HomeOpinion & AnalysisColumnistsBudget: Imperatives for the financial sector

Budget: Imperatives for the financial sector

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This week, I had planned to write about financial sector support for the arts as part of corporate social investment (CSI) programmes but in the wake of the presentation of the 2011 National Budget by Minister of Finance Tendai Biti on November 25 2010, it would have been some kind of dereliction of duty — if not a fatal form of denial — not to pay attention and, more importantly, say something about the minister’s fiscal agenda.

My focus is however not on the adequacy or lack thereof of the Budget, enough ink will be spilled in the coming weeks by all kinds of analysts doing just that.

I limit my two cents’ worth to the implications of the Budget for the banking sector, as might be expected of FSS.

Having sufficiently reviewed the Budget, I have come to the conclusion that as far as the banking sector is concerned, the story is one of growth.

Deposits levels, transaction volumes and values, the loan-to-deposit ratio, liquidity – all these parameters trended upwards during the review period.

The article reviews some of the key aspects of the Budget with implications on the banking sector.

Recapitalisation

As at September 30 2010, 16 out of 24 banking institutions (excluding POSB) were in compliance with the minimum paid-up capital requirements.

Resultantly, eight financial institutions were not in compliance then (some might have complied by now) which resulted in the Reserve Bank extending the deadline to December 31 2010.

Given that the apex bank has signalled unwillingness to extend the deadline further, can we realistically expect to see a flurry of capital-raising initiatives including mergers, rights issues and engagement of foreign partners – as suggested by the minister – between now and December 31 2010? If not, what will happen?

Shotgun weddings? Between who and who? Time – very short time- will tell.

Bank Deposits

Bank deposits grew by a monthly average of US$82 million from US$1,3 billion in January 2010 to US$2,3 billion in September 2010, signifying improved confidence in the sector, according to the minister.

But seriously, was it confidence or liquidity which improved? I thought it was more of the latter than the former but it’s neither here nor there; the important thing is that deposits grew.

The minister went on to say that the short-term nature of deposits, coupled with lack of financial instruments on the money market, makes it necessary that measures be taken to get banks to begin promoting long-term deposits, including savings deposit products.

Methinks it is necessarily a function of improving liquidity and disposable incomes first before people can be coaxed to save for the long haul because realistically, they will only be able to do so once they are able to meet their basic short-term needs in full and still have something to spare.

However with salary levels for civil servants having trailed the Poverty Datum Line (PDL) by an average 70% for most of the current year, and with deposit rates which, in the words of the minister, “in most cases average 0%”, mobilising long-term deposits was always going to be a long shot in the dark.

Now that the minister has budgeted for a 100% increase in the civil service salary bill next year, expectations for notable growth in deposit levels would not be misplaced, even though deposits will remain largely transient in nature.

Cheque Transactions

The good minister noted that current limits on the value of cheques are limiting greater usage of this payment instrument and urged the Reserve Bank to institute measures to review some of the limits on the values of cheques.

Raphael Khumalo, the CEO of Alpha Media Holdings, echoed the same sentiments at the launch of the Banks and Banking Survey 2010 early last month.

While the upward review of cheque limits is most welcome in as far as it seeks to improve transaction volumes, the unintended consequence could be an increase in the incidence of cheque fraud.

The contribution of the different types of payment instruments during the period January – September 2010 is illustrated below:

Transaction Type Volume Value
RTGS 1 300 000 US$16,7 billion
Cheque 138 000 US$34 million
Card ( ATMs & POS)
2 000 000 US$210 million
Mobile & Internet 373 000 US$165 million

It would be interesting to see how the contribution of the mobile and Internet transactions will change, following the introduction of NetOne’s OneWallet mobile money transfer solution, which was recently launched in conjunction with FBC Bank Limited, the banking partner that underwrites the project.

Lines of Credit

Disbursement from approved facilities performed below expectation, increasing marginally from US$205 million in July 2010 to US$273,6 million in September 2010, against commitments of US$735 million.

This underperformance could be attributed to tough drawdown conditions which most intended sub-borrowers cannot meet, particularly with regard to the security requirements.

The African Export Import Bank (Afreximbank) has remained the major financier of the country, with approved facilities amounting to US$299,6 million, out of which US$156 million (52%) was disbursed. Many wonder how Afreximbank has consistently been able to lend where others fear or fail to do so, but its best kept secret is the nature of its form of financing.

Trade finance is typically short-term in nature, highly collateralised and self-liquidating, therefore essentially quite a safe asset class. Afreximbank also has preferred creditor status in its member countries.

The bank is set to play a bigger role in providing longer- dated financing or project-type of financing, as the economy moves from stabilisation to growth mode.

And still on line of credits, Interfin Banking Corporation was appointed as the Local Administrative Agent (LAA) for the Zimbabwe Economic Trade Revival Facility (ZETREF) while BancABC (U$5 million), NMB Bank (US$5 million), TN Banking Corporation (US$5 million) and FBC Banking Corporation (US$10 million) were appointed as disbursing agents.

Notably, so far no foreign-owned financial institution has been appointed to play any sort of role in this facility and FSS believes that this is meant to counter the current situation whereby the top four banks account for around 60% of total deposits.

Money Market Deepening

The period under review saw tentative steps to avail long- dated funding by tapping the money market through bond issues by Agribank (in conjunction with FBC Bank Limited) and ZB Bank for US$10 million and US$30 million respectively, to finance agriculture.

In order to encourage market deepening and increase lending to the private sector, government granted these instruments special features such as prescribed asset status, tax exemption and liquid asset status.

Exchange Control Liberalisation

Following the adoption of the multi-currency regime and liberalisation of the current account, no enabling legislation had subsequently been enacted.

The minister therefore proposed new regulations to provide a legal framework within which the new policy dispensation can operate.

Banks, among other market players, were also directed to “display the daily applicable international cross rates for all prescribed currencies in a manner that is conspicuous to the public”.

Banks can therefore expect to receive a new exchange control directive from the Reserve Bank anytime soon, giving effect to the minister’s pronouncements.

Other reform-minded initiatives

The minister proposed to allow money transfer agencies (MTAs) “to also conduct capital transfers originating from the country”, which in effect makes them deposit-taking institutions. This will have the effect of heightening competition for deposits in the market.

In order to resuscitate the micro-finance sector which had been decimated by hyperinflation, the minister proposed to mobilise US$5 million as seed money for the for the setting-up of a Micro-Finance Revolving Fund, into which CBZ Bank and the Arab Bank for Economic Development (BADEA) would each inject US$5 million to put the initial fund size at US$15 million.

Given the significant contribution of the informal sector to our economy, this is a welcome move which will, in the words of the minister, “facilitate access to reasonably priced lending by marginalised groups”.

In a nutshell, the agenda of the fund is financial inclusion.

In a move that should complement the restoration of the Reserve Bank’s lender of last resort function in terms of increasing confidence in the banking sector, the minister pledged government support the for the mobilisation of funds to recapitalise the Deposit Protection Fund which had been decimated by hyperinflation.

FSS also applauds the imminent introduction of an Agricultural Commodity Exchange which will improve transparency in the trading of commodities and increase farmers’ funding options.

Omen N. Muza is a banker and Managing Director of TFC Capital (Zimbabwe) (Pvt) Ltd. He writes in his personal capacity. Feedback: omen.muza@gmail.com

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