Is Zim’s banking sector as healthy as perceived?

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Alexander Maune
THIS article is my response to the Reserve Bank of Zimbabwe (RBZ) governor’s proclamation in his August 2021 monetary policy statement that, “the banking sector is stable, safe, and sound despite the disruptive impact of the COVID-19 pandemic.” As I looked at the RBZ’s quarterly banking sector reports, one thing struck me, the revenue structure of banks, that is, the dominance of non-interest income.

According to the June 30, 2021 RBZ report, non-interest income accounted for 54,82% of total income. The current revenue composition tells how unsafe, unstable and unsound the banking sector is. Yes, other elements can be used to measure the banking sector performance, but turning a blind eye to the current revenue structure of banks and pretending as if everything is okay is not only a betrayal of trust but failure on the part of the authorities. Non-interest income mainly comprised fees and commissions that constitute more than 80%.

How banks make money

Traditionally, banks have generated much of their income by issuing loans and collecting interest. However, a large fraction of bank revenue also comes from so-called “non-interest income.” In the wake of subdued lending due to high risk, it might seem natural that banks make greater use of non-interest income to make up for any declines they might be experiencing in interest income.

Brunnermeier et al (2012) argue that a bank with higher non-traditional income exhibits a higher level of systematic risk. Hunjra et al (2020) added that non-interest income and revenue concentration have drawn great attention to the banking sector.

Further studies by DeYoung and Roland (2001); Stiroh and Rumble (2006); Lepetit et al (2008); Williams (2016); and Maudos (2017) found a significant positive relationship between non-traditional sources of income and risk. DeYoung and Rice (2004) claim that banks with good management rely less on non-traditional income sources than banks with inefficient management practices.

Berger et al (2010) confirm this view in China. Baele et al (2007) argue that revenue diversification leads to an increase in the systematic risks of a bank.

Banks take in deposits from consumers and businesses. In turn, banks take the deposits and either invest those funds in securities or lend to companies and consumers. Since banks receive interest on their loans, their profits are derived from the spread between the rate they pay for the deposits (which is zero) and the rate they earn or receive from borrowers.

Banks also earn interest income from investing their cash in short-term securities like Treasury Bills. However, banks also earn revenue from fee income that they charge for their products and services that include wealth management advice, checking account fees, overdraft fees, automated teller machine fees, interest and fees on credit cards etc.

The primary business of a bank is managing the spread between interest that it pays consumers and the rate it receives from its loans.

In our case, banks earn interest by lending free money from depositors. No wonder all banks are making profits in this environment. It is a lucrative business. The size of this spread is a major determinant of the profit generated by a bank.

Net interest income vs non-interest income

Under the traditional banking business model, net interest revenue is the largest source of banking income. This, however, is not the situation in Zimbabwe where non-interest income makes up a significant portion of most banks’ income.

The average bank non-interest income to total income value for Zimbabwe during the period 1996 to 2017 was 39,97% with a minimum of 2,85% in 2003 and a maximum of 73,42% in 2009. The industry’s average fraction of interest income to total income was trending below 50% from 2009 to 2012.

Something happened from 2013 to 2018. This period saw the domination of net interest income as the major contributor to total bank revenue. This has since reversed since 2019. This must be a cause for concern for the monetary authorities and they cannot claim that the banking sector is stable, safe and sound while the sector is abusing/fleecing customers.

Who will stand for the customers if the authorities turn a blind eye to an unhealthy system that benefits the so-called bank elite?

The picture is even worse if we remove the interest portion that banks receive from Treasury Bills. The percentage of non-interest income will be higher. This situation is not good for an economy that aspires to be a middle-class economy by 2030.

That vision is being fought against in the name of maintaining sanity and stability in the financial services sector. We need real discussion around these issues as a nation. The central bank does not possess monopoly of knowledge in monetary economies.

The central bank in 2020 gave the reason as to why the revenue structure of banks looks the way it looks. Its argument was that: “The significant contribution of non-interest income indicates a shift from traditional sources of revenue such as interest income from loans and advances, towards activities that generate fee income, trading revenue, and other types of non-interest income.” In other words, the central bank is admitting that banks have abandoned their core business of lending towards cheap and easy money, taking advantage of customers who have no alternative. No wonder why billions are circulating in the informal market. This is a sign of something structurally wrong in the economy. The functions of banks are clearly stated in the Banking Act and hearing the central bank justifying the abuse of customers is a shocker.

Hearing the central bank governor telling the nation that he needs to pursue moral suasion for banks to start paying interest on deposits is something the Legislature needs to look into. It seems as if banks have become monsters that even the regulator is afraid of. Can this happen in countries like China, Russia or the Asian tigers? I do not think so. With such kinds of institutions realising vision 2030 will remain a pipe dream.

The cost of banking has gone up despite technological developments in the sector. This is in contradiction to what is being said regarding FinTech developments. The sector calls for a disruptive agent to disrupt the existing order. Every bank has its own app these days and most banking activity is done online and clients no longer physically visit bank branches, but customers are now paying high commissions to sustain these branches.

Digitalisation is supposed to make banking cheaper than the current scenario, where the public is unaware of how expensive they currently are.

Instead of helping clients manage their money better, banks are making money off the ignorance of clients. Banks can save people a lot of money by helping them manage their accounts better. Just imagine banks paying nothing on deposits and taking higher interest on loans.

This is daylight robbery. No wonder why banks are making huge profits in an ailing economy like ours. Even if we leave these banks to small boys or girls they will be able to make huge profits given the current environment and protection they enjoy.

We know that the banking industry today is as transparent as one big smokescreen. Which bank can say that it is fair and transparent, a bank that people will want to move to? To get a good answer, just ask its employees before even going to its customers.

The central bank as a regulator must not be involved in Dutch Auction System (DAS) which is a disaster in the making. The central bank must concentrate on its constitutional mandate. As long as the Reserve Bank of Zimbabwe is a player and referee in the DAS, we have to forget about currency stability as a country. This does not need a rocket scientist to tell. Allocation has never worked and will never work. It will just enrich the elite. We must let market forces do their balancing act. This they know very well. Who knows maybe the central bank is praying for miracles to happen one day. But why is the RBZ disregarding the call to get off the playing field to ensure real currency stability, not the manipulation we see happening? The central bank must know that confidence and trust are attributes that are earned.

The RBZ talks of US$1,7 billion in FCA deposits in the banking sector and we wonder why banks seem reluctant to lend that money given the dire need in the economy. Something is fundamentally wrong somewhere. Some of these problems are a result of our own creation but we pretend to be solving them.

In the process we find something or someone to cast blame on. For example, inflation, everybody knows it is caused by money supply. We are inflating money supply in the economy. But who gets the blame at the end of the day, manufacturers, retailers and foreign currency dealers.

Customers are looking for a bank that is a complete alternative to their current bank. People do not know how to manage their money. One can be a professor, an economist, the greatest genius, but people get lost amid cashflow, current accounts, expenses, accounts, guarantees, checks, pension funds, and investments. Their money is scattered around in a million places and no one is guiding them. The reason why money is not taught in school is by design.

Today how much does it cost to hold an account with a bank for a year? Just look at a bank’s fee chart list (pricing schedule) and see how many are they and you do not even see what you are paying for.

People do not have the slightest idea how much their bank costs them. We are living in a smokescreen of charges and expenses that we do not see. Part of the banking system’s current business model is based on these knowledge gaps. The current bank products are spread all over as a way to increase revenue. Instead of creating a simple product that will show one’s entire financial picture in one place, plainly and cleanly.

On the balance, while it is clearly acknowledged that there are other sources of bank income, the current bias towards non-interest income is a big concern.

  • Alexander Maune is a Talmudic scholar, researcher and consultant as well as a member of IoDZ