Monday, May 17, 2021

Can Bank of Botswana avoid the financial liquidity trap?

On Thursday, Central Bank Governor Linah Mohohlo confirmed that over the past five years liquidity in the banking industry, as represented by outstanding Bank of Botswana Certificates (BoBCs), has declined from P17.7 billion as at end-2010 to P4.6 billion in February 2015.

“The cap for this excess money is currently P5 billion and it was put in place to encourage productive lending by banks as well as to moderate the cost of mopping up excess liquidity,” she said.

However, Mohohlo maintained that the banking sector in Botswana remains sound and profitable. The Governor’s statement is in contrast with that of banking industry captains, who have over the past few years lamented reduced profitability caused by suppressed financial liquidity in the local market. Property companies have also complained of limited access to funds as banks tightened their purse strings. When presenting its half year results for the period ended December 2014, First National Bank Botswana (FNBB) bemoaned the tight liquidity conditions in the market, which led to deposits of commercial banks growing by only 9 percent year on year as at October 2014.

“This presents a challenge for financial institutions to participate in growth opportunities in the country,” read a statement accompanying the financial results.

The same sentiments were expressed by RDC Properties, a property giant that owns Masa Centre, at their financial results presentation on Thursday. RDC Properties officials said their investment ambitions have been put on hold by a sudden rise in the cost of borrowing.

“Banks are now giving us loans at a very higher rate due to financial liquidity problems,” they said.

Two weeks back, Barclays Bank also complained of suppressed liquidity when it announced its financial results.
Slower growth in deposits

By end of 2014, leading commercial banks tightened their credit lending schemes as the loan/deposit ratio in the banking sector rose to unprecedented levels. At the same time, deposits increased at a slower pace of 31.7 percent from P40.4 billion to P53.2 billion between 2010 and 2014. While the local banking industry was squirming and pleading for some kind of relief, Mohohlo cast a relaxed demeanour of a Governor at ease, saying the slower growth in deposits was possibly due to sluggish growth in incomes, inadequate financial inclusion, more streamlined procedures for government funding of parastatals and very low interest rates paid by banks on deposits.

“It is indeed imperative that banks undertake measures to attract deposits and focus on productive use of more limited funds available for lending. More emphasis on deposit mobilisation and improved financial inclusion would be steps in the right direction towards a more mature banking sector,” she said.

Mohohlo said recent economic and market developments have had no adverse impact on levels of capital in the banking industry, with the aggregate Capital Adequacy Ratio at 19 percent as at January 2015, and above the prudential limit of 15 percent. Still on Thursday, Mohohlo expressed confidence that commercial banks will welcome the PRR reduction as part of a bouquet of complementary initiatives that the Central Bank will undertake in support of banks. Although the reduction is expected to release a total of P2.3 billion to augment banks’ loanable funds, some analysts have expressed worries that the move could expose local households to further debt. Despite low deposits growth, figures show that credit from banks continues to grow at a robust pace, as evidenced by the January 2015 annual growth rate of 13 percent, which was higher than nominal economic growth. After the Central Bank changed tactics on Thursday from absorbing liquidity to injecting liquidity into the banking system, it remains to be seen whether commercial banks will open up and issue more loans to households. Analysts have warned that should the available loanable funds be used for consumption and not productive purposes, the domestic economy will likely find itself in a financial trap.

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