Banking malpractice source of liquidity crunch

In a bid to improve the liquidity situation in the country, RBZ governor Gideon Gono and Finance minister Tendai Biti announced measures that included forcing banks to return balances held in nostro accounts.

But is this the source of the liquidity problem? Have the individual international banks that have huge nostro deposits been facing liquidity challenges?
If not, then that is not the source of the problem.

The current liquidity challenges being faced by one of the big banks is a clear sign of the problem of bad banking practices.

Banks have to actively manage their liquidity gap, and any huge asset and liability mismatch ultimately creates a liquidity crunch.

A bank mobilises deposits of varying tenor periods and should also lend the money in a way that ensures that it can meet its contingent liabilities.

Various banks are facing liquidity problems due to huge balances of non-performing loans. Despite the technical argument by one bank that its loans cannot be classified as non-performing since customers were still servicing the loans by paying interest, the non repayment of the outstanding capital amounts is creating a serious liquidity crisis.

The short nature of deposits and the incessant rolling over of outstanding loans has also precipitated the liquidity crisis across the banking sector. This, analysts say, is largely a result of bad banking practices by non-adherence to the proper principles of lending.

Provision of bank credit to related entities and insider loans are causing banks not to adhere to the correct cannons of lending and the money advanced to such entities is not being paid back at agreed periods.

The shenanigans at Renaissance Merchant Bank (RMB) revealed the depth of the problem, where loans were being provided to close family members and related parties who under normal circumstances would not have qualified for the loans and would definitely not be committed to repaying the loans.
So, is the repatriation of nostro balances by international banks a solution to the problem?

 

The trend shows that locally-owned banks have high loan-to-deposit ratios as compared to the conservative lending approach by international banks which have relatively lower ratios.

Analysts say it now seems that the reward for good banking is punishment. The current crisis shows the different approaches to banking by international banks and local banks and the impact on long term viability of these institutions.

The RBZ has instructed all international banks to bring nostro balances to the Real Time Gross Settlement (RTGS) system and these banks have been given one week to utilise the funds. But such short notice will cause banks to make lending decisions in a rush and there is a high probability of adverse selection of clients who will later default on repayment.

Given that foreign currency balances held at the RBZ were wiped out at the height of Zimbabwe’s economic crisis, characterised by foreign currency shortages, banks that have repatriated nostro balances may face sleepless nights on their depositors’ funds if the central bank decides to move on banks that have failed to utilise the funds before the stipulated timeframe.

Another source of the liquidity crisis is the lack of adequate implementation of prescribed measures. The RMB saga is a clear indication of a sleeping regulator since the central bank was failing to keep its eye on the ball.

For instance, Gono recently announced that liquidity ratios had been revised upwards from 25% to 30%, but at the moment there are banks with liquidity ratios as low as 5%. At what point does the central bank step in to avoid the collapse of a bank, and is enough being done on the ground to police banking institutions?

Gono indicated that the minimum capital requirements could be reviewed upwards in line with regional levels to further enhance financial sector stability. But the current minimum capital levels as a ratio of gross domestic product (GDP) are relatively high in Zimbabwe.

“As monetary authorities we remain vigilant towards reviewing minimum capital requirements upwards and these will be announced in the market in due course if we see that there is need for that,” said Gono in his 2012 Monetary Policy statement.

A regional comparison of ratios of minimum capital requirements (MCR) for commercial banks to GDP shows that Zimbabwe is ranked second at 0,14% behind the Zambian ratio of 0,52% for international banks. For locally-owned banks in Zambia, the ratio is lower at 0,11% and South Africa has a MCR-to-GDP ratio of 0,01%, Nigeria 0,06% and Malawi 0,09%.

Increasing minimum capital requirements may not necessarily be a solution to the problem, given that it would not be linked to economic activity, and this may stretch banks unnecessarily in an already constrained operating environment. 

Regulatory authorities should take into consideration the fact that the indigenous bank owners had their savings depleted during the hyperinflation period and the call for the shareholders to dispose of their shareholding to foreigners will not be concomitant with the current indigenisation laws.

Local banks need a reasonable turnaround time based on the viability of their businesses and also the performance of the economy. Given that most deposits are transient, how are banks expected to make a reasonable return on their investing activities?

With time, banks can manage to generate profits which they use to recapitalise. Most indigenous banks are servicing niche markets and the level of their deposits may not prompt a high capital adequacy ratio.

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