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 policy 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 (PRR) and the reserves are held in the form of non-interest bearing deposits at the central bank. In terms of Chapter 55:01; Part VII; 40 of the Bank of Botswana act, as of July 1, 2011, the Primary Reserve Requirement has been set at 5 percent of bank deposits excluding foreign currency accounts (see Official Order and press release).
With a view to providing more flexibility to banks, on October 9, 2019, the Bank implemented “reserve averaging” in the determination of the PRR. Under “reserves averaging”, commercial banks do not have to meet the Primary Reserve Requirement daily but, rather, fulfil this statutory requirement on an average basis over the maintenance period. In the Botswana case, the maintenance period shall run from the second Wednesday (inclusive) of each month to the second Tuesday (inclusive) of the following month. “In this way, the maintenance period follows the 12 month year cycle while at the same time avoiding commencing/finishing on weekend, month end and (as far as possible) public holidays, thus helping to smooth banks' liquidity requirements.”
This measure has provided a basis for improved liquidity management by both the Bank and commercial banks. In particular, commercial banks are now actively using the Primary Reserve account as a tool for effective management of liquidity and the Bank envisages that this will over time lead to reduced demand for excess reserves held by commercial banks for precautionary purposes, thus freeing up additional resources for productive lending.
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).