RESERVE Bank of Zimbabwe (RBZ) governor John Mushayavanhu recently claimed that Zimbabwean banks were causing an artificial liquidity crisis by being reluctant to engage in interbank lending. To get the banking sector’s position on the matter, our assistant editor Mthandazo Nyoni (MN) spoke with Bankers Association of Zimbabwe (BAZ) president Lawrence Nyazema (LN), who stated that the country’s interbank levels were considerably higher compared to those in other markets such as Botswana and Zambia. Below are excerpts from the interview:
MN: What is BAZ’s response to the governor’s claim that banks are causing an artificial liquidity crisis by being reluctant to engage in interbank lending?
LN: BAZ acknowledges the concerns raised by the RBZ governor regarding the level of interbank trading and activity. While the level of interbank balances appears low at 3,15% of total banking sector assets as of December 31, 2024, this was actually an increase from the average of 2,69% recorded during the period from 2021 to 2023. It was also considerably higher compared to levels in other markets such as Botswana (2,8%) and Zambia (2,65%).
MN: What do these figures suggest?
LN: The figures suggest that interbank trading does occur and deviations from expected levels may reflect other market circumstances and dynamics beyond normal banking operations.
For example, with deposits or funds being withdrawn daily from the banking sector through statutory reserve requirements and non-negotiable certificates of deposit, over and above unpredictable daily withdrawals by clients, it is only rational for banks to adopt a cautious approach to liquidity management.
MN: Can interbank trading be used to resolve liquidity challenges?
LN: Our view is that interbank trading can be used to resolve liquidity shortages only to a limited extent and for specific purposes, beyond which other sources of liquidity would need to be activated.
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This is why banks have been turning to regional and global markets to raise longer-dated lines of credit, indicating that local liquidity is insufficient to meet the expectations of all stakeholders.
Lastly, interbank trading is an investment or lending asset class, and decisions are made in line with alternative asset classes, regulatory requirements, customer needs, and the attendant risk-return profile.
Having said that, it is important to underscore that the banking sector and the central bank continuously engage on these issues. As noted by the governor in the monetary policy statement, work is already underway to enhance liquidity flow, mitigate risks and foster a more robust interbank market.
We believe these collaborative efforts between the banking sector and the Reserve Bank will yield positive outcomes for the financial system and the broader economy.
MN: Can you provide data or evidence to counter the RBZ’s assertion that banks are not doing enough to facilitate interbank lending, which is exacerbating the liquidity crisis?
LN: We believe the approach should not be about proving or disproving, but rather focusing on identifying the root causes of our liquidity challenges and the low levels of interbank trading, and then coming up with solutions to address these root causes.
Regarding the levels of interbank trading, as noted earlier, interbank balances at 3,15% of total industry assets are higher compared to levels of 2,65% in Zambia and 2,8% in Botswana. This is despite the consistent withdrawal of funds through statutory reserves at 15% for time deposits and 30% for demand deposits, against comparative ratios of 6% in Tanzania and 2,5% in Botswana.
Again, given the need for banks to balance promoting interbank trading with fulfilling their fiduciary duties, the banking sector appears to be performing relatively well in interbank market trading.
MN: How do you think the RBZ’s accusation will impact the banking sector’s reputation and investor confidence and what measures will you take to address these concerns?
LN: BAZ does not view the governor’s statement as an accusation, but rather as an expression of a different perspective regarding the levels of interbank trading activity in the banking sector.
It also shows that the central bank is actively monitoring the performance of the financial sector, in line with its mandate. As such, in our opinion, the central bank’s views should not negatively affect the banking sector’s reputation, but should affirm to the market that the central bank is actively monitoring the financial system’s performance.
Moreover, the central bank has highlighted that it is working with the banking sector to address the seemingly low levels of interbank trading and nothing could be more reassuring than this.
The RBZ has consistently maintained an open-door policy and we will continue to engage on industry concerns and explore solutions that balance regulatory requirements and expectations with the need to support economic growth.
MN: What other alternative solutions or proposals does the association have to address the liquidity crisis, and are you willing to work with the central bank to implement these solutions?
LN: Banks have already established counterparty limits to guide their interbank trading activities. These limits are reviewed frequently in line with changes in the operating environment and trading will continue to be guided by overall policy conduct, market liquidity, counterparty risk profiles and customer demands.
Banks have also been raising lines of credit from regional and international markets, sometimes at interest rates as high as 10% or more, as part of measures to enhance liquidity supply and flow into the market.
However, it should be noted that liquidity is a function of several factors, which require concerted efforts by various stakeholders.
MN: What about at the policy and private sector levels?
LN: At the policy level, the authorities need to continue calibrating a policy framework that reflects market demands and aligns with regional and global practices.
At the private sector level, economic agents that borrow from banks also need to diligently meet their debt obligations and deposit cash resources from their operations with the local banks that have supported them. Poor borrower performance and delays in settling debt obligations have a significant negative impact on liquidity flow in the economy.
MN: At the macro-economic level?
LN: At the macro-economic level, there is a need to continuously foster a stable and predictable policy environment that makes it easier and cheaper for banks to attract alternative sources of liquidity, such as through credit lines.
Banks have gone to great lengths to source funding from regional and international financial institutions to augment locally-available funding and, in the process, resolve liquidity shortages on a broader level.
However, some of this funding has come at a higher cost to the banks and the economy.
Meanwhile, in terms of working with the authorities, the BAZ always collaborates with the central bank and all other policy-formulating institutions and it will continue to do so, as this is the very reason for its existence.
MN: Are there any regulatory or policy changes that the association believes are necessary to encourage interbank lending and alleviate the liquidity crisis, and if so, what are they?
LN: Additionally, a well-functioning lender-of-last-resort facility for both the local currency and foreign currency markets remains a critical component for the better functioning of the interbank market.
