We were doing our internship at one of the local banks and our behaviour during the first days of the programme was extraordinarily fervent with a blend of mortifying self-regard and praise. It is a general feeling among university students that they “know it all” and once they lunge into the industry, it is common for them to exhibit some form of confused elocution and skills.
Ngonidzaishe Makaha and Blessing T. Maredza
One day, during lunch, the General Manager responsible for treasury came to us and asked what we understood by the term “bank”. To us, this was a perfect opportunity to recite one of those winding and big worded definitions we had crammed at university. After our show of ebullience in big worded definitions the general manager only grinned and said, “I thought bank means trust”. We felt ashamed of our validity seeking show. In fact, that was very humiliating for us. We felt naked!
Confidence in Zimbabwe’s banking sector is at an all-time low because people and corporates no longer have any trust in the system. Bank closures and abuse of depositor funds have been the hallmark of factors that have led to erosion of trust and confidence in the financial system. The analogy that best describes the subject of confidence between banks and depositors is one of a relationship between husband and wife.
It is imperative that monetary authorities and banks work on restoring confidence in the financial system. Some basics banks and monetary authorities need to revert to include: Holding of liquid and near liquid assets as capital.
The system used to determine bank capital in Zimbabwe is not anywhere near the preferred international standards as stipulated by the Basel Committee on Bank Supervision. The Basel standard is very clear on the need for banks to hold a lot of liquid and near liquid assets as capital. The Basel Accord also takes into consideration the specific risks which affect the banking sector, namely liquidity, credit and operational risk.
Over the last decade, most of the banks which folded in Zimbabwe were either misrepresenting monetary authorities on their capital adequacy or quoted fixed assets as capital. Misrepresenting capital or quoting fixed assets only becomes corrosive when there is a run on the bank and during times when liquidity obligations are in excess of what the bank can meet.
It seems the prevailing capital requirements are just arbitrary figures which do not take into account the specific risks faced by banks. The current requirements are also universal for all banks and this has the effect of overlooking the level of risk each bank is exposed to.
To counter the possibility of bank closures due to capital inadequacy, it is vital that monetary authorities coerce banks to hold the bulk of their capital in liquid and near liquid assets. In fact, Zimbabwean monetary authorities need to adhere to the recent Basel Accord governing bank capital so as to minimise closures that stem from liquidity and operational risk. Elimination of liquidity and operational risk will drive confidence among depositors as safety of funds and continuity of business is enhanced.
There was a time when foreign banks were accused of having a cavalier attitude to the local credit market. One striking observation today is that in the current liquidity crisis, banks which were writing a lot of loans and accumulated non-performing loans are the worst hit. Banks, mostly foreign, which were abstemious and cautious, are better positioned though they are in the same mess.
Credit management systems employed by banks should be coherent because non-performing loans deteriorates the liquidity position of a bank. Once the liquidity position is affected, depositors lose, leading to erosion of confidence and trust.
As known in the business world, the primary goal of any business is satisfying customer needs and anything apart from that is secondary. In the banking sector, customer needs are drawn from three principles of security, reliability and efficiency
Banks need to be reliable in terms of their systems and service offerings. In Zimbabwe, reliability particularly in terms of cash management and banking system performance need to be addressed. Customers are now familiar with the tunes, “we don’t have cash at the moment”, “the system is down” and “temporarily out of service” on ATMs.
If there is no reliability that customers can transact anytime they want or be able to withdraw the cash they want, then they will desist from depositing with banks. Efficiency is also concerned with service performance. Banks should plan for peak periods in terms of cash and personnel, to avoid prolonged queues and cash shortages.
If these aspects are addressed it will improve on the value offered by banks. This value is measured in the customers’ perspective of how the bank’s service offerings are able to satisfy their needs.
Return on trust
Banks in Zimbabwe have long taken depositors for-granted.
In essence they only see themselves offering a service yet they overlook the trust they get from depositors who lodge their savings with them. Before the digital disruption initiated by mobile money, the cost of transacting through a financial institution was frightfully high, and is still high, yet there is virtually no reward on savings.
There is need for banks to offer considerable return on deposits to promote saving. This will also enhance the liquidity position of banks whilst placing a lot of financial resources at the disposal of the credit market as well. Along with this move there is need for banks to offer affordable transaction costs.
Revision of corporate governance systems across the financial sector is a vital element that can drive confidence in the banking sector. Abuse of depositor funds by directors and shareholders deters people and corporates from engaging banks.
Monetary authorities should set tight corporate governance tenets that can put a plug on activities such as insider lending that end up defrauding depositors.
It is also critical that departments such as Treasury, Risk and Credit are manned by competent people that adhere to the prudential standards of banking.
Robust safety nets
The current situation does not allow the central bank to stretch its capacity and act as a safety net for failed banks and it is regrettable as it further impacts on confidence in the financial system. However, this is a blessing-in-disguise as it also drives away moral hazard, which is the incentive that banks have to act irregularly.
Monetary authorities have got to ensure that banks are covered by robust private sector safety nets that include institutional investors. This can take the form of direct control through shareholding. When a bank is backed by a financially sound institution it helps during stress times. There is also need to fully capacitate the Depositor Protection Corporation.
In the financial system, there is an element called contagion risk, which means the balance sheets of banking institutions are inter-twined such that failure of one bank can drag other banks. When there is low confidence in a particular banking institution, confidence in the whole financial system is affected.
As a result, confidence is not a caveat that should be safeguarded for the depositors only but for the financial sector as an industry itself. It is imperative that monetary authorities coerce banks to adopt effective capital standards and corporate governance practices that drive customer value and confidence in the financial system. Banks must bill up to their meaning, banking is trust.
Makaha is a financial consultant and Maredza is a banking expert. These New Perspectives articles are co-ordinated by Lovemore Kadenge, president of the Zimbabwe Economics Society. E-mail: firstname.lastname@example.org,.+263 772 382 852.