Biz Comment : Central bank’s cap on cash withdraws and its impact on liquidity

Local banks are still finding it difficult to extend credit to the private sector yet two years ago the central bank was tasked to mop up excess money from the economy.

Local banks are still finding it difficult to extend credit to the private sector yet two years ago the central bank was tasked to mop up excess money from the economy.

Credit conditions have continuously tightened since the beginning of this year and statistics show that while the Monetary Program targeted an increase of 3.2 percent during the first half of 2009, outstanding credit to private sector declined by 3.4 percent.

The genesis of the credit crunch in the local banking system can be traced from a strong credit distribution in 2007 and 2008 when deposits growth was declining due to a deposit-credit mismatch.

Measures have since been put in place and there are signals that in the second half of this year credit to the private sector started increasing. 

Recently the National Bank of Rwanda came up with a new guideline that directed commercial banks to limit their daily maximum cash withdrawals by individuals and companies to Rwf5 million.

Central bank’s major explanation of this directive is to encourage electronic and cheque transactions.

According to the institution that regulates all the financial institutions in the country, cash transaction should be discouraged because it is risky and also lowers the durability of the banknotes thus increasing banknotes printing costs. Lastly, it also drains liquidity in the banking system.

However, in part some members of the private sector feel violated, like someone denied them their rights.

Really the protest is very valid because the main reason people deposit funds at a bank is to store savings in the form of a demand claim on the bank.

It is important to note that our banking industry is still in transition with growing need for loans in all sectors, traditional transaction methods and lack of modern banking methods. This means that it has to be one of the most regulated sectors.

The current trends in the local and international financial industry have also created panic thus forcing banks to be vigilant in their lending practices.

It is purely fear that is ruling investment decisions at this time. As loans stall, the private sector is also pulling its deposits from banks. This is clearly a case of running scared.

Some members of the private sector say that the cap on cash withdraws could encourage people to keep their money in their homes since it bars one from withdrawing large sums of money.

The reasoning behind this is that some firms pay overheads that over and above the Rwf5 million withdrawal limit.

This would definitely mean huge deposit outflows from banks and it can potentially worsen the current liquidity conditions.

But by using electronic banking customers can access their bank accounts to make cash withdrawals and check their accounts’ balance.

Electronic banking methods also allow people to deposit cash or checks, transfer money from one bank account to another, pay bills or purchase goods and services.

The private sector has to adopt since it policy has worked well for government institutions.

In the current challenging environment, bank liquidity planning is paramount.

The writer is Journalist