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Rediscovering Zim banks relevance

Business
“Finance promotes growth, but without a properly functioning financial system, this supposition remains a myth in Zimbabwe.”

“Finance promotes growth, but without a properly functioning financial system, this supposition remains a myth in Zimbabwe.”

OMEN MUZA

In this instalment, we feature guest columnist Ronald Rateiwa, a competition policy and development finance specialist with more than 10 years’ experience across Southern African countries, who posits that banks in Zimbabwe have lost their way and need to rediscover their relevance if they are to achieve their full potential. Before joining DNA Economics in South Africa, Rateiwa spent six years as an economist in the Enforcement and Exemptions Division of the Competition Commission in the same country. He holds an MSc in Banking and Financial Services and is currently completing his PhD in Development Finance.

It has been theoretically postulated, and empirically demonstrated that, by carrying out its financial intermediation role, the financial system improves the productivity and allocative efficiency of capital, thus promoting economic growth. Unfortunately, a review of the performance of the financial system in Zimbabwe, by function, suggests that the sector has long lost its relevance. This article suggests that finance promotes economic growth under certain conditions. While it is common cause that the macroeconomic and political environment increase the risk profile of the country, this article only reviews what I think the banks could still have done better under the circumstances.

Firstly, savers in Zimbabwe now prefer to keep their money under mattresses than depositing it with a financial institution, wherein one will have to spend hours, if not days, queueing to withdraw their savings. Due to the perennial cash shortages that have existed in the financial system, depositors have lost confidence in the financial system. The loss in confidence by savers has been exacerbated by excessive charges (non-interest income), which have become the core source of revenue for most banks. This then feeds into a system where people prefer to use cash and keep it under the mattress rather than lose most of it to bank charges. Anecdotal evidence suggests that, whatever amount of money depositors withdraw from the banks, they will not deposit it again into the banks. Secondly, banks appear to be risk averse when it comes to lending. Credit is required to finance working capital and investment into new equipment. Figure 1 above shows that, as from January 2012, banks have been lending less and less compared to the deposits they mobilise. Lending by banks becomes critical when the country’s external sources of credit are limited, leaving borrowers to rely heavily on the domestic financial system for their financing needs. Thus, while banks should not lend excessively, in particular circumstances, as was in the case of quantitative easing, banks may be required to extend more funds to support investment in productive sectors. This case does not need to be over-emphasised for Zimbabwe.

Thirdly, notwithstanding the mobile money innovation, cash shortages have adversely affected the ability to transact by ordinary citizens. My parents in the rural areas are now resorting to barter trade because cash transactions are difficult to consummate. Barter trade increases the cost of doing business, which ultimately affects the productivity of the economy.

Fourthly, due to inadequate project screening, monitoring, and failure to adhere to corporate governance procedures, the occurrence of non-performing loans and insider (related party) loans have been rampant. Inadequate screening of projects suggests inefficient allocation of capital. Figure 2 below shows that while banks might have succeeded in bringing down the volume of non-performing loans, there is an awkward relationship that exists between the level of lending and non-performing loans in Zimbabwe. The theoretical proposition posits that as banks lend more, the amount of non-performing loans is likely to increase. However, Figure 2 seems to show a different picture, wherein non-performing loans increase when the level of lending is decreasing. The comparison uses bank intermediation, “proxied” by the ratio of bank credit to bank deposits, and non-performing loans. A high intermediation ratio implies that banks are lending more relative to the deposits they are mobilising.

Lastly, the other role of the financial system is to facilitate risk diversification and management. However, the financial system in Zimbabwe seems to be exacerbating, rather than ameliorating liquidity risk for savers — wherein, they can deposit their savings, but cannot access their money as and when they want it. Because of the little activity by non-bank financial institutions which are otherwise a source of long-term financing, banks resort to using short-term deposits to finance long-term projects. This is unsustainable for banks as repayment obligations do not match with project cash flows, and contributes to bankruptcy.

Considering the preceding discussion, I have three suggestions to the banks, which should help re-define their relevance to economic activity and growth in Zimbabwe. Please note that while policy consistency on the part of government and the central bank is also important, the purpose of this instalment is to focus on the side of the financial institutions.

Robust screening strategies to identify bankable projects

My view is that it is lazy man’s work (or lack of capability and capacity) for banks to argue that the economic environment in Zimbabwe is risky, therefore, they cannot lend for investment. If there were no bankable projects in Zimbabwe, how does it happen that some projects are being sponsored by investors from the Far East? And they keep on investing in the country. There is a need for banks to reinforce their corporate finance divisions to be able to identify bankable projects and monitor borrowers. The number of cases wherein banks are pursuing borrowers (some of them related parties) through the courts to recover their money for projects they did not even know or see attests to this.

Banks need to regain the confidence of the savers

While the blame has always been placed on the government or the central bank, I firmly believe that banks have failed in their own right to perform their fiduciary role. The result is that savers have lost faith in the banks. What they believe is that banks are arrogant and do not care about them. There is a need for step-change interventions to change this perception if banks are to remain relevant in the future of the country. Also, improved corporate governance by banks will help to attract deposits.

Sponsor entry into non-bank financial institutions sphere

Lastly, opportunities for the development of investment banks, venture capital, and other non-bank financial institutions go begging. It is common cause that the country requires long-term financing, which finance should be predominantly sourced from non-bank financial institutions. While banks cannot carry out the functions of non-bank financial institutions due to regulatory requirements, they can sponsor entry into that sphere.

If they seriously consider the foregoing suggestions, I believe that banks will be able to rediscover their relevance to the future of Zimbabwe. I am not suggesting that banks should start taking on excessive and unwarranted risk, they should learn from the experience of banks in other countries in order to define a new development pathway for the country. Such an approach, will not only re-define the role of players in the financial sector in the Zimbabwean economy, but also help them to rediscover their relevance to the economic growth process in the country.

Omen N. Muza is the founder and editor of the MFSB. You can view his LinkedIn profile at zw.linkedin.com/pub/omen-n-muza/30/641/3b8 or initiate contact on [email protected].