Mushayavanhu slams banks

STAFF WRITER

Reserve Bank of Zimbabwe (RBZ) Governor John Mushayavanhu has strongly criticised banks for failing to trade among themselves through the interbank market, warning that their reluctance is worsening liquidity challenges and destabilising the financial system.

 Mushayavanhu expressed frustration over banks’ continued dependence on the central bank instead of leveraging the interbank facility to manage short-term liquidity needs. He emphasized that a properly functioning financial system requires active participation in interbank trading rather than excessive reliance on the RBZ.

“Banks need to start trusting each other and utilising the interbank market. The central bank cannot and should not be the primary source of liquidity for the entire financial sector,” Mushayavanhu said.

“A well-functioning interbank market is essential for price discovery, liquidity distribution, and overall financial stability.”

The interbank market is designed to allow banks to lend and borrow from one another to manage short-term liquidity fluctuations. In well-functioning financial systems, it serves as a critical mechanism for efficient capital allocation and monetary policy transmission. However, in Zimbabwe, banks have largely shunned this facility, preferring instead to hold excess liquidity or rely on central bank interventions.

The result has been persistent liquidity distortions, with some banks experiencing cash shortages while others sit on idle reserves. This failure to trade among themselves has also weakened the RBZ’s ability to influence interest rates effectively.

Mushayavanhu argued that banks’ unwillingness to engage in interbank trading is not only inefficient but also detrimental to economic stability.

“When banks hoard liquidity and refuse to trade among themselves, they create unnecessary market inefficiencies. This behavior increases reliance on the central bank, which is neither sustainable nor healthy for the financial system,” he said.

A key reason for the dysfunctional interbank market is the lack of trust among banks, particularly regarding counterparty risk.

In an environment where some financial institutions are perceived as less stable, banks have been reluctant to lend to one another, fearing potential defaults.

Mushayavanhu acknowledged these concerns but insisted that financial institutions must develop mechanisms to assess credit risk and build confidence in interbank transactions.

“Risk is part of banking. Managing counterparty risk is a fundamental aspect of financial markets. If banks do not trust each other, then we have a deeper problem that needs urgent resolution,” he said.

To restore confidence, he urged banks to enhance transparency, strengthen risk management frameworks, and improve due diligence processes. He also called for stronger regulatory oversight to ensure that interbank lending remains secure and efficient.

Beyond liquidity management, Mushayavanhu highlighted the broader economic consequences of an underutilised interbank market, particularly its impact on exchange rate volatility.

Zimbabwe’s foreign exchange market remains highly sensitive to liquidity conditions. When banks fail to distribute liquidity efficiently through interbank trading, pressure mounts on the RBZ to intervene in the forex market, often leading to excessive money supply growth and exchange rate instability.

“A functional interbank market is critical for stabilising both interest rates and exchange rates. If banks are not trading among themselves, it distorts the entire financial system and fuels market speculation,” Mushayavanhu warned.

The RBZ has been implementing measures to stabilize the local currency, but the lack of interbank activity complicates these efforts. The governor stressed that banks must actively participate in liquidity redistribution to ensure monetary policy tools remain effective.

Mushayavanhu’s remarks serve as a stern warning to the banking sector as failure to utilise the interbank facility will not only weaken financial stability but also invite stronger regulatory intervention. He urged banks to take immediate steps to revive interbank activity, emphasizing that a vibrant financial system depends on trust, transparency, and market-driven liquidity management.

“We cannot continue with a situation where banks are sitting on liquidity while others are struggling. The financial sector must take responsibility and play its role in ensuring a stable and efficient banking environment,” he concluded.

As Zimbabwe continues its economic reforms, the role of financial institutions in fostering market stability will be under increasing scrutiny. Whether banks heed Mushayavanhu’s call remains to be seen, but the message is clear, a dysfunctional interbank market is not an option.