Saturday, January 19, 2019 | 05:07 AM

Reserve Requirements

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It is common for commercial banks to be required to hold a minimum proportion of their total deposits at the central bank. While also contributing to maintaining public confidence in the solvency of the banks, the primary purpose of such reserve requirements is a tool of monetary policy which restricts the amount of money that is available for the banks to lend. It is a direct monetary instrument, since the amount of required reserves can be specified precisely. This is in contrast to indirect monetary policy instruments, such as interest rates where the amount of bank lending is influenced through the cost of borrowing.

In Botswana, this is known as the Primary Reserve Requirement and the reserves are held in the form of non-interest bearing deposits at the central bank. As of July 1, 2011  reserve requirements will be 10 percent of bank deposits excluding foreign currency accounts (see official Order and press release), up from 6.5 percent. This is calculated on a monthly basis using deposits from two months earlier (e.g. required reserves in January will be calculated on the basis of average deposits for the previous November). The increase is intended to reduce the amount of liquidity that is absorbed through Bank of Botswana Certificates. Given the amount of excess liquidity in the banking system, this measure will not constrain the supply of credit.

Data on the level of commercial banks’ reserves (both required and actual) at the Bank of Botswana can be found in the monthly Botswana Financial Statistics (Table 3.11).

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