Under the agreement signed this week in Gaborone, the central bank will work hand in hand with Frontclear on drafting a money market diagnostic framework, a policy that will guide money market operations in the country.
The local money market is a component of the economy that deals with the trading of short-term debt and currencies between financial institutions. Conventionally in Botswana, the trading of currencies and short debt options between local banks has been plagued by low activity due to the central bank’s heavy involvement.
Speaking at the signing ceremony, United Nations economist, Jean-Marc Kilolo said that Botswana's money market is plagued by low activity between banks leading to liquidity issues that handicap them from creating products that match the needs of micro players like SMMEs.
“The GDP gap between the needs of SMMEs and the actual banking products available stands at 19%. This is because commercial banks are not incentivised enough to create more products in the market,” he said.
The central bank controls transactions between banks through the Botswana Interbank Settlement System (BISS). The settlement system is an electronic interbank payment system that allows funds to be transferred between participating institutions on an irrevocable and real-time basis. Payments are routed through participants’ settlement accounts held at the BoB.
The improvement of interbank activity will see banks lending more amongst each other, and setting viable rates by offering each other short debt options, an incentive to create more banking products as liquidity improves in the market.
Bankers Association of Botswana chairperson, Mpho Masupe said inter-banking activity in Botswana has been low and concentrated only amongst major banks. He said this has led to over-dependence on the central bank as a credit broker when commercial banks experience downturns.
“TL1 banks don’t offer credit to TL2 banks mainly because there is concentration of capital in the money market. Banks overly depend on the central bank for bailouts and this affects the efficiency of the local money market,” he said.
The central bank is known as the lender of the last resort, meaning that commercial banks should knock at their doors only when they have exhausted all options in the market to resolve credit issues. However, due to systematic issues in the local money market, BoB has been the lender of the first resort with banks seeking bailouts from the central bank first, before exhausting inter-banking options available.
