By Nhlanhla Nyathi
IT will take some time for the banking sector to fully recover from the effects of the liquidity crunch and the subsequent punitive interest payments
made to the Reserve Bank of Zimbabwe (RBZ) for secured and unsecured liquidity support.
Looking at some of the amounts involved and the punitive interest rates of 1650% charged by the central bank, this liquidity crunch will have a lasting damaging effect on the balance sheets of a number of banks and might unexpectedly eat into capital reserves.
Further recapitalisation initiatives might need to be undertaken to avoid bank closures. Undoubtedly all financial institutions, including asset management firms and discount houses will come out of this liquidity crunch dented in one way or the other.
Almost all financial institutions will be affected due to the fact that there is the primary lot of banks which faced liquidity problems because of direct exposure to illiquid assets relative to liquid depositor requirements while the other lot was exposed in the inter-bank market and subsequently faced liquidity problems because of failure to settle by the first lot.
Consequently, the liquidity crunch had spread into a contagion that affected some financial institutions that were not involved in the trade of illiquid non-core securities.
It is unfortunate that the whole sector was subsequently labelled as villainous out of ignorance on account of a few errant institutions and miscalculations on asset liability matching within perfectly legal banking securities.
Whatever the case and whoever was to blame, the net effect is that confidence in the banking sector as a whole was once again shaken and it will take a lot of convincing before depositors confide in the banking system again. Going forward, lessons from the liquidity crunch will show that banking institutions and punitive RBZ policies are equally to blame for the unfortunate situation.
Banking institutions take part of the blame because there is evidence suggesting that some of them were players in non-core markets and consequently held illiquid securities that put liquid depositor funds at risk causing some level of discomfort for depositors.
The RBZ on the other hand has to shoulder part of the blame because it instituted punitive policies such as high statutory reserve requirements and long dated 0% non-negotiable certificates of deposits. This in a way contributed to the errant behavior of banks to trade in other unofficial but more lucrative markets to compensate for the non-performing portion of deposits held by the RBZ. In addition, at one point, the RBZ starved the market of short-term paper and flooded it with long dated treasury bills which were prudently avoided by banks because of the obvious asset liability mismatch.
However, those banks that avoided taking up the long dated paper to prevent an asset liability mismatch were unexpectedly punished through the issuance of 0% non negotiable certificates of deposits for 270 days if they had surplus positions at trading day end.
Obviously all these strategies and policies contributed to the liquidity crunch and should serve as a stern lesson to both the banks and the central bank.
If the RBZ’s monetary policy statement is anything to go by it appears the RBZ might be reforming through reducing some of its punishing statutory reserve requirements across the board to all banking institutions.
In addition, in the same monetary policy statement there has been a reduction in the tenor of non negotiable certificates of deposits from 270 days to seven days, which will go some way in alleviating the liquidity crunch and facilitating a better asset liability matching structure across the banking sector.
Although more still needs to be done, it is a step in the right direction.
While bankers might still be pre-occupied with trying to sort out their liquidity positions the concern for every investor is where the banking institutions will make their money from, if non-core markets are permanently closed off through tight bank supervision and a tight monetary policy as presented by the RBZ governor for post elections?
To answer this question, we need to revisit the monetary policy statement and pick out sections with implications on operations of banking institutions and their possible impact.
In the monetary policy statement, the RBZ governor’s main thrust was to consolidate economic productivity and to stabilise inflation, which he proposes to achieve through a tight monetary management programme accompanied by high interest rates to discourage speculative borrowing and inflationary credit expansion.
In addition, the RBZ governor proposes to wean off farmers from the Agricultural Sector Productivity Enhancement Facility window and to retire the Basic Commodities Supply Side Intervention Facility by 30 June 2008, after which banks will be required to take over the traditional role of lending from the central bank.
In essence, there will be little room to maneuver outside traditional banking practices and there will be no injection of inflationary liquidity from the central bank. The expiry of Bacossi and Aspef means that corporate banking departments cannot make margins on moneys received from RBZ for on-lending to farmers and the manufacturing sector.
If the governor keeps his word, it will be difficult for banks to explore non core markets and they will have to restructure their organizations to make money from traditional banking which focuses on corporate banking, corporate finance, international banking, and treasury operations.
Unfortunately the restructuring of these key business areas is a case of easier said than done because all of them normally feed off a thriving economy.
During economic recession it will be difficult to feed off other sectors of the economy because the majority of inflation tracking economic transactions take place in the parallel market outside formal banking channels.
Formal banking only acts as a transitory window for money en-route to the parallel market to facilitate trades in the informal sector.
Bankers have the tacit task of luring depositors back into their banks so that other areas such as corporate banking and treasury operations can be funded to facilitate deals. Without substantial deposits flowing through, it would be difficult to sustain key profit business areas in a bank.
On the other hand international banking and forex dealing would continue suffering because of an overvalued fixed exchange rate that forces trades to take place on the parallel market at more lucrative rates outside official banking channels.
*Nhlanhla Nyathi is a director of a private equity firm. He can be contacted on 0912250092 or firstname.lastname@example.org.