With the adoption of multi-currencies and obtaining liquidity shortages, banks are now relying more and more on new but reliable sources of revenue –– non-funded income.
Traditionally, a bank gets income in a few ways. The primary way is by holding funds on deposit for people who have excess cash and then loaning that money out to others. The difference between what the bank charges for loaned out money versus what they have to pay the depositors for their money translates into income. For instance, John deposits $20 000 in Bank X savings account paying 1,00% interest, then Jack borrows $20 000 from Bank X to buy a car. The loan has a rate of 4,00% interest.
But in Zimbabwe it appears most banks are now making the bulk of its money through service charges to boost income and support the infrastructure they put in place. While bank deposits are still largely depressed, some banks are sitting on attractive deposits yet service charges are “very high”.
Bankers Association of Zimbabwe president John Mushayavanhu told businessdigest this week that bank charges in Zimbabwe were “much lower” than what the region was charging.
“That is the general perception but our bank charges are much lower that what other countries in the region are offering,” he said.
“In South Africa depositors are charged for depositing cash or cheques, something that is not present with our local banks,” Mushayavanhu said.
Figures obtained this week showed that an individual is now charged between US$1 and US$7 for a single withdrawal, while companies pay up to US$10.
For most banks, withdrawals above US$400 attract between 1 and 3% of the amount being withdrawn.
To be issued with a draft/RMO, individuals and corporates are parting with between US$8 and US$15. Telegraphic transfers cost between US$15 and US$30 for both corporates and individuals depending on the amount involved. The same amount is charged for deposits received by telegraphic transfers.
Asked if the local bank charges were justified, economic analysts Farayi Dyirakumunda said banks typically derived their income from a combination of interest income as well as non-funded income which includes bank charges.
“The local charges while seemingly high compared to regional peers are somewhat justified in the local context given the cost structures prevailing in the banking institutions,” he said.
“With the subdued income from the core lending activities, fees and commission income have been maximised to boost overall profitability but this will gradually correct itself in response to market forces, increased competition and technological advances,” said Dyirakumunda.
Dyirakumunda said as new banking institutions re-enter the market, pricing of services will certainly become more competitive.
“Fees and service charges will however remain an integral part of all banking institutions’ income,” he said.
While some banks are not charging for maintaining clients’ accounts, others are levying US$3.
Corporates are being charged between US$8 and US$12 per month for monthly account maintenance. FCA inter account transfers cost between US$1 and US$5 depending on the bank for both individuals and corporates. Service charges for salary processing tariffs cost between US$1,50 and US$4 per entry for manual salary payments. Unclaimed salaries cost between US$4 and US$7.
Bankers and economists interviewed by businessdigest who are attached to banking institutions said they could not comment on bank charges because Reserve Bank governor Gideon Gono warned them against commenting on issues relating to the banking industry
“The governor categorically stated this was his domain, as such those who feel the urge to talk about the banking sector should restrict themselves to commenting about their own banks,” a bank official told businessdigest this week.
Bankers interviewed this week said the charges on cash withdrawal and loan arrangement fees were justifiable for most banks.
“These are direct expenses involved in sending the telegraphic transfer and in importing the cash and work done in approving the loan. Compared to the region, I would say that Zimbabwe is competitive (although there is scope to reduce),” a CEO of a commercial bank told businessdigest on Tuesday.
“Charges like monthly account maintenance, statement requests, are still relatively high but this should correct itself as the economy improves.”
Companies are being charged between US$7 and US$10 per payroll for late salary submissions.
Most banks have not set a charge for intermediated money transfer tax.
Facility negotiation fees for companies cost 5% of the value of the overdraft or loan.
Between US$4 and US$8 is charged for stop orders. Accounts closed within six months are attracting a fee of between US$18 and US$25, while reactivation of a dormant account costs between US$20 and US$25.
Services for bonds guarantees, securities and indemnities and bills range between 5% and 10% of the amount at hand.
Charges for letters of guarantee, and guarantees are between 4% and 6% of the amount involved. Letters of credit for foreign inward cost US$75 per credit. Foreign outward for commercial banks cost 10% of the amount being transacted.
A head of treasury with a local bank said financial institutions had resorted to higher charges to boost their income and support the infrastructure they put in place when the economy was faring better.
“The economy has been on a decline during the past 10 years and this has left a number of them with higher costs and less business to write hence the need to cover costs through increased charges,” the official said.
Banks are currently making money from loan portfolios but given the uncertainty in the deposits levels, it has become prudent to write smaller percentages of loans so as to manage the liquidity risk.
The lack of good quality paper like Treasury bills that used to offer good yields at a much lower risk also puts pressure on banks to cover their costs of running the business through other means.
For example, a bank in Zambia would have a huge portfolio in Treasury Bills and government bonds to cover their deposits cost, but in Zimbabwe banks rely on loans and now rely largely on non-funded income to cover the costs of running the business.