Eric Bloch Column: Banking sector crisis undercuts economy

It is only a few banks whose continued existence is precarious and are unable to assure depositors of the security of their deposits. Their delicate situation makes Zimbabweans in general and business enterprises in particular apprehensive over the viability of all banks and associated financial institutions. This has resulted in many being reluctant to deposit funds in banks opting to hold them at home.  In turn, this worsens the illiquid economy further hindering any chance of them recovering.

 

Due primarily to the interventions of the Reserve Bank of Zimbabwe (RBZ) which oversees the banks, most banks have recovered from the ills that afflicted them in 2008 during the hyperinflation era, and in early 2009 when Zimbabwe demonetised its currency and adopted the prevailing multi-currency system. The RBZ vigorously monitored the banking sector and used its authority to force recapitalisation of all those banks that had become undercapitalised. The RBZ’s actions ensured banks attained prescribed minimum capitalisation requirements to ensure the banks’ continued operations, and their ability to timeously service withdrawals by depositors. 

 

As and when the RBZ deemed it fit, the prescribed capitalisation levels were re-assessed and, when necessary, the RBZ dictated further bank recapitalisation.

As a result most of the formerly troubled banks, which happen to be locally-owned, achieved restoration of viability and security. Nevertheless, the RBZ maintained a watchful eye on developments in the banking sector.  Despite this, some banks progressively eroded their capital resources and became insecure havens for depositors’ funds.  This was, in the main, due to mismanagement, entry into insecure transactions, ill-considered and insecure lending among causes. 

As a result, where it became evident to the RBZ that such banks were increasingly unstable and not protected-against by capital adequacy to support the levels of transactions entered into by the banks, there was no alternative but for the RBZ to place them under curatorship, or merge them so as to consolidate their capital resources. Illustrative of the effectiveness of RBZ’s actions was the placing of Renaissance Bank under curatorship, and its subsequent recovery.

Notwithstanding the commendable RBZ monitoring and supervision of the banking sector, a few banks escaped the RBZ’s efforts until their negative circumstances became serious.  Interfin Banking Corporation and Genesis Investment Bank Ltd’s inability to fully service customer withdrawals is evidence of this.

A major consequence of the instability that prevailed within the banking sector over the last three to four years has been the reluctance of many to deposit their funds in the banks.  That disinclination was intensified by concerns that Zimbabwe would discontinue usage of the multi-currency regime and revert to its own currency, concurrently with a forced conversion of all foreign currency holdings into the Zimbabwean currency.

This has driven many to hold their funds outside the banking system despite the attendant risks. The drop in deposits has exacerbated the inability of banks to operate effectively and extend loans to customers except for limited amounts and for short periods of time.

This has impacted adversely upon the long-awaited economic recovery. The 2008 hyperinflation and subsequent currency demonetisation resulted in almost all enterprises being grossly undercapitalised.  Their capital was severely eroded, and yet the funding needed to resume operations was more than before the hyperinflation era.

To restore working capital levels to required levels the enterprises needed access to enhanced banking facilities, and those facilities had to be of a sufficiently long duration to meet operational needs. However the banks, being recipients of only short-term deposits instead of medium and long-term deposits, were only able to make advances only for very limited periods falling short of the borrowers’ needs. 

The inability of banks to extend sufficient loan facilities and provide the funding for the periods of time required by borrowers has been one of the major causes of business closures and the downsizing of many more.

The inability of banks to extend sufficient advances to meet the needs of commerce and industry is compounded by their inability to access substantial amounts of offshore lines of credit. International lenders have serious reservations about making advances to Zimbabwean institutions.  Those reservations are founded upon the oppressive indigenisation programme being implemented by government, and the political and economic instability still prevailing in Zimbabwe.

Because of the limited amount of lending banks can engage in, they have to charge high interest rates on such advances to cover their operating costs. However, those high interest rates are prohibitive for most enterprises, whose limited viability ensures they cannot afford costly borrowings, despite their desperate need for such.

Thus, despite the RBZs valiant efforts to address financial sector instability the banks remain in a precarious situation.

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