Banks’ liquidity squeeze looms

Maclewen Sikwese

The banking sector may start facing a liquidity squeeze which haunted the sector for a good part of last year as the government is expected to borrow K491 billion through Treasury Bills and Treasury Notes, among other tools.

Last year, banks were facing tight liquidity averaging between negative K80 billion and negative K90 billion which also saw increased use of the Lombard rate facility where banks are allowed to borrow from the central bank.

To ease the pressure, RBM injected liquidity in the banking sector through OMO reverse repos which have since started maturing.


According to RBM Financial Market Developments report of April 29 2022, between last month and next month, RBM would have sucked approximately K141 billion from the market through the maturity of the repos and K491 billion through Treasury Bills and Treasury Notes.

Even though there are such fears, under normal circumstances, liquidity is expected to be cushioned because, within the same period, the government will have to inject approximately K260 billion through the maturity of Treasury securities.

Market analyst Cosmas Chigwe, however, fears that treasury securities may be rolled over while OMO reverse maturities should represent significant liquidity being taken out of the market.


“These securities are, however, used exactly for the reason of managing liquidity and, as such, I am sure that monitory authorities should be able to manage the situation,” he said.

Financial Market Dealers Association President McLewen Sikwese said the market, indeed, might face tight liquidity unless monitory authorities and commercial banks play their crucial laws accordingly.

He said the monetary authority’s decision will be whether to renew the reverse repos or not but, either way, the decision will have a profound impact on both market liquidity and the ability of Treasury to raise funds in the auctions.

Sikwese added that the banks’ decisions will be on what to do with liquidity from maturing securities especially whether they will be deploying this liquidity back into government securities or retain it within the market to resolve the liquidity challenges

“Considering the market is already short and borrowing heavily from the Lombard, the net positive settlement of K191 billion from Treasury securities and reverse repo maturities will not be enough to accommodate both the market’s short and treasury’s demand of K491 billion.

“There is, therefore, going to be increased pressure on the monetary authorities to address the impending worsening liquidity situation which is likely going to be addressed through a combination of targeted reverse repos, purchases of government securities and liquidity injection from foreign exchange purchases from the market,” he said.

Tight liquidity likely increases the cost of borrowing as demand for loans does not match demand and available funds for disbursement.

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