RBZ directives caused liquidity challenges – Research

RBZ directives caused liquidity challenges – Research

HARARE – Directives by the Reserve Bank of Zimbabwe on cash and Nostro holdings in the dollarisation era “to an extent” had a negative impact on liquidity and liquidity risk management in the country’s financial markets, a research paper shows.

The paper was presented at the University of Zimbabwe (UZ) Graduate School of Management (GSM) Research workshop, held under the theme: UZ-GSM making a difference to socioeconomic development through research.

The research paper titled: “Impact of Reserve Bank of Zimbabwe (RBZ) Directives on Liquidity and Liquidity Risk Management in Zimbabwe’s Financial Markets in the Dollarisation Era (2009-2016)”.

The paper noted how, over the period 2011 to 2016, the Reserve Bank of Zimbabwe issued policies and directives limiting holdings on both the Nostro and cash positions as a percentage of total holdings of banking institutions. “Banks were directed to move all excess balances above the set thresholds either on Nostro or in cash (vaults) to RBZ. These would be reflected on the respective bank’s Zimbabwe Electronic Transfer Settlement System accounts at the RBZ. Banks requiring extra funding would then notify the RBZ and funds would be moved back to the Nostros or as cash at a cost.”

Zimbabwe has been facing some liquidity challenges in terms of meeting nostro account requirements and cash requirements, while the banking sector continues to face liquidity challenges despite a number of measures introduced by the RBZ to stabilise the sector and improve liquidity. Some local financial institutions are having difficulties in settling foreign payments for their clients or give out cash.

The study, which explored the extent to which the prevailing liquidity challenges can be attributed to the market interventions by the RBZ, established that the directives by central bank on Nostro and cash holdings contributed to the liquidity conditions in the country.

“The reduction of balances on Nostro limited that ability of banks to import cash to meet their customers’ needs and negatively impacted on the capacity of banks to meet their import payments”, says the study, adding that the move also distorted the different forms of liquidity in the economy, leading to more complications for managing liquidity risk.

“Liquidity risk remained under the purview of the individual banks despite being unable to control the various sources or forms of liquidity”.

The study however noted that some of the causes of liquidity shortages in the country include the huge import bill, externalisation of funds, low levels of productivity, the issuance of treasury bills and lack of customer education by banks around use of cashless forms of transacting.

It recommended that authorities should limit controls on nostro account holdings to restore confidence and minimise issuance of treasury bills. It also called on the government to foster a conducive environment for investors, and restore relationships with external lenders while ensuring that it gets buy in from all stakeholders on proposed forex controls.

Banks management, the paper says, should ensure sufficient liquid asset buffers (cash/nostro) to meet demand and to manage liquidity risk, and should create metrics to allow for measurement of the different forms of liquidity in the economy

The paper also recommended that interbank relations should increase to enable movement of funds from those with excesses and underscored the need for better rapport with clients so that they understand the situation at hand.

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