Like many issues in the economy there is no easy answer to this and the likely solution has to be a trade off between the competing interests of consumers and banks.
It is very important for the economy to have significant savings because this money will ultimately provide the funding needed for domestic investment. This makes more sense now when the country has essentially failed to attract foreign investment. It is only through that the economy will start registering real economic growth.
Foreign direct investment has not been forthcoming due to factors like the constant bickering in the government and the fear of property rights violations. Only when the government clarifies the Indigenisation Act, will foreign investors start trickling into the country.
Domestic investment
Domestic investment is normally financed from savings, lines of credit and soft loan facilities from multilateral lending institutions. However the latter two have not been forthcoming due political factors.
Contrary to what some believe, the saving culture is still alive but unfortunately this seems to be happening outside the banking system. An estimated $3 billion remains outside banks. This now brings us to the issue of bank charges and how they continue to inhibit growth in domestic investment.
During the hyperinflation period of between 1999 and 2008 businesses, including banks, had to constantly adjust the prices of their products to shield against inflation. Banks were in a peculiar position because they could not, according to the law, hold onto non-prescribed assets. This left them in a particularly bad position because the considerable amount of assets they held were in the then rapidly deteriorating Zimdollar.
One way banks could compensate for this was by regularly adjusting the cost of providing their services. This, along with the hyperinflation, helped to drive people away from banks as they sought to insulate themselves against inflation.
The final straw for banks came when the huge Zimdollar balances held by banking clients simply disappeared.
Banks shunned
Banks have carried these heavy charges into the multiple currency system and most low-income earners have refrained from returning to banks as a result. When they do use banks it is for purposes of moving funds and not necessarily keeping them in the bank. Clients give high bank charges and low interest on deposits or savings as their reason for shunning banks. This is one fact that has consistently been supported by the published results of many banking institutions. In the past year one financial institution, POSB, which supposedly caters for low-income earners, showed that revenues from charges accounted for nearly 75 percent of all revenues.
Such a performance raises questions about the level of charges and how these are justified in an economic environment where workers survive below the poverty line.
Generally bank charges and commissions make up 35-50 percent of revenues accruing to banks, with the remainder coming from core activities. Banks have routinely defended the charges claiming the environment they were operating in justified these. However, it becomes a little strange when banks remain profitable while the rest of industry continues to reel under the shortage of credit.
Because of the exorbitant charges, banks are not able to attract long term savings, which means there will be little medium to long-term credit available. The lack of such credit means companies that desperately need fresh capital for retooling or expansion will not be able change their circumstances.
Govt intervention
There will be no jobs created, no value addition and certainly no economic growth. The recent revision downwards of the country’s growth figures is partly due to this and reports seem to indicate the government wants to intervene by setting standards with regards to banking charges.
While the central bank apportions blame solely on banks, it cannot escape blame itself because it was instrumental in activities that fuelled inflation – namely the printing of money.
Confidence in the entire financial system has to be restored first and reforming the central bank to the satisfaction of all stakeholders is central to unravelling this banking charge crisis. A credible apex bank will be able to pressure banks into towing the line without causing unnecessary upheavals in the financial markets. So far the resistance banks seem to be showing indicates that it will not be easy to convince banks to act.
Post published in: Business