bank rate and Bobcs to curb a spike in the inflationary rate. 
However,┬á Professor┬á Roman Grynberg’s research┬á that showed that, under the current tools used by┬á Bank of Botswana , commercial banks┬á are making huge┬á profits┬á from unbelievable interest rates while at the same time┬á getting huge returns from Bobcs at no risk.

The central bank┬á has┬á defended its┬á tools┬á used┬á in its “effective┬á monetary policy”,┬á such as the Bobcs and the setting of the bank rate, which it said┬á┬á have been successful in controlling┬á excess liquidity in the market .

The Bobcs were introduced in 1991 as a form of moping excess liquidity in the market but later were curved as a reserve for the chosen commercial banks – mostly British and South African owned banks.
Professor Grynberg had questioned the rationale of paying the local commercial banks higher interest rates than what the country is getting from investments overseas in the form of foreign reserves.

He added: “There are┬ávery considerable direct costs of the current monetary policy. The most significant are the cost of interest paid to banks that have every symptom of earning┬ávery high profits by the standard of Sub Sahara Africa.

“Not only are the costs substantial i.e. 2.5 percent of the GDP in 2008, up from 1.1 percent in 1999,” he said.

He said the interest that is being paid to the banks comes from national assets being foreign reserves that constitute the bulk of┬áthe central bank’s┬áinterest earnings.

This week one  financial analyst joined the chorus; although he welcomes a rise in requirement reserves, Bank of Botswana should open up to more banks so that  interest rates  charged  on  loans and advances are market driven.

“Probably┬áthe country is┬áun banked. I think what we should look at is the possibility of opening up for more banks, so that they can compete for customers on the basis of interest┬áthey charge,” one analyst said.

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