The United Nations Economic Commission for Africa in collaboration with the Central Bank of Tanzania and Front-clear has just launched the feasibility of an Umbrella Guarantee Facility for the Tanzanian market.
The Umbrella Guarantee Facility (UGF) also known as Tradeclear, is a systemic approach to reducing counterparty credit risk in the market, the key challenge behind market segmentation.
On the other hand, Front-Clear, which is a technical partner for the UN Economic Commission for Africa (ECA), is an institution dedicated to money market development working in Tanzania since 2016.
It was stated during the launching seminar in Dar-es-salaam that entrenched market segmentation pushes banks to rely on central bank standing facilities for their liquidity adjustment, despite often high levels of excess liquidity in the banking system.
Where liquidity trading does occur, it is limited to few often larger counterparties.
Segmentation thus prevents relatively smaller banks from mobilizing funds at lower rates, making the trickle-down effect of lowering credit rates in the financial system more difficult.
Without access to the interbank system, such banks that often play an outsized role in serving Small and Medium Enterprises hoard liquidity as primary risk mitigation versus putting it to more productive economic use.
An inclusive interbank market will be central to recovery and to improved resilience to future shocks.
The Trade-clear Feasibility project will involve extensive market engagement to determine the optimal Trade-clear Tanzania structure, tailored to the local dynamics of market demand, legal factors, and settlement processes.
The Bank of Tanzania (BoT) Manager for Domestic Markets and Financial Markets Liku Kamba, hailed the partnership between ECA and Frontclear hatched in 2022, reiterating the central bank’s commitment to develop Tanzania’s money market.
The ECA Economic Affairs Officer, Sheng Zhao, explained the commission’s functions and ongoing efforts of its Innovative Finance and Capital Markets Section in helping African countries develop their domestic financial markets.
Mr. Zhao also gave an introduction on ECA’s technical assistance programme on money and interbank market development in Tanzania, which is funded by the French Development Agency (AFD).
Both Philip Buyskes, the Executive Officer of Frontclear and Ingrid Hagen, Senior Vice President, Frontclear made presentations on repo and swap transactions, Tradeclear and its concepts, structures, benefits, mechanisms and needed documentation.
They also addressed the purpose, steps, and required inputs of the feasibility study.
Peer country experience was drawn to sensitize the market participants, and preliminary findings were introduced on the compatibility of standard repo documentation and the local legal and regulatory environment in Tanzania.
This feasibility study came after the completion of Money Market Diagnostic Framework (MMDF) study in early 2023, implemented by Front clear in collaboration with ECA and funded by AFD and Front-clear, with detailed analysis on Tanzania’s money market and recommendations for improvements to the monetary policy framework and liquidity management.