Financial Sector’s Dilemma: to Bank or not to Bank?

zimtradeTHE stock market is back after almost three months without trading.
Momentum is gradually picking up. However those who had hoped its resumption would end their cash woes must be disappointed by its performance to date.

The bourse has lost a cumulative 42% and still counting. The really touching story is that of some investors who, during the euphoria of ‘kuburner mari’, liquidated huge sums of US dollars to buy shares.

Today with no record inflation gains to mask their wounds, they stand glaring at massive losses of five to 10 times their principal values.

Economists and analysts on the other hand so far appear vindicated as it is turning out that after all fundamentals, which they so religiously believe in, don’t lie. When the market was on a rampage, they attributed the rally to too much money in circulation.

Today with the market now foreign currency denominated, there are very few greenbacks floating around, at least formally, the market is net sellers and prices are tumbling.

Meanwhile the global financial crisis rages on with big economies now swimming deep in recession. What started as bad mortgage lending has spread very far and wide hurting everyone along the way.

There is a complete freeze in credit markets as banks are unwilling to lend due to a high risk of default. In fact, write offs constitute a huge chunk of the losses being reported. The cancer appears to be a complete loss of confidence in the financial systems.

In all of this however, one is tempted to conclude that there is a lesson to be learnt for application in our own financial system.

If anything, one is reminded of the importance of a sound financial system to an economy. It is folly to envision a turnaround without healthy and stable financial institutions. Hearty calls for financial assistance are being made every day in the local media from farmers and industry. Coming from a decade of decay, injections are needed to recapitalise and kick-start


Local banks are facing a multitude of challenges that are threatening their future and that of

the other sectors which depend on credit lines from them. Ideally, the basic role of banks is that of facilitating the movement of funds from those who hold excess to those who need it for various activities.

In Zimbabwe, however, this function has been mutilated.

As is the case globally, the public has completely lost confidence in

the financial system. Memories are still fresh on what happened in 2003. People watched helplessly as some banks were bundled down, taking with them their hard earned cash. Over the years inflation and very low deposit rates have reduced their account balances to nothing.

Recently cash shortages provided the final nail in the coffin: with hyperinflation raging, unable to withdraw their funds, people watched in horror as they were wiped out.

The sector has also experienced heavy regulation, close monitoring and shifting policies – a development that has seen the public viewing the authorities with suspicion and mistrust. Policies have been abruptly changed with painful consequences on depositors. The exchange control framework has been one such policy.

At one time depositors were required to prove the source of their

funds while disposing 45% of gross sales at the inter-bank rate. One fatal

consequence of this policy is the closure of mining houses after failing to

access their FCA’s deposits.

The recent monetary policy has tried to address this but the

requirement to surrender 7.5% or 5% of gross earnings remains very punitive.

It being a given that we are currently operating a cash economy, the

situation does very little to convince people to bank their cash.

Salaries and any deposits are likely going to be withdrawn while

producers and exporters have an incentive to under-invoice transactions,

while hiding the bulk of their receipts. Some companies are finding it

better off to deposit funds outside the country in pursuit of lower costs

and a trusted service.

The hastily crafted dollarisation has left the central bank in a

position where it cannot act as the lender of last resort. Financial

institutions are now forced to outsource services expensively.

For instance, a telegraphic transfer costs US$60 and takes four days

to clear because it passes through multiple accounts. If the same

transactions had been done through RTGS it would only take 24 hours and at a

lower cost.

Cash is also being imported at a cost from regional banks

notwithstanding the limitations on the possible amounts they can withdraw

and the impact of the time lag on cash management. This also implies a

possibility of failure to meet withdrawals. The costs are being passed on to

the local consumers in the form of high service charges, making it even more

unattractive to use banks.

While there is a huge demand for credit to boost production, banks

will be unable to mobilise substantial deposits to meet this, especially

with the inconsistencies and a lack of clarity such as the conflicting

statements from the various authorities.

Already individuals who have substantial cash reserves under their

pillows are making a killing from desperate borrowers. Indeed the days of

chimbadzo (loan sharks) are back again, the reapers are charging as high as

25% for loans granted. Unless measures are taken to restore confidence, the

road ahead looks bumpy for us all; the challenges bedevilling financial

services will have ripple effects across all sectors.


Post published in: Manufacturing

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