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Budgetary implications for financial sector

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In last week’s instalment we reviewed budgetary implications for agricultural financing and development.

This week we explore the impact of the fiscal policy on the financial services sector, while highlighting the interrelated nature of the agricultural and banking sectors.

The 2012 Budget’s theme includes sustaining inclusive growth, so it highlights the need for easier access by the public to basic services such as banking services.

It therefore pledges to focus on “redesigning the financial services sector to promote savings, financial deepening, viability, sustainable finance to the business sector, as well as reduction of financial sector vulnerability”.

The financial services sector is expected to weigh in with a GDP growth rate of 23% in 2012, down from 24% in 2011. Notably, this will be the highest growth rate of any sector in 2012, which augurs well for general economic growth as the banking sector plays a critical role in the realisation of the development aspirations of any country.

Banking sector liquidity support: Perhaps the single most significant aspect of this Budget for the financial services sector is the introduction of a $100 million fund jointly funded by as yet undisclosed international financial institutions and a regional financier.

The fund will enhance the Reserve Bank of Zimbabwe (RBZ)’s lender of last resort function which should in turn have a positive impact on interbank market activity and positively impact on the flow of liquidity from surplus areas to deficit areas.

Deposit mobilisation: From a level of $3,3 billion as at September 30 2011, the deposit base is estimated rise to around $3,8 billion in 2012.

An amount of $2 billion, however, remains out of the formal banking system mainly due to lack of incentives and historical factors linked to market confidence.

The imperative for the financial sector is to up the game in order to not only reach this target but also surpass it. While the fact that this unbanked market is there for the taking is sufficient motivation to spur banks into action, fierce competition for existing deposits is an even bigger reason.

However, in terms of deposit interest rates, banks will have to do better than current levels of as low as 0,2% if they are to make any headway.

Lending rates: Of the estimated deposit base of $3,8 billion, 80% will be available for lending, but with lending rates in the 15-30% range, growing the sector’s loan book will not come cheap for borrowers.

Financing of agriculture: Given limited fiscal resources and an annual financing requirements of $2,5 billion for agriculture, the imperative for “stimulation of larger private financial investments in agriculture” cannot be overemphasised.

Completion of work on a securitised lease should therefore address the concerns of the banking sector and pave the way for more funding to flow into agriculture.

The government is also arranging a commercial agricultural financing facility through the banking sector.

Apparently, no time is being wasted because before the ink on the Budget statement is dry, CBZ is already on the market to mobilise $100 million through issuance of 360-day Agro-Bills on behalf of the Agricultural Marketing Authority.

Growth clusters: The adoption of the growth cluster approach and the subsequent establishment of strategic companies at provincial level will require critical supporting business activities and infrastructure.

Subject to appropriate feasibility studies, the banking sector will be expected to reconfigure itself to provide the banking needs of these clusters.

Of note is the proposed establishment of the offshore financial hub in Victoria Falls or Kariba whose functionality is not yet clear, but might perhaps be further explained in the RBZ’s forthcoming Monetary Policy Statement.

This cluster concept should be of significant interest to banks because it can hasten their adoption of the value chain approach to financing.

Decentralisation/devolution of power in banking: One of the notable things about this Budget is its focus on creating equity.

It is in this spirit that the Finance minister proposes the decentralisation of the provision of a range of both public and private services including banking, away from Harare and pledges to work with the financial services sector to achieve this objective.

This is a strategic issue that banks with branches in Matabeleland/Bulawayo have to seriously consider because they may end up being directed to devolve power to disburse funds under facilities such as Zetref and Dimaf to clients without reverting to head office.

Verdict: My verdict on this Budget is that, through one massive act of avoidance (hopefully not denial), it once again manages to side-step some of the more critical issues the financial sector would have expected to be addressed, such as refunding of the corporate foreign currency accounts funds that the RBZ helped itself to in its weaker moments, compensation of the Zimbabwe dollar account holders who lost their money upon dollarisation in February 2009 and the recapitalisation of the Deposit Protection Board.

Other issues which the Budget glosses over are the establishment of the Credit Reference Bureau and the long-standing issue of importation of coins for change.

While it clearly sets out to “redesign the financial services sector to promote savings, financial deepening, viability etc” after going through it, I am none the wiser as to how this Budget intends to do so, which leaves me a bit underwhelmed.
Weigh in with your insights on omen.muza@gmail.com.

Omen N Muza is a banker and managing director of TFC Capital (Zimbabwe) (Pvt) Ltd who writes in his personal capacity.

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