Monday, May 17, 2021

Will BoB’s P2.3 bln save banks from stormy weather?

In its latest financial statements, Botswana Stock Exchange (BSE) quoted banking technology trailblazer FNBB grew advances to customers by 16 percent to a new high of P12.7 billion. However, the bank bemoaned tight liquidity conditions in the market, which led to commercial banks’ deposits growing by only 9 percent year – on – year as at October 2014. The market loan-to-deposit ratio (excluding foreign currency) was reported at 97 percent in October 2014, said FNBB, which boasts of a strong mortgage book. On the other hand, Barclays said its loan to deposit ratio (LDR) has increased to 90 percent, forcing the banking giant to consider tapping into its capital base and bond market to shore up liquidity.

Bank of Botswana (BoB) regulations recommend that banks must have a LDR of 60 to 80 percent. Available figures show that LDR has been on an upward trend in the domestic banking system while liquid asset ratio has been declining. Between 2009 and 2013, total banks deposits grew by 30 percent while advances grew by 132 percent.

“This can be attributable to deposits growing more slowly than advances,” leading economists at e-Consult opined.
A quick study of financial sector figures by The Telegraph shows that by end of 2014, leading commercial banks tightened their credit lending schemes as the loan/deposit ratio 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.

Declining liquidity

BoB Governor Linah Mohohlo has repeatedly dismissed statements that the banking sector is experiencing tightened liquidity.

“I would like to take this opportunity to dispel the perception that the banking system is experiencing an overall tight liquidity situation. In particular, I would like to correct the misconception that, in order to alleviate the perceived liquidity shortage, the BoB needs to inject liquidity into the banking system.” ??This past Thursday, Mohohlo announced the Reserve Bank will reduce the Primary Reserve Requirement to five percent from the current 10 percent. The downward adjustment is expected to release a total P2.3 billion to augment banks’ loanable funds. Mohohlo’s sentiments came just a few months after seasoned independent economist, Dr Keith Jefferies noted in his quarterly economic review (Q3) that the banking sector is moving into uncharted territory.
Jefferies warned that if the trend of declining liquidity continues, various changes should be expected; among them an independent rise in interest rates as well as change in impact of certain policy and regulatory measures.

However, Mohohlo hit back, saying the sluggish growth in personal incomes over the last few years contributed to the muted expansion in bank deposits which, when matched against the faster increase in credit, resulted in a decline in excess liquidity. On Thursday, 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. 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.

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