Price controls unhealthy

Although key players had mixed feelings about the MoU, the Bankers Association of Zimbabwe said, “the agreement means we will be taking away just over $40 million in terms of income from the financial services sector”.

As there are efforts by government to actually convert the MoU into a law, the implications of such a move should be carefully understood. Basically, the MoU has capped the lending rates at 12.5 percent, deposit rates at at least four percent, point of sale charges to be between 10 and 50 cents and ledger, maintenance and service fees to be no more than $4 per account, among other terms.

What the above means is that the MoU has introduced price controls in the banking sector. The MoU has also killed the operation of market forces in the banking sector – so much for being a developmental state.

The only sustainable solution for banks would be to widen their nets, catch the unbanked sector and be innovative enough to introduce new financial products.

Under the pillow

However, confidence will determine the banks success to tap into the unbanked, who are now very faithful to their religion of keeping their money under the pillow. Some of these people lost their entire savings in 2009 when they woke up one morning to see that their bank accounts had been frozen. The number of active bank accounts declined from around 5 million in 2007 to less than 1 million in 2010, which indicates the informalisation of banking.

Restoration

The issue of price controls is, however, my particular concern. We should learn something from the year 2007, when all price increases required approval from the National Incomes and Pricing Commission. We all know that it negatively affected the operations of the majority of companies and played a significant role in de-industrialisation.

In June 2007, a directive by government to slash prices had catastrophic effects on manufacturing and distribution sectors, with some players never recovering. Price controls were pervasive – from goods, labour, money and foreign exchange – and gave rise to massive distortions in these markets. We ended up with empty shelves, a very strong parallel market and high unemployment.

Let us fully restore our developmental stateship, by storing the market forces’ freedom to cast lots in the banking sector. Capping prices takes away the flexibility of players to tactfully respond to economic dynamics and business cycles. It also does not give us an accurate reflection of the current operating environment. Furthermore, it compels players who are trying to recover the income of $40 million already lost, to stay at the extremes of the cap. To that end, players will keep their deposit rates at four percent and lending rate at 12.5 percent , even if the base rate for banks falls down.

Ideally, the main income stream for banks should be net interest, which should also be able to cover the banks’ operational costs. However, because of the liquidity crunch problems, banking income is being generated from non-interest income. The absence of alternative investment instruments such as treasury bills and other government securities also aggravated the situation.

A difficult time

The MoU also came at a time when the Reserve Bank raised minimum capital requirements for the various classes of banking and non-banking financial institutions. By the same period next year, commercial banks are expected to have raised their minimum capital bases to $100 million. Due to the reduction in income, which has been brought by the MoU, banks will experience a difficult time raising their capital bases. As a result, this will put pressure on banks to merge. Banks play a vital role in economic development; they provide essential services such as receiving money, extending credit, trading instruments, providing money transmission services and financial leasing. Sanity must prevail in this sector, so that banks can thrive and optimally contribute to the economy.