Ceteris Paribus: High bank charges and a shrinking financial market

A bank generates income when the interest it earns from these loans exceeds the interest it pays on deposits.

OF late, social media has been awash with complaints from account holders in Zimbabwe’s financial institutions  on the state of bank charges, which have been compared with peers in the region and the world and found to be rather exorbitant.

Amid low disposable incomes, this development has raised concerns from also prominent figures in the country. It is, therefore, imperative to assess how the banking sector reached this state.

According to a study, Zimbabwe ranks high in bank fees compared to most countries in the region. A study by Equity Axis also found that most developed countries do no charge bank account holders for services, like withdrawals and certain transactions, which appears to be astonishing news to a typical Zimbabwean.

However, understanding how banks make money is crucial in assessing this difference in the banking approach. Primarily, interest income is the main revenue stream for most commercial banks. Typically, in a functional economy, banks accept deposits from customers and pay interest in return on certain accounts, particularly savings accounts.

Banks then use these deposits to issue loans and earn interest. A bank generates income when the interest it earns from these loans exceeds the interest it pays on deposits.

Banks also use these deposits to participate on financial markets, investing mainly on short-term financial instruments. The targeted return on these investments ought to be wider than interest paid on the deposits.

The deposits made by customers come in different forms and categories. Long-term deposits made by customers give banks more time to invest the money and earn more returns.

Due to subdued confidence in the banking system of Zimbabwe, banks in the country have suffered a decline in deposits. This has also been exacerbated by the highly fragile local currency, ZWL, which has wiped away appetite for savings.

Reduced confidence in banks stemmed from the financial crises that eroded trust among Zimbabweans. As a result, Zimbabweans perceive higher risks associated with banking activities.

Since banks in Zimbabwe have, to their disposal, less deposits to depend on for interest income, a strategic diversification into non-interest income has bolstered the survival of banks in the country amid the harsh operating environment.

Non-interest income includes such items like returns on investment properties and other related investments, and fees and commissions income under which bank charges fall. For most, if not all the banks in Zimbabwe, the fee and commission income has been the highest driver of total income.

The fee and commission income comprise of, but not limited to, account maintenance fees, transfers and other transactional fees, card-based transaction fees, and cash withdrawal fees. Transfer fees and withdrawal fees tend to contribute the most income.

As customers increasingly rely on electronic payment systems and digital banking channels in the wake of a flourishing currency exchange market, banks charge fees for these various transactions, and these fees contribute significantly to overall incomes while reducing reliance on interest-based lending amid a weakening loan-book in the sector.

In the face of a fragile currency and hyperinflation, the Reserve Bank of Zimbabwe (RBZ) has turned to a contractionary monetary policy which, among other measures, saw a sharp increase in borrowing costs thereby discouraging speculating borrowing.

This also heavily weighed on the loan-book and interest income. During periods of economic slowdown caused by contractionary policies, borrowers' ability to repay loans may be compromised due to reduced cash flows or business failures.

This increases credit risk for banks as they face higher default rates and potential loan losses. To mitigate this risk, banks may tighten lending standards or reduce loan portfolios altogether.

Consequently, banks had to turn to non-interest income, which is mainly fee and commission (bank charges). In conclusion, the shift towards non-interest income as a primary revenue source reflects the changing macro-economic dynamics in Zimbabwe as opposed to a deliberate shift within the banking sector.

  • Duma is a financial analyst and accountant at Equity Axis, a leading media and financial research firm in Zimbabwe. — [email protected] or [email protected], Twitter: TWDuma_


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