HomeOpinionEric Bloch:Bank probe misguided, pointless

Eric Bloch:Bank probe misguided, pointless

AT a recent 2011 budget consultative meeting, Finance minister Tendai Biti voiced the government’s concern at the conduct of banks, and intimated government’s intent to undertake a comprehensive investigation of their operations. 

In particular, government found it unacceptable that there are liquidity problems, notwithstanding that (as at end of June, 2010) the banks held deposits of US$1,86 billion, equating to approximately a third of the country’s annual gross domestic product (GDP), which amounted to US$5,2 billion.  He argued that those deposits sufficed to provide a sufficiency of currency to meet the country’s needs, and yet these problems persist.  He also castigated the banks for the magnitude of their charges, which recurrently erode the depositors’ funds.
The declared intent to conduct an indepth probe into the operations of Zimbabwean banks is misguided, unnecessary and  pointless. It will lower  the  levels of public confidence in the banking system.  The majority of the populace is deeply distrustful of Zimbabwean banks because of the recurrent “borrowing” by the Reserve Bank of depositors’ foreign exchange during 2007/2008. The depositors of those funds were continuously hindered from accessing their funds.  Thereafter, the distrust was intensified when Zimbabwe demonetised its currency in 2009. It resulted in most bank account balances being rendered worthless.  The result has been a deep reluctance of almost all small, and many medium-sized businesses, to operate within the banking system.  Instead, they hold their funds in safes in their business premises (notwithstanding being facilitative of intensifying armed robberies and of in-house misappropriations of funds), or in suitcases and boxes in their homes, meeting most payment obligations with the cash held, instead of bank transfers, cheques, and plastic money.
Moreover, the minister overlooks the fact that, to a very great extent, the deposits held by the banks, cited by him as being almost US$2 billion, are naught but book entries, arising from interbank transfers creating interbank indebtednesses, and not by tangible currency.  The reality is that the gross inadequacy of currency in circulation is that, to an exponential extent, that currency flows out of the country to fund imports of the vast range of commodities not readily available from Zimbabwe’s distressed commerce and industry.  The insufficiency of currency in circulation is considerably exacerbated by the magnitude of currency which is held, outside of the banking system.  The harsh fact is that although the banks hold relatively substantial deposits from account holders, only a small portion thereof is represented by actual currency, and this is evidenced by the extreme difficulty that most banks have in servicing depositor withdrawals, save when those withdrawals are by way of interbank transfers.
The grievous insufficiency of bank loan funding into the economy is due to several circumstances.  In the first instance, it must be recognised that they cannot use the entirety of depositors’ funds to fund loans to others.Banks are obliged to maintain prescribed statutory reserves and, on the other hand, they are aware that the overwhelming great majority of the deposits are of very short duration, with  immediate withdrawals within days of deposit.  They have no assurance, in the volatile and unstable Zimbabwean economy, that replacement deposits of equal or greater amounts will be timeously forthcoming.  A major constraint upon the banks giving loans to  revitalise the economy is the absence of medium and long-term funding, for the loan funding requirements of most enterprises are not of short duration.  The funds are critically needed as ongoing working capital whilst the enterprises recover from years of economic oppression, and to finance expenditure upon the rehabilitation and refurbishment of plant, machinery, equipment, and the like, and to acquire state-of-the-art technology resources.
The banks are further greatly constrained by the extent that intending borrowers are unable to provide appropriate security for repayment of loans.  A consequence of the foolhardy approach to land reform is that the agricultural sector is deprived of the opportunity of using land as collateral for loan funding.  Property ownership in that sector has been legislatively abolished, and notwithstanding that the Minister of Lands, Herbert Murerwa, intimated government’s intent to accord negotiability to the so-called 99-year leases, that has as yet not happened (over and above that most of leases can be summarily terminated by government on three months’ notice).  Other sector enterprises are also, in very many instances, unable to provide the banks with adequate security and, as a general rule, banks cannot risk depositor funds by making substantial advances without security.
The security circumstances are further worsened by the promulgation of the Indigenisation and Economic Empowerment Act, and its underlying regulations, for the resultant of the legislation is that banks are unaware as to who will be the future controlling shareholders of the borrowers and, therefore, cannot assess whether those borrowers will be properly, effectively, and viably managed and controlled, or whether future mismanagement will place in jeopardy the ability to meet loan service obligations.  Moreover, to be able to meet the economy’s borrowing needs, the banks must have substantial access to offshore medium and long-term funding.  However, foreign financiers are extremely hesitant to make such funding available, deterred by the Zimbabwean political and economic instability, but also by pronounced concerns as to the impact of the  indigenisation legislation.
Instead of threatening the banks with probes and investigations, instead of castigation and vilification, government needs to resort to facilitation of financial sector recovery and viability.  This necessitates positive actions for genuine, comprehensive economic recovery, modification of land reform and of indigenisation legislation, determined reconciliation with the  international community. Substantive efforts are needed to restore national confidence in the banking system, and in that regard one small step forward was taken, last week, when government restored the Reserve Bank role as lender of last resort to the banks.

 

Eric Bloch

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