The Zimbabwean economy is significantly agro-based; it relies on primary and extractive industries so drought and falling commodity prices will conspire to make 2016 a difficult year, considerably increasing the risk of operating in the country. Despite this dipressing background, there will still be some opportunities, moreso, given that financial institutions are in the business of managing risk anyway. This installment explores some of the issues banks are likely to grapple with in 2016.
Financial Sector Spotlight by Omen Muza
Adoption/Usage of Renminbi/Yuan
In December 2015, Central Bank Governor John Mangudya announced that the People’s Bank of China and the Reserve Bank of Zimbabwe were investigating the feasibility of increasing usage of the Chinese currency under the multicurrency system, a development that could increase trade and help minimise exchange rate losses between the countries. With a policy decision having been made to enhance usage of the Renminbi or Yuan, banks will have to be part of the implementation matrix since all financial flows must pass through the formal banking system. This entails forging new relationships with Chinese correspondents at a time some European banks have been closing accounts for Zimbabwean banks.
A cryptocurrency is a digital currency in which encryption techniques are used to regulate the generation of units of the currency and to verify the transfer of funds, typically independent of any central authority.
The first cryptocurrency to capture the public imagination was Bitcoin, which was launched in 2009. It’s relative success has spawned a number of competing cryptocurrencies such as Litecoin, Namecoin and PPCoin. This is however, still virgin territory for Zimbabwean financial institutions, though a few local fintech companies have been exploring this already, some in partnership with banks. Bitmari, a local version of Bitcoin is one such initiative. We also hear that BitFinance has rolled out a bitcoin exchange that allows users to buy and sell bitcoins using mobile money or their bank accounts. The advantage of this internet-based currency is that it is instantly transferable electronically at very low transaction costs, which could help to address the issue of the high charges locals encounter when receiving money from the Diaspora. I, therefore, expect that one of the key issues of 2016 will be how or whether banks will respond to this opportunity. Will they snooze as they did with mobile money, and let fintech companies run away with it? Some however, ask whether Bitcoin is actually an opportnity in Zimbabwe, against the background of individuals and merchants elsewhere in Africa proving reluctant to adopt it as a means of sending and receiving money.
Arrears clearance strategy
While it is most welcome, implementation of this strategy is definitely a double-edged sword, especially given the relatively short time in which it must be achieved.
In the short-term this may have significant implications as it may suck liquidity out of the domestic market as Treasury seeks to meet the collateral requirements for the required bridge loans. However, in the medium to long term, this strategy should unlock new sources of external financing. I say no pain, no gain — a country has to do what a country has got to do.
“We have made commitments to clear debts by April next year. If we go the extra mile to clear the arrears, it will be a new ball game entirely because that will put us in line for a country financing programme. Acceptance of our arrears clearance strategy has improved our standing. Our risk premium is already being looked at in better terms” said Finance Minister Patrick Chinamasa recently.
Implementation of the Indigenisation Law
Foreign-owned companies operating in Zimbabwe — banks among them — are definitely watching recent developments in respect of indigenisation with keen interest given compliance implications. Banks not in compliance may soon have to pay a fee, according to the new implementation framework, which would definitely, add to their cost structure.
After the policy announcement, actual implementation, including the still to be determined quantum of the fee is keenly awaited.
Broadly speaking, a more flexible framework for implementing the indigenisation law could result in increased investment inflows, which would have a salutary effect on the country’s liquidity situation.
The Reserve Bank of Zimbabwe is finalising the National Financial Inclusion Strategy and once the apex bank has set the regulatory and strategic agenda, banks will have to toe the line as they are expected to play a huge role in enhancing financial inclusion, something that requires them to make a paradigm shift.
In fact, the central bank has made it mandatory for banks to submit financial inclusion plans, a development that will see no new bank licences being issued without credible financial inclusion policies. Already, the likes of Old Mutual are responding positively to this policy stimulation and positioning themselves to play a meaningful role in the area of financial inclusion. The diversified financial services group has established a Financial Inclusion Division for which it is already recruiting staff.
Establishing new correspondent relationships
“Global regulations are having a significant impact on transaction patterns. As a result, larger international institutions are reviewing their correspondent banking relationships and de-risking. This, together with the costs to meet international regulatory requirements, may ultimately result in smaller domestic banks in Africa being excluded from international banking relationships,” said Hugo Smit, head of sub-Saharan Africa for Swift.
Smit said this in mid-2015 and it has since come to pass in Zimbabwe, among other African countries. A number of local banks have recently had their Euro and United States dollar accounts closed by their European correspondent banks and their challenge in 2016 is to quickly establish new relationships in order ensure that payment streams are not disrupted, otherwise they risk losing market share for international banking business. What are their options? Increasingly using the Yuan/RMB and forging new partnerships/relationships with Chinese lenders? Increasingly leaning on regional payment systems such as Sadc’s Integrated Regional Electronic Settlement System?
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