Liquidity Buffers, Systemic Banks, and Interbank Rate Spread: Evidence from Rwanda

This paper examines how monetary policy actions, bank liquidity positions, and institutional heterogeneity shape interbank pricing in Rwanda. Using a bank–month panel dataset constructed from transaction-level records on the Rwanda Integrated Payment Processing System (RIPPS) for monthly data from 2018 to 2022, we estimate a dynamic fixed effects model of the interbank spread, defined as the difference between a bank’s volume-weighted borrowing rate and the Central Bank Rate (CBR). The findings show that policy rate changes are transmitted to the interbank market but with incomplete and gradual adjustment. Liquidity buffers lower funding costs in normal times, yet their stabilizing role weakens during system-wide stress, particularly evident during the COVID-19 shock, which generated a broad-based and persistent widening of spreads. Despite holding the bulk of system liquidity, domestically systemic banks do not receive preferential pricing once liquidity positions are controlled for. Robustness checks using a Basel-aligned liquidity risk index confirm that liquidity risk is consistently priced over time. These results suggest that strengthening liquidity forecasting, enhancing fine-tuning operations, improving coordination with fiscal cash-flow cycles, and adjusting corridor design to the policy stance would reinforce interbank market stability and improve the effectiveness of Rwanda’s price-based monetary policy framework.