Bank of Botswana surprised the markets this week by employing “prudential measures” to protect the general customers against the onslaught of the commercial banks by hiking up the primary reserve requirement (PRR) in an inflationary environment.
The bank issued a directive calling for PRR to be jerked up from 6.5 percent to 10 percent against their depositsÔÇöshying away from its normal tradition of hiking interest ratesÔÇöto protect customers from ruthless commercial banks.
The move will mean that commercial banks will deposit an equivalent of 10 percent of customers deposit holdings in a non interest earning account with the Central Bank in an attempt to mop up excess liquidity in the market.
Further, the move will have two-pronged benefits; the money will not go into a risk-free 90-day financial paper, namely the Bank of Botswana CertificateÔÇöthereby protecting national asset — and on the asset side, consumers will be protected from high interest rates as bank rate would not go up.
The shift in the Central Bank’s monetary policy was confirmed by the Monetary Policy Committee (MPC) that left rates on hold despite the fact that inflation is still above target level of 3 -6 percent.
Further, dark clouds of administrative prices powered by food, fuel costs and fluid developments in advanced countries are likely to influence inflationary trends going forward. The bank rate is on hold at 9.5 percent.
The move will entail greater competition between the banks in trying to lure customers to their banking halls. The war that is likely to ensue will depend on the depth of each banks’ pocket.
At a press briefing this week, Bank of Botswana governor, Linah Mohohlo, applauded the contribution made by the media on their input, implicitly referring to Sunday Standard.
She said they are using some of the media input to try to shape some of the policies.
The Sunday Standard extensively raised the issue of the cost of banking that is negatively impacting on the customers. One of the issues that the Central Bank dealt with included the phasing-out of early repayment charges that commercial banks have been doing.
The Sunday Standard quoted Professor Roman Grynberg, who showed in great details how the commercial banks were making a great killing– from unbelievable interest rates while at the same time getting huge returns from Bobcs at no riskÔÇöunder the “traditional tools” used by Bank of Botswana.
The central bank, over the years, relied on Bobcs and the setting of the bank rate, which it said have been successful in controlling 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 ÔÇô being British and South African owned –where they can uninterruptedly make profit from nation assets.
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 very considerable direct costs of the current monetary policy. The most significant are the cost of interest paid to banks that have every symptoms of earning very high profits by the standard of Sub Sahara Africa.
“Not only are the cost substantial i.e. 2.5 percent of the GDP in 2008, up from 1.1 percent in 1999,” he said.
He said the interests that are being paid to the banks come from national assets being foreign reserves that constitute the bulk of the Central Bank’s interest earnings.
Further, he pointed out that the commercial banks’ “huge interest rate spread” has enabled the banks to ‘consistently earn higher rate of return on assets than their counterparts in Sub Sahara Africa during 2005/6 period.
“On the basis of the time commercial banking sector in the period under study can be described as super-normal,” he said.
He blamed the Central Bank’s bank rate, which he said acted as a price setter but the depositors were getting a raw deal on other hand. He pointed out that over the year, the 88-day deposit rate has largely become unattractive because the low interest that it offers compared to the prime rate.
The move, he said, has resulted in low saving culture in the country.
“What is important to note is that the ex post spread i.e. what commercial banks are actually charging customers for advances minus what they are actually paying depositors is significantly larger than the indicator or ex ante spread,” he said.