Last week’s instalment titled “Why Bank Profitability Is Under Threat” elicited several responses, the gist of which was that without addressing key structural issues of the banking sector, we can only be scratching the surface.
Financial Sector Spotlight with Omen Muza
Under such circumstances, whether individual banks are profitable or not, is probably not the real issue.
In the final analysis, the regulatory and operational context in which they are free to fail or succeed is probably more important for the long haul.
All else is mere talk on the periphery, serving no useful purpose other than to distract attention from the elephant in the room. As in Shakespeare’s Macbeth, it is a tale “full of sound and fury, yet signifying nothing”.
A senior industry professional pointed out — as previously highlighted by other institutions such as the African Development Bank (AfDB) — that without restoring the Reserve Bank of Zimbabwe’s role as a lender of last resort and reviving the interbank market, stability remains a mirage.
This, of course, is linked to the imperative of resolving the apex bank’s debt question in the wider context of national indebtedness.
Yes, banks need liquidity, good risk management policies and practices as well as to strike a good balance between revenue and expenditure, but at the root of the matter is the fact that the central bank is largely non-functional.
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If the Reserve Bank was properly equipped to perform the mandate envisaged for it by the Banking Act there, for instance, would have been no need for it to engage in gruelling negotiations in order to arrive at a memorandum of understanding (MoU) with banks.
It would simply have deployed the policy levers at its disposal to influence the situation appropriately.
Experts argue that the full import of the Reserve Bank’s lack of capacity is that if the country was to face financial dire straits such as those currently playing out in Cyprus, the consequences would be too ghastly to contemplate.
The apex bank can only watch since it has no financial means with which to launch any kind of meaningful intervention strategies. Experts point out that all other countries that go through financial crises routinely turn first to their central banks before seeking external help.
A regrettable consequence of the Reserve Bank’s indebtedness, the argument goes, is that there is now neither internal nor external faith in its ability to carry out the traditional roles of a central bank.
In order for it to assume its pride of place as the mainstay of a financial sector which not only supplies, but also regulates the flow of liquidity in the economy, it will first have to become solvent.
The apex bank is supposed to be playing the role of guarantor to banks seeking access to foreign lines of credit, but alas, the sovereign risk emanating from its own indebtedness is actually a primary impediment to banks’ otherwise valiant efforts.
Part of the RBZ’s duty is to make onsite inspections of banks and issue CAMELS ratings, but it is awkward to have an institution that is itself insolvent issuing statements on parameters such as capital adequacy, asset quality and liquidity. With no moral high ground to stand on, the Reserve Bank is faced with a moral problem of significant proportions, industry figures contend.
Maybe that is why the full scope onsite examinations of some banks were last conducted as far back as 2006 despite sea changes in all the material respects of capital adequacy, asset quality, management, earnings, liquidity and sensitivity to market risk.
The discussions that ensued from “Why Bank Profitability Is under Threat” reminded me of the insights of one Vikram Mansharamani, a Harvard Business Review contributor who argues that we have become a society obsessed with specialists.
We “have come to value expertise, and in so doing, have created a collection of individuals studying bark. There are many who have deeply studied its nooks, grooves, coloration, and texture. Few have developed the understanding that the bark is merely the outermost layer of a tree. Fewer still understand the tree is embedded in a forest,” he says.
None more so than in the case of Zimbabwe’s banking sector is his viewpoint clearly illustrated. We are in danger of becoming “experts” diligently studying “bark” when the issue is about context — the actual tree and forest in which it exists.
The point is: Whatever is happening inside banks, we ultimately have to place it squarely in the sovereign context in order for it to make sense, because that is where the real structural issues needing attention reside.
Otherwise if we continue to focus exclusively on issues such as recapitalisation and profitability while paying scant attention to broader contextual issues, we will continue to tinker with decimal points only to realise that when all is said and done, we will have missed the wood for the trees.
Omen N Muza writes in his personal capacity. You can view his LinkedIn profile at zw.linkedin.com/pub/omen-n-muza/30/641/3b8 [email protected].
