Financial product innovation the future

The Zimbabwean banking sector underwent a period of impeded development in the last 10 years due to the hyperinflationary environment which prevailed in the economy.

 This is usually referred to as the “lost decade”. In general the country’s banking sector has lagged behind the region and the world in terms of financial product services and innovation, with most products that are now considered normal banking offering in more developed countries still a luxury or non-existent locally.
There was a proliferation of indigenous banks from around 2000 which posed competition to the “traditional” foreign-owned banks like Barclays and Standard Chartered. This resulted in fierce competition with banks like Trust, Royal and Barbican taking the lead in coming up with innovative products like in-store banking, private banking concepts and derivatives among others. The bank crisis of 2003/4 resulted in the closure of these newer banks and this resulted in a “flight to quality” by the investing public.
This also increased the general risk aversion amongst average investors with most of them being wary of any financial product that was not generic. The hyperinflationary environment also made investments meaningless with most people preferring to hold “hard assets” such as property to store value. The banking system’s existence was now mainly for transactional purposes. However this became obsolete as the cash shortages worsened, resulting in the economy becoming informal. The question to be posed is what are the current limitations in terms of product offering from a regulatory perspective.
The country still has segmented banking licences which define banks as merchant, commercial and building societies among others. The trend globally, especially in Europe, has been the issuance of universal banking licences with a bank carving out their niche depending on their area of expertise. The summation of this model is that banks become superstores for financial products under one roof. This model has nevertheless been criticised for discouraging specialisation as banks take on more product offerings than their key competences in an effort to be all things to all.
Nigeria recently announced that it is abolishing Universal Banking Licenses with effect from 2011 as there have been situations where banks became insurance companies, stock broking outfits and investment and commercial banks, all in the name of universal banking. The counter argument is that there will always be a separation of the wheat from the chaff as the level of expertise and skills base will determine who commands the biggest market share in a particular product offering. It becomes a distinction on who becomes the “Rolls Royce” of a particular sector depending on their level of expertise. The environment would require an effective regulatory framework and would encourage bank consolidation. The existence of small boutique banks will also become difficult as competition intensifies.
The outlook for the economy, in my view, points towards more distinction in terms of products and innovation. The generic banking model of deposit picking and on-lending will not give anyone a leading edge in the market. The pricing structures will become more or less uniform under the “dollarised” environment and there will be no differentiating factor between banks apart from service levels and long standing relationships. The likely re-emergence of the sophisticated investor as liquidity improves and the middle class becomes more defined will call for value addition and the introduction of global products. The trend has started appearing in the market with banks introducing rand and US dollar denominated debit cards, the re-introduction of internet banking and private banking. There is also a shift towards structured finance and international banking since the local industry is still operating at low capacity and most products are being imported.
There is also scope in the market with stability for the introduction of products such as Exchange Traded Funds (ETFs) which are investment funds traded on the stock exchange, much like shares. Their pricing is based on the net asset value of the underlying assets which may include bonds and cash. Financial institutions may also introduce Index Funds which are a collective investment scheme that seeks to track the movement in a major index such as the ZSE industrial index. This can be achieved by buying all listed stocks in their exact ZSE weighting. The future for Zimbabwean banks would entail them playing catch up with the rest of the world and adding value to the discerning investor, and not merely “picking investor deposits” and on-lending them.

By Precious Mhlandhla