THE officialÂ dollarisation of the economy has brought back to the spotlight the soundness of Zimbabwean banks and their role in the long drawn out economic crisis, at a time many are already operating on a shift basis.
The countryâ€™s macro-economic conditions have had a negative bearing on the soundness of banks faced with contraction in the economy and the challenges of unrealistic exchange rates and interest rates.
Presenting his first monetary policy statement of the yearÂ on Monday, Reserve Bank governor Gideon Gono said following the use of multiple currencies, banks should come up with strategies that will ensure that they will not be affected by any liquidity crisis to avoid curatorship.
â€œIt is now time for the (banking) industry to develop aggressive marketing strategies, incentives and products that promote banking in foreign currency, especially by individuals,â€ said Gono.
Gono hinted that a liquidity crisis was inevitable if proper banking practices were not adhered to as was the case in 2003/4.
A liquidity crisis occurs whenever a firm is unable to pay its bills on time or lacks sufficient cash to expand inventory and production or violates some terms of an agreement by letting some of its financial ratios exceed limits.
A liquidity crunch in Zimbabwean banks reflects a multi-dimensional problem. A volatile economy creates moral hazards with strong speculative elements. Overregulation had also resulted in an unprecedented increase in black market activities.
Bad banking practices, weak regulation, ineffective supervision by the agencies and the market also induces excessive risk-taking by banks such as the increased participation on highly illiquid markets such as the property or stock market in an attempt to avoid inflationary pressures. Gono said all restrictions on foreign currency cash withdrawals had been removed.
â€œBanks are therefore, required to implement complementary measures to ensure that cash is readily available to the transacting public. In this respect banks shall continue to be allowed to import foreign currency cash from their Nostro Accounts,â€ Gono said.
A well-developed and sound financial system can contribute significantly to economic growth because of the important role that financial intermediaries play in bridging the disequilibrium between savings and investment needs within an economy.
The importance of banks to the stability of the financial system is also highlighted in their broader public role in the payment systems and in being the main depository for the economyâ€™s savings.
To ensure the viability of the banking sector, authorised dealers can now levy their bank charges for foreign currency accounts and related transactions in foreign currency, export for non-foreign exchange earnings entities, individuals and other special cases.
Banks were further encouraged to apply prudent lending practices when lending to individuals to finance their current account transactions.
â€œSuch lending shall attract an interest rate of not more than London Inter-Bank Offer Rate (LIBOR) + (1-6)% depending on customers risk assessment profiles,â€ Gono said.
LIBOR is the interest rate that the banks charge each other for loans (usually in eurodollars).
Gono said banks should ensure that most of their loan advances were biased towards the productive sector to reinvigorate the supply side of the economy.
In order to give the banking sector robust incomes streams, particularly in light of the shift of the bulk of their expenditure overheads into foreign exchange, the Reserve Bank said it was encouraging banks to deepen issuance of foreign exchange loans in support of productive activities.
â€œUnder this framework, the country will have a two-tier money market system, comprising local currency lending, which will be at inflation consistent interest rates and foreign exchange lending which will be at interest rates that take into account the banksâ€™ risk assessments, as well as the cost of capital international financial markets,â€ said Gono.
All banks providing foreign exchange loans will present the Reserve Bank their general term sheets across difficult risk categories for assessment of reasonableness and approval.
â€œThis oversight process is meant to ensure that borrowers are protected from predatory interest charges,â€ Gono said.
Reflecting the Reserve Bankâ€™s general unwillingness to create inflationary pressures through lending to the banking system, accommodation rates on the local currency will continue to be highly penal and shall remain pegged at 10 000% for secured and 40 000% unsecured.
Bank distresses have a macro and micro origin, being a complex interactive mix of economic, financial and structural weaknesses. To focus myopically on the weak internal governance of banks as the major cause of distress misses theÂ point.
The recurrent cash crisis, the RTGS gridlock, out-of-control inflation and the continued pressure on the exchange rates indicates a deeper economic fracture than the authorities would care to admit.
BY PAUL NYAKAZEYA