WHILE commercial banks are quick to adjust minimum lending rates (MLR) in line with inflation and changes in other economic fundamentals, deposits have however significantly
lagged behind other interest rates in the economy, discouraging savings, says the Reserve Bank of Zimbabwe (RBZ).
Banks have been increasing their MLRs in tandem with the country’s hyperinflationary environment.
The inflation figure has shot up from about 100% in January this year to 455,6% in September.
Most of the country’s commercial banks are now charging MLRs ranging from 120% to 140%.
“There is, therefore, need for banks to embark on aggressive strategies of mobilising deposits and increasing the pool of national savings so as to ensure a sustainable long-term solution to the problem of cash and liquidity shortages,” the RBZ said in its Weekly Economic Highlights for the period ending October 3.
The bank said while the scrapping of service charges on deposits was a welcome move by some banks, additional deposit mobilisation strategies were however required.
“Making depositing of money the easiest and most convenient transaction in banks also goes a long way in attracting deposits,” the RBZ said.
It said although total deposits in the banking system rose from $15 billion in 1995 to $1 477,3 billion by August this year, the country’s savings ratio, however, fell from 22,5% in 1995 to 455,6% by September. This has significantly eroded the real value of domestic savings, resulting in concomitant declines in investment and economic growth.
The RBZ said more than 60% of total deposits in the banking sector was in the form of demand deposits – for which banks paid little or nothing, by way of interest.
The interest rates on demand deposits range between 0% and 15% for most banks, and up to 25% for a few others.
The central bank said the mobilisation of savings and time deposits, the major source of funds for meaningful long-term investment, had also remained subdued by the combination of high inflation and low deposit rates.
“Regrettably, short-term deposits, not suitable for long-term investment, have tended to be rewarded more by banks, at the expense of deposits with longer maturities,” the RBZ said.
“Interest rates on 90-day NCDs and other short-term deposits are currently in the region of 90% and 95%, while deposit rates on savings and time deposits range between 8% and 40%.”
The RBZ said the money market was currently experiencing severe liquidity shortages, yet by offering very low deposit rates, banks appeared to be signalling that they did not require funds.
In the past one and a half months daily market shortages have averaged $40 billion, with shortages peaking at $90 billion in the first week of October, the RBZ said.
“In spite of these shortages, banks have resorted to sourcing funds from the inter-bank market, particularly from the central bank, instead of raising deposit rates and mobilising deposits,” the RBZ said.
The intermediary role of financial institutions is to mobilise deposits from the public and channel financial resources to the country’s investors.