The National Bank of Ethiopia (NBE) Governor Mamo Mihiretu has initiated a new directive allowing commercial banks to trade their liquidity through interbank money market operations, hoping to enhance financial stability in the sector. The directive put forth last week enables banks to access short-term liquidity by borrowing and lending directly from their excess reserves.

The directive outlines regulatory mechanisms for liquidity trade, requirements, trading timelines, platforms, and mechanisms for a safe, efficient, and collateralised interbank market. Until an electronic trading platform is fully implemented, a manual book-entry system will facilitate interbank market trading while physical certificates may temporarily substitute for dematerialised securities.

According to Fikadu Digafe, vice governor of the central bank, this is one of the central bank's roles to ensure fiscal and monetary stability while opening the door for inter-bank money market rate operation. He said they plan to meet short-term liquidity objectives by allowing finance movement based on demand and supply.

"Financial stability and vibrancy is the goal," he said.

Financial stability and vibrancy is the goal.

The central bank had availed a three-year strategic plan, marked by several directives and establishing open market operations to take a shot at inflation. Taking benchmarks from other countries such as Kenya, Uganda and Malaysia, Fikadu said the operation will be a trust-based liquidity swap between the banks, while the fixed-time deposit facilities are ongoing.

Market participants must quote overnight or seven-day tenors, with a minimum deal amount of 25 million Br while the law grants the banks to manage their exchange rate and interest risk.

“We’ve established a regulatory mechanism to monitor fairness,” he said.

Trading hours are restricted to the five working days of the week, and transactions must include the maturity date, interest rate, and price in local currency.

Recently, the central bank set an interest rate of 15pc as the anchor of its monetary policy, three percentage points lower than what it previously lent to commercial banks under liquidity strain. The law also introduces risk management measures, such as a reduction of underlying assets to mitigate market and credit risks. Transactions will be backed by collateral securities similar to those used in the central bank's refinancing operations.

The interbank lending market will be facilitated through the Central Securities Depository System (CSD), managed by the US-based technology firm Motran, which recently partnered with the central bank. The directive introduces a Real-Time Gross Settlement (RTGS) system to enable the transfer of funds with interest upon maturity.

Another trading platform is under the Ethiopian Security Exchange (ESX) for the upcoming operation in the capital markets. CEO Tilahun Kassahun noted that the exchange will facilitate trading once approvals are granted by the Capital Market Authority. He said that interbank operations are foundational for other financial instruments such as bonds, securities, and derivatives.

“Enabling banks to operate without the need to match loans to deposits will give them flexibility,” he said.