Increase inconsistent with increase in liquidity
BoB says small banks are lending to bigger banks
Is the significant increase in interbank activity a consequence of structural liquidity challenges faced by smaller banks, or are there other factors that influenced this trend? This critical question lies at the core of the banking industry, which witnessed a substantial surge to P4.9 billion in interbank activity during the month of February.
In some quarters, there were speculation over whether this figure encompassed banks beyond Botswana’s borders.
Interbank activity, which encompasses lending between banks, surged from P1.9 billion in January 2024, according to May Financial Stability Report.
The first issue pondered is the concentration of liquidity predominantly among larger banking entities, leaving their smaller counterparts grappling to secure adequate funds.
The banking industry refers to this practice as counterparty limits, where liquidity providers such as government, mining companies, asset managers, and pension funds play a significant role. A counterparty limit is imposed by a financial institution to restrict its maximum exposure to a specific counterparty, which in this context pertains to the amount of funds deposited with a particular bank.
Treasurers observed that smaller banks typically receive lower liquidity limits, resulting in them not benefiting as much as larger banks when the market experiences a surplus of liquidity.
According to the Financial Stability Report, average daily market liquidity rose from P11 billion in January 2024 to P11.9 billion in February 2024, against the background of high government spending. This increase, the report said, was not in line with the overall trend of market liquidity growth, meaning as liquidity increased in the banking system, no such huge amounts of activity was expected.
The Bank of Botswana noted that towards the end of 2023 and in the first half of 2024, there has been a noticeable movement of funds from smaller banks to larger banks.
“Because of the liquidity in the system, everybody has access to liquidity and even these so called smaller banks are able to lend to the bigger banks,” Lesego Moseki, the Director of Financial Markets Department at the bank said this week. “So we can see money moving from Baroda to Standard Chartered or to First National Bank Botswana (FNBB) which is a good development in terms of liquidity.”
Financial Stability Report showed that the Non-Domestic-Systematically Important Banks contributed 55% to total interbank lending and took up 67.1% of total interbank borrowing. The report identified and designated the FNBB and Absa Bank Botswana Limited as the only Domestic Systemically Important Banks for 2024.
Bankers argued that smaller banks may have been growing their assets at a faster pace. Kgori Capital previously said: “sometimes we have a situation where it’s a structural difference where tier 1 has access to more liquidity than tier 2”. “Then you are able to perhaps play that area to enhance yields to take on a different exposure”.
Tier 1 banks also have backing from parent organisation to support larger limits and better credit appetite. Asset growth was really evident around 2021/22 which is when they started extending loan tenors and maximum credit amounts. This pushed the whole market to do the same across personal loans and asset backed finance.
Smaller banks tend to bid aggressively for institutional deposits. Not all funds come through the pension fund directly — so for example Botswana Public Officers Pension Fund (BPOPF) has limits with all the banks. They also have a portion managed by asset managers which is where smaller banks offer high deposit rates.
Some experts argued that bigger banks also lend in the interbank market looking for better rates than the Standing Deposit Facility at the BoB. The SDF has a low rate and the spread is meant to encourage interbank activity.
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