Industry and Trade minister Welshman Ncube yesterday confirmed cabinet on Tuesday debated liquidity problems during a presentation at the Independent Dialogue Series, attended by business executives and the media, while addressing problems affecting the country’s economic recovery.
“Government is seized with this matter. On Tuesday we spent well over two hours debating the liquidity situation,” he said. “Banks have had no money for clients since before Christmas. There is a very deep concern over the current financial crisis. It’s clear we have a problem in that regard and we risk reversing gains made so far. We need a raft of measures to alleviate this liquidity crisis.”
Information obtained from other dependable sources shows cabinet ministers confronted the liquidity problems, which has been rocking the market of late with banks failing to meet their obligations.
Banking sources said cabinet heard on Tuesday that most banks were now badly struggling, closing daily business with paltry balances, some as low as US$400. Only a few banks usually close with healthy balances, particularly the medium-sized MBCA owned by Nedbank of South Africa which is understood to average US$14 million.
Sources said Finance minister Tendai Biti on Tuesday tabled a report on the banking and liquidity situation before a heated debate on the matter ensued.
Sources say while six out of 26 banks used to be strong a few months ago and the rest were breaking even, the situation has now dramatically deteriorated. This has sent alarm bells ringing and forced ministers to move in quickly to deal with the situation before it reaches damaging levels.
The recent failure of ReNaissance Merchant Bank, which affected other banks, was reminiscent of the 2004 crisis in which 13 banks got into dire straits. Between December 2003 and June 2004, five banks were placed under curatorship, two liquidated and four placed in intensive care under the central bank’s Troubled Banks Fund.
“Ministers were on Tuesday alarmed by the state of the banking sector and the current liquidity crisis,” a senior government official said this week. “There is need for urgent and radical interventions in the market to prevent a full-blown crisis.”
One banking executive said government needed to move with speed to prevent a run on banks, an overwhelming demand for cash by the depositors.
“Most banks are now failing to meet their financial obligations when they are due,” he said.
“What is happening is that banks have lent lots of money to companies and individuals who are failing to repay. That’s why the deposit to loan ratios are so unsustainably high. Banks loans have been used to finance relatively illiquid assets, while the institutions themselves fund their loans with short-term liabilities. In this case one of the main challenges facing banks is to ensure their own liquidity under such conditions and it’s very difficult.”
It is also understood cabinet debated the issue of some banks maintaining huge balances in nostro accounts. A nostro account is a bank account in a foreign country held by a domestic bank, denominated in the currency of that country. It is usually used to facilitate settlement of foreign exchange and trade transactions.
“There was a heated debate on nostro accounts but differences emerged over the use of the term externalisation which some felt had negative connotations and smacks of what happened in the past when people were accused and arrested on those accusations,” one source said. “Externalisation in our case implies people stuffing cash in their suitcases and taking it out without prospects of it circulating back in the local market.”
Ncube said liquidity troubles and power shortages were negatively affecting production, also indicating “there is deep concern over the current financial crisis”. He said there was need for a “raft of measures to address the liquidity crisis”.
Energy minister Elton Mangoma also addressed the Independent Dialogue series, saying the country was facing serious power shortages because the last expansion on energy facilities was done in 1984. Mangoma later travelled to Zambia to deal with power problems.
Amid fears of looming bankruptcies in the banking sector, Biti and Reserve Bank governor Gideon Gono recently moved in to calm the market, intervening through a series of measures including boosting lines of credit and the central bank’s lender of last resort function.
Gono said last week while the banking remains “safe and sound” overall, there were serious problems posed to financial institutions by the negative operating environment.
“The banking sector remained in a safe and sound condition in 2011notwithstanding underlying risks posed by the operating environmentnotably volatile deposits, absence of an active inter-bank market and lack ofan effective lender of last resort function, market illiquidity, cash basedtransactions and limited access to external credit lines,” Gono said.
“The weak and troubled banks in the sector are few, small and of lowsystemic importance. Collectively, as at 31 December 2011, theseinstitutions had a combined market share below 5%in terms of totalassets, deposits and loans.”
However, while he acknowledged current interventions to stabilise the situation, Ncube said he did not think measures adopted so far were robust enough and adequate to address the problem. He said the trouble was that most of the interventions already made were “cosmetic”.
Biti recently said Treasury was withdrawing US$110 million from Zimbabwe’s General SDR Allocation Account at the IMF to augment the 2012 national budget.
He said the money, which would boost liquidity, would go towards infrastructure, lines of credit, central bank lender of last resort position and agriculture.