By Linda Tsarwe

IT took a lot of effort to attract deposits back into the system after dollarisation. Coming from a background where most people had lost their savings in the banks due to hyperinflation, no one was willing to go through the same predicament again, especially with US dollars. As at November 2011, the banking sector had deposits amounting to US$3.3 billion, having grown from as low as US$1.4 billion at the end of 2009, signalling that confidence is slowly being restored. In turn, due to an increase in the deposit base, most banks resumed their lending activities which had been put on hold. By December 2011, the average loan to deposit ratio, including offshore lines of credit, was over 87%. Local banks have notably been the most aggressive when it comes to lending, while the international banks have been more prudent.

Although deposits have grown over the years, the hot nature of these deposits has not really changed. As at November 2011, demand deposits accounted for 89.3% of total deposits, which limits long term lending. As such some banks managed to secure offshore lines of credit which are relatively cheaper and longer term. These have not been sufficient to cater for the funding needs of the whole country. One therefore wonders how these local institutions have managed to be so aggressive in lending. It is quite likely that these banks have a huge funding gap due to the mismatch of assets and liabilities on their balance sheets.

However, the core problem that has developed out of this aggressive lending is that of the high default rate. It was inevitable, considering that credit was available at every corner though not at the right price. If one has an active credit account at a furniture retailer, one with a clothing retailer and a loan at the bank; considering the levels of incomes that an average consumer is getting, then there is a strong chance that the consumer is over-borrowed. And now it seems like the bubble is about to burst as the brunt of over-borrowing is catching up with many. 

It is reported that most corporates are failing to repay the funds they borrowed and are rolling over these facilities. Not surprising, since most companies had to recapitalise after dollarization and the only option was through debt as cheaper routes like rights issues failed to get support from shareholders. This has resulted in huge finance charges.

Loan loss provisions by banks have not portrayed a true picture of the events on the ground. The Ministry of Finance together the Reserve Bank have been quoted reassuring the public that the banking sector is safe. At a press conference held last week, the Minister alluded to the liquidity challenges in the economy as attributable to expenditure pressures during the festive season, which was characterised by ‘high volumes of high value transactions’. This argument seems somewhat disingenuous. If an account is adequately funded then why should the bank fail to honour its obligation?

At the CZI seminar and in the monetary policy statement, the RBZ governor further reassured the public that the banking sector was safe, citing that the bulk of the assets and deposits were in the hands of the ‘strongest’ banks. It, however, raises the question of which banks are being defined as the strongest? The papers were full of reports of ‘perceived’ strong banks that were failing to make payments to clients.

Although opinions differ on how financial authorities should handle a possible liquidity crisis, not acknowledging the problem is surely not the solution. It is apparent that most banks are failing to honour their obligations. Solutions such as staggering high value payments do nothing but make banking less flexible. According to the monetary policy statement presented by the RBZ governor on Tuesday, cash withdrawals now require a notice period, the length of the notice period being dependent on the amount involved. Only funds that amount to US$10 000 or less can be withdrawn on demand. So much for the convenience of banking! It would also be a hard call to convince the unbanked to trust the banks. No one needs a restrictive condition attached to their hard earned cash.

Essentially, we have gone back to a similar Zimbabwe dollar scenario of cash rationing. Such a move is in huge contrast to the claims that both the Governor and the Minister have been making about the banks being safe and sound. In fact, this only heightens the fears that the liquidity crisis could be worse than we think.

To ease the liquidity crunch, the Minister highlighted at  the press conference that US$120 million would be availed to the RBZ for the purpose of carrying out its lender of last resort function in addition to the US$7 million announced in the budget. Further, the RBZ Governor mentioned in the monetary policy statement that a further US$80 million accessed from Afrexim bank would also be channelled towards the same purpose. A total amount of only about 6% of total deposits!  And obviously insufficient.

Can the RBZ really be relied upon to utilise these funds correctly after its history with the statutory reserves and the FCAs of gold producers? Both the Minister and the RBZ are now talking about issuing tradable paper backed by statutory reserves that most likely do not even exist. Essentially, it means the paper is worthless. The RBZ failed to honour the gold bonds created for gold producers at maturity. Will the tradable paper for statutory reserves be any different?

Instead of all this going back and forth, which does nothing but destroy the confidence that has been painstakingly built up in the banking sector, some hard decisions are required. Controlling banking by limiting transactions does not work and has proved to not work elsewhere in the world. It actually makes the situation worse by creating speculative opportunities. International banks that have been blamed for not aggressively lending will have the last laugh. Aggressive lending in this volatile environment just does not cut it.

All the signs seem to indicate that the credit bubble must eventually burst despite assurances by the authorities. Whether the authorities will eventually admit it or not is another issue. Only time will tell how events will pan out. But as indicated in the monetary policy statement, we should brace ourselves for the worst.

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