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Tight liquidity: The new norm?

Publishing Date : 18 May, 2015

Author : VINCENT MATUMO

Asset management firm African Alliance says that it is highly likely that commercial banks funding will remain structurally tighter and that household disposable incomes will remain under pressure due to increased retrenchments in the economy.

The management of African Alliance told this BusinessPost in response to an enquiry, that: “Because of the continued tight liquidity in the market and increased arrears from both households and corporates as well as the already high loan to deposit ratios; the local banks do not have much flexibility to push up their loan growth to the historic mid twenty levels and therefore loan growth is expected to be in the lower teens or even single digits for some banks.”

“As most banks have already indicated, this might not be a once off phenomenon but the new normal for the domestic banking industry,” the firm added.

African Alliance noted that domestic credit extension dropped significantly in 2014 to average of around 14 percent from a 20 percent average in 2013 as banks became increasingly selective in extending credit facilities, particularly to households. “This was partly due to the tight liquidity situation and increasing arrears on loans from both households and corporates; a sign of credit weakness.”

The liquidity crisis, which has hit the banks’ ability to lend out funds, has also left other sectors such as the property development sector, feeling the heat of increased interest rates for borrowing.

The central bank reduced the Reserve Requirements from 10 percent to 5 percent from 1st April, releasing P2,3 billion pula in cash, into the banking system.

African Alliance said that the reduction would support credit extension but it would not go to the all time highs experienced before 2014.

“In the short term credit extension will likely be supported by the Primary Reserve Requirement reduction, although we do not anticipate it to return to the 20 percent levels seen in the period pre-2014 for several reasons. Firstly, commercial banks funding will likely remain structurally tighter and secondly household disposable incomes will remain under pressure due to increased retrenchments in the economy,” said African Alliance.

Recently, Bank of Botswana 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.

Explaining the cause of the reduced liquidity, however noting that banks are still profitable, Mohohlo said is the result of a combination of factors and events including, the Bank of  Botswana’s phased   reduction   of the   excess   money   that   is continuously mopped by way of auctioning of BoBCs. This she said, resulted in the rapid credit growth of the commercial banks coupled with lowered deposit taking at the same banks.

“This ratio increased from 53.1 percent at the end of 2010 to 87.6 percent in a period of four years to the end of 2014. In essence, funds previously held in BoBCs have been diverted to loans by banks and more than doubled –growing by 104.3 percent, from P22.1 billion in December 2010 to P45.2 billion in January 2015, said Mohohlo at the press briefing to announce the central bank’s measures to mitigate the crisis.

“Deposits increased at a slower pace of 31.7 percent from P40.4 billion to P53.2 billion in the same four-year period,” said the Governor. Mohohlo cited several possible reasons for the reduced deposits, such as, sluggish growth in incomes, lack of financial inclusion and Government’s more streamlined methods of financing parastatals as well as low interest paid by banks on deposits. She encouraged Banks to find ways of increasing deposits.

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