De-risking worsens Zim’s cash crunch

Cash-photo.jpg

IN the past few months, there was strong talk on foreign banks closing the nostro accounts of Zimbabwean financial institutions, particularly those in the United States and Europe. Commerzbank made headlines after it terminated its contract with local banks. The German bank was correspondent institution for many local banks which include NMB, BancABC and CBZ, among others.

Financial Matters with Shingai Moyo

Closure of nostro accounts and termination of relationships between big Western banks and Zimbabwean financial institutions is a result of broader breakdown of correspondent banking relationships across the globe. In the aftermath of the global financial crisis, large global banks have been forced to re-assess their business models as they rebuilt their capital buffers, strengthen their risk management practices and face compressed net interest margins.

As a consequence, correspondent banking relationships whereby large global banks provide payment and deposit-taking services on behalf of other banks, often located in smaller countries, declined. This trend, known as de-risking, was and is still being driven by concerns about money laundering, terrorism financing and the associated regulatory pressures. For instance, the exit of Commerzbank came after Barclays Plc was fined US$2,5 million by the US Treasury Department for processing transactions of Zimbabwean individuals, companies and related parties on the US sanctions list. Increased regulatory requirements had adverse impact on banks relationships. The effect is more pronounced in smaller vulnerable economies in the Caribbean, central Asia and Africa.

Zimbabwe, the only practically dollarised economy in Africa, felt the might of the impact, as local banks no longer could process payments on behalf of their clients and import the much-needed US dollars, entrenching the cash crisis. Since correspondent banking plays an important role in the global payments system, of enabling cross-border transactions and access to overseas products, the effect of the breakdown in the relationship was much more severe for our economy which relies on imports for both capital and consumer goods. Given the current cash crisis and the country’s exposure to the US through usage of the US dollar, de-risking or breakdown of correspondent banking relationships worsens our economic plight. As large global banks have reduced their exposure to Zimbabwe, with only a few still dealing with local banks, the country is exposed to high concentration risk. If the trend of de-risking intensifies, it will imperil Zimbabwe’s access to cross-border remittances, undermine the already lower ability to finance economic activity and even weaken our response to natural disasters, given the economy’s reliance on donor funds in times of both natural and man-made disasters.

Products and services such as international wire transfers, cash management services, letters of credit and trade finance may become difficult to access. Without access to correspondent banking services, businesses and individuals may be unable to import goods from overseas, which we are already experiencing although as a result of other factors. In turn, problems with the supply chain could push some businesses into distress and lead to greater levels of unemployment. Further unemployment beyond current levels is unimaginable. The government should act with speed to correct the pandemonium as being further de-risked may result in individuals failing to send remittances, school fees and any support to family members overseas.

In his mid-term fiscal review statement, Finance minister Patrick Chinamasa highlighted the problem as he explained that there was an ongoing trend whereby international correspondent banks were terminating banking relations with financial institutions in the Eastern and Southern Africa Anti-Money Laundering Group member states, including Zimbabwe.

However, of concern is that there is no update from the government and the RBZ on the issue despite its severity. Given the RBZ drive towards introducing bond notes, which may dilute the over-dominance of the US dollar, restoring international banks’ correspondent banking relationships is key to ensure that the country will not run dry of the much-demanded greenback.

Moyo is an economic and financial consultant.

Top