RBZ interventions erode bank margins

THE move by the Reserve Bank of Zimbabwe (RBZ) to lower interest and bank charges has eaten into banks earnings, further worsening viability challenges, banks financial results have shown.

Financial Matters Shingai Moyo

In May, following acute cash shortages, foreign payments gridlocks and general entrenched economic hardships, the RBZ announced a raft of policy measures it assumed would ease the cash crisis and put the economy on a growth path.

The interventions included direct controls on interest rates and bank charges, cash withdrawal limits, reduction of e-banking charges and foreign payments prioritisation. Banks cried foul as the measures suppressed their non-funded income given the constrained credit expansion in the economy on the back of a widespread balance sheet recession. The two banks that have so far published their mid-year financial results have shown depressed earnings as a result of these RBZ measures.

MBCA, a member of Nedbank Group of South Africa, reported a 12% decrease in interest income to US$8,7 million in the six months to June 2016 from US$9,9m in the same period last year following reduction in interest rates. CBZ Holdings, which registered a US$11,9m profit down from US$13,7m last year had a 11,9% decrease in interest income.

CBZ’s interest income fell from US$101m in 2015 to the current US$89m. Although lowering of rates was good for the general public, the policy has really affected banks’ earnings. Steward Bank, which rides on the EcoCash platform, is the only bank that is expected to show stronger performance. The caps on cash withdrawals and resultant increased usage of plastic money generally benefit those few banks that have strong and well-diversified electronic channels.

Generally, the measures further worsened market distortions and have heightened settlement risks for all payments, especially foreign. It now takes more than a week for a foreign payment to settle when it used to take three days.

There is no longer certainty in the banking sector that foreign payments will go through. Delay in settlement of payments actually increases transactional costs of businesses involved in cross-border trading. Businesses may further incur storage and warehousing costs as a result of delay in payment settlement. Zimbabwe is ranked 155 out of 189 on ease of doing business by the World Bank. The Office of the President an Cabinet took responsibility of addressing the challenges on the ease of doing business and should have a relook on the RBZ May 2016 monetary policy interventions. However, the same government is the architect of the policy and therefore the nation should not expect any changes. If not addressed, the issue on ease of doing business will continue to constrain foreign investment in an economy in need of new capital.

The country has been attracting a paltry US$400m in foreign direct investment compared to Mozambique’s over US$1 billion despite it being in a political crisis as a result of continued security disturbances. Given the recent demonstrations and countrywide protests, Zimbabwe will continue to struggle on the ease of doing business and the economy should prepare for an extended period of negative growth due to depressed investment inflows.

Poor policies generally result in negative sentiments and controls result in rent-seeking behaviour. Current commoditisation of cash is a result of the developments in the banking sector as caused by RBZ interventions. There are long queues at banking halls as people hold on to cash for speculative purposes and in anticipation of the imminent introduction of bond notes — arbitrage. Some retail outlets are also charging a premium for payments in forms other than cash. Without proper checks and balances, some banks may start selling cash on the parallel market to compensate for lost revenues. One wonders where the people selling cash on a daily basis are getting it from.

Banks selling cash is not new, as it happened before during the hyperinflationary era with the RBZ leading the pack. Currently, some banks have so much cash in their vaults, but are holding on to it, imposing cash withdrawal limits in fear of victimisation by authorities.

Moyo is an economic and financial consultant. He writes in his personal capacity.