Banks must act now to revive interbank trading

Reserve Bank of Zimbabwe (RBZ) Governor John Mushayavanhu has delivered a stark warning, that the banking sector’s reluctance to trade among themselves through the interbank market is exacerbating liquidity challenges and destabilising the financial system.

His frustration is justified.

A functioning interbank market is the backbone of any modern financial system. It facilitates efficient liquidity distribution, enhances price discovery, and supports monetary policy effectiveness.

When banks refuse to lend to each other, preferring to hoard cash or rely on the central bank, they create market distortions that have far-reaching economic consequences.

The failure of Zimbabwe’s interbank market is not new, but its continued paralysis is indefensible.

Banks’ unwillingness to engage in interbank trading forces the RBZ to play an outsized role in liquidity management, an unsustainable arrangement that weakens financial independence.

By acting as the primary liquidity provider, the central bank inadvertently encourages banks to shirk their responsibility of managing short-term liquidity risks through market mechanisms.

Mushayavanhu is right to call out banks for their misplaced priorities.

Liquidity is not meant to be hoarded—it is meant to circulate.

The current situation, where some banks sit on idle cash reserves while others struggle with shortages, is not only inefficient but also damaging to financial stability.

A banking sector that refuses to trust itself is a sector that cannot be trusted to support economic growth.

At the core of this dysfunction is a crisis of confidence.

Banks fear counterparty risk and, in some cases, question the financial health of their peers. While these concerns are valid in a fragile economy, they should not be an excuse for inaction. Risk management is a fundamental aspect of banking. Institutions must develop robust frameworks to assess counterparty risk and ensure that interbank transactions are secure.

Trust is not built overnight, but without a functioning interbank market, Zimbabwe’s financial sector will remain trapped in a cycle of inefficiency and uncertainty.

Beyond liquidity management, the reluctance to engage in interbank trading also has severe implications for exchange rate stability. The country’s foreign exchange market is highly sensitive to liquidity conditions. When banks fail to distribute liquidity efficiently, pressure mounts on the RBZ to intervene, leading to excessive money supply growth and heightened exchange rate volatility. This, in turn, fuels market speculation and weakens confidence in the local currency.

Banks must take immediate steps to revive interbank activity. Strengthening transparency, improving risk management, and fostering greater regulatory oversight are necessary measures to rebuild trust in interbank transactions.

More importantly, the sector must recognize that its own survival depends on the stability of the financial system. If banks continue to shun interbank trading, they risk inviting heavier regulatory intervention that could further constrain their operations.

Mushayavanhu has made it clear, a dysfunctional interbank market is not an option. The financial sector must step up, assume its responsibilities, and restore market-driven liquidity management. Zimbabwe’s economic stability depends on it.