Guarantee facility in interbank money market in offing
TANZANIA is set to have a Tradeclear or an Umbrella Guarantee Facility in the next two or three years to help more banks to participate more actively in the interbank money market.
The Chief Executive Officer of Frontclear, a financial market development firm, Phillip Buyskes told the ‘Daily News’ in Dar es Salaam last week that they were looking forward to developing an umbrella guarantee facility to develop a more stable and inclusive interbank market among local banks in Tanzania.
“Our long-term focus (which is) subject to Central Bank approval, is to develop a tradeclear or an umbrella guarantee facility to help small banks participate more actively in the market,” he said after signing a Memorandum of Agreement with the Central Bank to develop and money markets.
Under the MoU, Frontclear in partnership with the UN Economic Commission for Africa (ECA) will conduct diagnosis of the money and interbank market and propose measures to further deepen the market in consideration of the prevailing local and international markets.
They would also conduct feasibility studies to build capacity of the Central Bank and money and interbank market players on the mechanism and benefits of the umbrella guarantee facility to deepen further the markets.
The interbank market has been limited to the top players because they lacked the risk appetite to deal with smaller banks which in turn affect the level of credit the smaller banks could extend to their customers, he said.
This umbrella guarantee facility will cover the risk of interbank defaults. If a borrowing bank fails to pay the lender in a secured transaction, Frontclear will stand ready to pay back the funds advanced by the lender,” he said.
Speaking at the MoU signing ceremony, the Central Bank Deputy Governor, Economic and Financial Policies, Dr Yamungu Kayandabila said the agreement reflected a shared commitment to developing money market in Tanzania, including a more participatory interbank market and secondary bond market.
“Development of money market including a more participatory interbank market is clearly in BoT agenda,” said Dr Kayandabila noting that the agreement would help to develop money markets and including deepening interbank market and secondary bond market.
Under the MoU challenges in the money and interbank market would be identified and measures to deal with them would be recommended, he said.
He said more stable and inclusive money markets were a pre-requisite for increasing depth in local currency bond markets.
“The nucleus of the money market is interbank lending where banks borrow and lend to each other using financial instruments such as repurchase agreements (repos), and hedge balance sheet risks through derivatives.
“Central Bank and banks rely on interbank markets to deal with immediate liquidity challenges and to transmit changes in monetary policy,” he said.
The head of the innovative finance and capital markets session at the United Nations Economic Commission for Africa, Sonia Essobmadje, said they were pleased to support the Bank of Tanzania in its efforts to further develop the money and interbank markets.
She said they would be involved in the Money Market Diagnostic Framework (MMDF) analysis with the main expected outcome of strengthening the capacity of Central Banks in understanding the current development of the money and interbank market, including its strengths, weaknesses, and comparative positions and formulating policies to further develop the money and interbank markets in the light of current conditions.
She said they would carry out Tradeclear feasibility studies with the main objective of building the capacity of the Central Bank and market participants in understanding the framework, mechanisms, and benefits of the umbrella guarantee facility Tradeclear, and to reduce market segmentation and counterparty risk.
The Managing Director and Chief Executive Officer of Absa Bank Tanzania Limited Abdi Mohamed said the MoU was important as it would help to further deepen the money market.
Mr Mohamed who is also the Chairman of the Financial Markets Committee of the Tanzania Bankers Association (TBA), said the banking sector was committed to create and support financial stability.
He said challenges of money market in Tanzania were global in nature and drawing the support to make money market more efficient was a move towards the right direction.
The Acting Chief Executive Officer of the Dar es Salaam Stock Exchange, Mary Mniwasa commended BoT and ECA for signing the MoU noting the MoU was important to help small banks to take more active role in money market to improve liquidity in the financial system
“Commercial banks were the major market liquid providers but large commercial banks were the only participants in the interbank market. Any intervention by stakeholders in helping to develop the markets is highly appreciated,” she said.
