The interest rate at which banks lend to each other, that is the interbank lending, is more expensive in African markets than in matured markets.
A well-functioning interbank market provides a ready source of funds for banks with temporary liquidity needs that is dire need of funds and provides a comparatively low-riskdestination for the funds of banks with a temporary liquidity surplus.
Financial institutions use the global interbank market to trade currencies among themselves, mostly on behalf of the banks’ own accounts, and to borrow and lend funds on a short-term, often unsecured basis meaning such trading is accompanied by a lot of risk.
A recent economic report on African Banks, reveal that in Africa, interbank markets are struggling to play their role as a result of limited participation by banks, hence, such markets rely on the intervention of central banks.
“Most African interbank markets rely on a limited number of small banks. Large international banks can access intergroup funding, and the largest banks can access market finance, which reduces their participation in the interbank markets. Small banks are less able to attract deposits and end up relying on more expensive interbank funding.
“Interbank markets in Africa are also segmented, fragmented and inefficient, compromising the effectiveness of monetary policy in the short run”.
In part because of the small number of traders in these markets, a lot of pressure is put on the central bank to come in to meet any shortfall in funds. This coupled with the high policy interest rates, interbank lending is more expensive in African markets than in matured markets.
Additionally, the interest rates in these interbank markets are often used as a reference for the risk-free interest rate on various financial products that are tied to a variable interest rate, thus in effect, customers of such financial institutions are more likely to bear the burden as well because of the high charges that will be put on their financial products such as loans.
The structure of interbank markets in Africa implies that the interbank rate has no signalling effect on the state of market liquidity or market distress. Central banks often step in to provide liquidity to the market to give the appearance of normal conditions on the interbank market.
“African bank lending activities depend primarily on deposits. When banks fail to attract adequate deposits, they try to fill the gap by participating in the interbank market or by relying on liquidity provided by the central bank.
“But because interbank markets in some African countries are not functioning properly, they are unable to support bank lending. Only large and listed banks can issue debt securities or raise equity on stock markets”.
In recent years various reforms in the financial sector seems to be improving banking sector. With the coronavirus pandemic, the interbank lending rates have been reduced in various countries as part of the measures to drive down lending rates to individuals and the private sector. However, debt burden seems to be increasing as central banks have to borrow to also assist banks.
