Property: Dollarisation – Another Blow for Banking Sector

CENTRAL African Building Society (CABS) has become the latest victim of the official dollarisation of the economy which brought back to the spotlight the soundness of banks and their role in the long drawn out economic crisis.

The country’s biggest building society and mortgage lender last week closed 37 branches around the country.

The 37 branches are 22 from Mashonaland, four from Matabeleland, five in Midlands and six from Manicaland.

CABS head of retail banking Mike Finnigan said the closure of the branches was due to the unfavourable economic environment.

“We will still be operating a contact centre at our head office for any queries you may have,” Finnigan said.

The closure of the 37 branches could slow down property developments due to delays in mortgage processing as the country’s economy is poised for a  turnaround.

“We hope that in the future we will be able to return to normal business of providing you with full banking services,” Finnigan said.

There has been a halt in the construction industry owing to the cash squeeze that has hit companies and individuals alike. Building societies at one time had frozen granting mortgage loans.

FBC Building Society and Beverley have started to offer mortgage financing on a limited basis.

The economic slowdown and the shortage of foreign currency have impacted on the construction of high-rise buildings and residential properties.

The country’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 monetary policy statement of the year on February 2, Reserve Bank governor Gideon Gono said with 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.

“It is now time for the (banking) industry to develop aggressive marketing strategies, incentives and products that promote banking in foreign currency, especially by individuals,” 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.

“Banks 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,” 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 economy’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.

“Such lending shall attract an interest rate of not more than London Inter-Bank Offer Rate (LIBOR) + (1-6) % depending on customers risk assessment profiles,” 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.

“Under 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 banks’ risk assessments, as well as the cost of capital international financial markets,” 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.

“This oversight process is meant to ensure that borrowers are protected from predatory interest charges,” Gono said.

BY PAUL NYAKAZEYA