The International Monetary Fund (IMF) has recommended the formation of a cross-border bank-to-bank lending market, secured through physical surrender of collateral across eastern Africa.
The IMF said a secured interbank market would be a true repo (repurchasing agreement) market as the region lacks such facility between banks.
Small financiers are the most affected by the lack of a regional market for banks to lend and borrow from each other overnight, as they have to pay a hefty premium to get emergency funds from regulators or larger rivals.
IMF reckons banks could lend each other regardless of the location of the borrower in the region, especially as the countries race to set up structures for a monetary union in the next five years.
"A true repo market will be the safest way of integrating EAC money markets. The concept of a true sale is more uniformly understood (which) therefore makes cross-border trading easier.
"So, for example, a Kenyan bank is likely to feel much safer lending to a Ugandan counterparty if it receives outright legal title to Ugandan collateral," said the IMF.
The multilateral lender notes that in Uganda, for example, the repo market is not vibrant and does not match the international standards.
For one, the market does not use the standard documentation such as the global master repurchase agreement (GRMA), which sets out the guidelines of how the trading is to be done legally.
Tanzania is also in the process of adopting the GMRA, which Kenya adopted it in 2008 to pave the way for the horizontal repo.
The repo is supposed to redistribute liquidity in the banking sector with government securities serving as the collateral.
Though used in Kenya, it is still not very popular nor widely used across the region as the monetary union is not yet in place. The Kenyan GMRA is also domestically oriented, rather than regional.
The IMF advises Uganda to adopt the GMRA as the basis for the horizontal repo market."A true repo market will depend on a robust Master Repo Agreement (MRA).
There is no Master Repo Agreement in Uganda. Uganda does need to draft one from scratch; there are plenty of MRAs available across the markets that can be used as examples for Uganda and tailored as needed," says the IMF.
With regard to Tanzania, the IMF says such an agreement (GMRA) is a prelude to the adoption of a new monetary framework that uses interest rates as the anchor.