26 February 2019

Zimbabwe: Lender of Last Resort Facility On Cards

The Reserve Bank of Zimbabwe (RBZ) has announced plans to re-introduce a lender of last resort facility.

A lender of last resort is an institution, usually a country's central bank, which offers loans to banks or other eligible institutions that are experiencing financial difficulty or are considered highly risky or near collapse.

RBZ governor Dr John Mangudya said the lender of last resort facility will help local banks meet their monetary requirements.

"Going forward, as a bank we are going to open a lender of last resort window, an accommodation window because we know that in this market there is not too much money," said Dr Mangudya.

"The money in Zimbabwe, just to give you statistics, the real time gross settlement (RTGS) balances are just under $1,8 billion, the rest are loans and securities. And the bulk of the RTGS balances are required for local trades, not to purchase foreign currency. So while foreign currency will be available, what may be in shortage are RTGS balances to buy the foreign currency."

The country's interbank market was made dysfunctional upon the introduction of the multicurrency system as confidence in the banking sector waned.

In 2010, the Government moved to restore the banker-of last-resort function of the central bank by injecting US$7 million to improve fluidity of banking operations.

And while announcing the 2015 Monetary Policy Statement Dr Mangudya announced that the local interbank market was now in operation, describing it as a "great financial milestone."

"The interbank facility supported by the African Export-Import Bank (Afreximbank) under the Afreximbank Trade Debt Backed Securities (AFTRADES) is now operational. This is a great financial milestone," said Dr Mangudya at the time.

"The facility would be managed by the Reserve Bank as an agent bank for Afreximbank for the purposes of managing the surplus and deficit participants' requirements under AFTRADES.

Critically, the RBZ governor said the (interbank) "facility shall also be used as a precursor programme for the lender of last resort function by the Reserve Bank."

Zimbabwe currently has 19 operating banking institutions.

And as at December 31, 2018, 18 of the 19 banks reported profits for the year, with a 61,06 percent increase in aggregate profits from $241,94 million in 2017 to $389,85 million, official figures show.

The lender of last resort functions both to protect individuals who have deposited funds, and to prevent panic withdrawing from banks who have temporary limited liquidity.

All things being equal commercial banks usually try not to borrow from the lender of last resort because such action indicates that the bank is experiencing financial crisis.

However, critics of the facility say it entices financial institutions to take on more risk than would be considered normal without the lender of last resort facility.

Zimbabwe

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