Unpacking the banking crisis – second time around

Nhlanhla Nyathi

THE financial services sector has plunged into another liquidity crunch reminiscent of the 2004 banking crisis that saw the fall of iconic indigenous ban

ks and the subsequent restructuring of the sector by the Reserve Bank of Zimbabwe (RBZ).

This time around, what initially started as a cash crisis feeding off an unprepared monetary authority in rapidly absorbing inflationary pressures through the introduction of higher denominated bearer cheques or further slashing of zeros has taken an unexpected twist.

It appears to be the making of unethical banking practices within the financial services sector. After mounting pressure from a restless banking public since the onset of the cash crisis late last year, the RBZ governor last week made revelations that monetary authorities had over $100 trillion in cash uncollected in their vaults because banking institutions did not have the security to access the money to meet their customer withdrawal requirements.

At that point the blame for the cash crisis shifted entirely from the RBZ to banking institutions and the manner in which they invested liquid depositor funds. It appears many of them were guilty of violating provisions of the Banking Act and invested liquid depositor funds into relatively illiquid speculative investments that put them at risk in the event of a run on deposits facilitated by a massive increase in daily withdrawal limits for individual and corporate account holders.

The manner in which most of these financial institutions structured their balance sheets now puts their very existence at risk because of the prohibitive interest payments that they will have to make to the RBZ for accommodating them during this liquidity crunch. The ordinary man on the street might be probably cursing banking institutions for engaging in illicit operations that have caused them so much discomfort, but the question that remains unanswered is: what gave banks the courage to venture into the same unethical speculative tendencies that claimed the scalps of Trust Bank and many others in 2004 and are they solely to blame?

Should the RBZ bail them out to preserve the institution of banking that has been shaken far too many times? To find answers to these complex questions, we need to understand the effects of the economic recession on the banking sector and the impact of the regulatory environment on profitability before passing judgement.

The economic recession presented an operational challenge dimension for all sectors of the economy. The banking sector has been no exception and consequently fell victim to the economy wide culture of corporate cannibalisation wherein business entities engaged in more lucrative non-core business activities to remain viable.

In normal circumstances, the banking sector thrives when other sectors of the economy are doing well. However, during the economic recession core business activities have fallen by the way-side because of stifling government controls and reduced business activity in the commercial sector.

For instance departments in banking institutions such as corporate finance, corporate banking, and international banking have been drastically affected because of a depressed commercial trading environment.

Adding to this, the RBZ instituted punitive statutory reserve requirements on all deposits made to banks of up to 50%, implying that what every investment finally made by the banks has to cover for the 50% that is earning 0%.

In addition, the RBZ had of late been issuing 270 days non-negotiable certificates of deposits at 0% to banks that had surplus positions in their books at trading day end.

Unfortunately with the thrust in government being that of low interest rates to facilitate growth of the productive sector, it was impossible for banks to secure high yielding instruments within the confines of traditional banking to cover for the non-performing portion of bank deposits held by the RBZ at zero cost.

Perhaps such punishing requirements contributed to the errant practices of banks to trade part of depositor funds in more lucrative equity, property, and currency markets to compensate for the non-performing portion of deposits held by the central bank.

Obviously banks being private institutions, the profit motive cannot be ruled out. Whatever the case, the urge to trade in other markets, unethical as it might have been was part of the survival strategy given the difficult circumstances that the economic recession has presented for everyone. Obviously the massive portfolios controlled by banks through non-core operations did not materialise overnight.

The RBZ bank supervision and surveillance department ought to have known about this errant behaviour. The suspicion is that they conveniently turned a blind eye to it.

Given that they had allowed this culture to develop in the sector, the RBZ should have given financial institutions time to regularise their illiquid positions before drastically hiking withdrawal limits that obviously created a situation akin to a run on deposits, in the process destabilising the stock market.

Prior to the massive increase in withdrawal limits, banks could count on a significant portion of their deposits not being withdrawn over a short period of time hence having some semblance of control over their positions which in a way gave them latitude to explore the equity, property, and currency markets as alleged.

The current situation has shaken the people’s confidence in the banking sector and has created a dangerous situation whereby investors feel the stock market can be literally swayed in any direction by the RBZ. Integrity of the markets needs to be protected at all costs because it’s a game of confidence at the end of the day.

When the current RBZ governor, Gideon Gono, took office he initially adjusted and linked commercial banking capital requirements to a foreign currency amount of US$10 million. Looking at it now, the banking sector would have not been able to maintain such capital requirements from strict banking practices that required them to invest in low yielding TBs and other government stocks obviously out of sync with inflation and the parallel market.

If banking institutions towed the line
as had been expected, we would have had the frequent situation were banks went back to their shareholders time and time again for rights issues to remain in sync with US$10 million. In a way this also pushed banks to pursue other unofficial markets in violation of the Banking Act.

At the end of the day, people need to make their own informed decision. However, going forward, it is important for people to understand that most of the banks experiencing the current liquidity crunch do not have structural balance sheet faults that cannot be fixed. What might actually bury many of them is the continued payment of punitive accommodation rates to the RBZ if this unfortunate period is extended unnecessarily. The RBZ needs to act fast and bail out many of these banks through a more amicable process that does not perpetuate their fall. In essence, the RBZ cannot allow these institutions to fold without denting its own bank supervision and surveillance image in the public eye because they allowed the contagion to take hold in the sector unabated.

* Nyathi is a director of a private equity firm. He can be contacted on 0912 250 092 or kexhe@yahoo.com