Central bank seeks to revive interbank lending to smoothen liquidity flow

IN a bold move to address Zimbabwe’s persistent liquidity challenges, the Reserve Bank of Zimbabwe (RBZ), has announced renewed efforts to revive inter-bank lending, which remains sluggish due to market segmentation and risk aversion among financial institutions.

RBZ Governor, Dr John Mushayavanhu, reaffirmed the central bank’s commitment to ensuring optimal liquidity and fostering a more efficient monetary policy transmission channel.

“The Reserve Bank continues to closely monitor liquidity levels and developments, taking necessary measures to ensure the smooth and efficient operation of the national payments system,” Dr Mushayavanhu stated in the latest 2025 Monetary Policy Statement.

He emphasised that while maintaining monetary stability remains a priority, liquidity constraints must be managed carefully to support economic growth.

One of the biggest obstacles to an efficient monetary system in Zimbabwe is the lack of active inter-bank market trading. Despite efforts to enhance financial stability, banks continue to exhibit a reluctance to lend to each other, preferring instead to deposit excess funds with the RBZ in Non-Negotiable Certificates of Deposit (NNCDs), which yield no interest.

“Surprisingly, instead of lending to the bank next door and getting interest income, some banks are content with RBZ taking their excess funds and parking them in NNCDs at zero interest,” Dr Mushayavanhu remarked in January, highlighting a paradox that has plagued Zimbabwe’s financial sector.

This reluctance has forced the RBZ to step in and accommodate banks in short positions rather than allowing them to settle their net market positions through the traditional “Lender of Last Resort” mechanism.

To address this challenge, the RBZ has engaged in extensive consultations with the Bankers Association of Zimbabwe (BAZ) to encourage the establishment of counterparty limits that would promote a more vibrant and efficient inter-bank money market.

“Banks are encouraged to set counterparty limits among themselves to enhance inter-bank lending, which is crucial for monetary policy effectiveness,” the Governor added.

Despite progress in stabilising inflation and the exchange rate, Zimbabwe’s tight monetary policy has inadvertently led to temporary liquidity constraints. This situation has negatively impacted economic activity, prompting the RBZ to introduce an intra-day facility for banks to eliminate payment gridlocks.

The move has provided much-needed relief to financial institutions struggling to balance liquidity while meeting client demands.

“The liquidity situation is expected to improve further through disbursements under the Targeted Finance Facility (TFF) to support productive sectors of the economy,” Dr Mushayavanhu noted, expressing optimism that such interventions will facilitate a more robust financial environment.

However, the problem extends beyond liquidity shortages. In a largely dollarised economy, economic agents prefer to hold foreign currency as a store of value while spending local currency. This practice exacerbates liquidity mismatches and limits the effectiveness of monetary policy tools.

The lack of inter-bank trading is not merely a liquidity issue it is also a matter of trust. While some banks are lending to each other on an overnight and short-term basis, medium-term lending remains rare.

“Interbank lending is governed by the risk appetite that banks have for each other. There are lending limits between and among banks, and that has a bearing on the level of lending among market players even if liquidity is in abundance,” BAZ President Lawrence Nyazema explained in January.

This cautious approach has further stifled the development of an active inter-bank market, leaving banks reliant on the RBZ’s liquidity management interventions.

As Zimbabwe seeks to strengthen its financial markets, the RBZ is under pressure to foster confidence within the banking sector while ensuring that monetary policy measures translate into tangible economic growth.

The governor’s call for banks to increase inter-bank lending reflects an urgent need to shift away from dependence on the central bank and embrace a market-driven liquidity management framework.

With the RBZ working closely with commercial banks to ease liquidity constraints and resuscitate inter-bank market trading, the coming months will be critical in determining whether these interventions will succeed in restoring trust and efficiency within Zimbabwe’s financial sector.

Dr Mushayavanhu and his team at the RBZ have made their stance clear it is time for Zimbabwe’s banks to step up and play their part in revitalising the nation’s financial system.-ebsinessweekl