Zim banks lead in disintermediation

BANKS play a significant role in the economic development of a country. Historically, we have seen the importance of economic success to the financial sector’s development.


Misheck
Ugaro
economist

Zimbabwe, in particular, experienced a deepening of financial intermediation in the 1990s characterised by the entrance of many players and increasing banking penetration and sophistication.

The country’s financial services sector became comparatively more advanced than the regional markets outside South Africa.

Due to the persistent economic decline experienced over the ensuing two decades, however, (barring the intermediate recovery from 2009 to 2013 during the Government of National Unity period) with the major highlight being hyperinflation during the period 2006-2008, banks in Zimbabwe have gradually transformed from the traditional intermediation role into brokers and speculators.

A review of the financial results of banks in Zimbabwe shows that the income streams are heavily skewed towards non-core activities. The larger proportion of earnings comes from non-interest income (85%).

The banking public is carrying the burden of service fees which have become the main source of survival for banks. What is worrying is that banks no longer advertise, as is required by the Banking Act, their charges in the various media periodically. Neither do they display their charges in the banking halls anymore. The system has now become so opaque and there is no publicly displayed information available until one makes an effort to enquire at the banks’ information desks.

A cursory survey of some of the charges now being levied by the banks revealed the following:
Monthly card fees: ZW$50
Monthly account services fees: ZW$20
Transaction fees (swipe): ZW$7
Funeral cover premium: ZW$8
Account reactivation fees: ZW$100

In addition, mobile money transactions attract a 1% fee, outside the intermediated tax. An average personal account can easily exceed ZW$150 per month in fees and for a corporate account it reaches heights of about ZW$10 000 monthly.

However, our discussion is based on the level of charges for the personal accounts for the banking public and demonstrating this as one of the reasons an increasing proportion of the population no longer banks.

In fact, the number of dormant accounts has increased and it is very expensive to reactivate these accounts as shown above. There is a penalty for reactivating a dormant account despite the reasons that made the account dormant in the first place including loss of incomes due to a difficult environment.

What is amazing is the number of unjustified and clearly duplicated fees that the banks are collecting. For example, when customers card for transactions, they are charged between ZW$7 to ZW$10 per transaction. At the end of the month, they are charged another ZW$50 for just having that card.

As if this was not enough, a monthly account service fee of ZW$20 to ZW$30 is levied, depending on the bank. One would ask what these three different charges, totalling ZW$70 to ZW$100, are for and how different the card fee is from the transaction fee and the account service fee.

Given our environment, it is difficult to justify penalties for holding bank cards or for reactivating dormant accounts? Instead, this should be viewed as an opportunity to incentivise the re-opening of accounts in the banks. That supports the shift towards plastic money and of particular interest is its impact on the current cash shortages in the country. It appears the public is at the mercy of the banks.

Further, banks have come up with supposedly innovative ways of delivering customer satisfaction! But the mind boggles. Some spurious commissions and charges are levied without customers’ expressing consent. One such trick is a monthly funeral insurance cover premium of ZW$8 to ZW$10.

One may wonder whether customers have consented, especially given the current negative perceptions of insurance in Zimbabwe, arising from historical experiences or they just see the charges at each month end. The consent may be contained in the small print and by signing up to opening an account a customer is deemed to have accepted this service and many more.

Currently, the insurance business is suffering severe credibility issues and it is surprising that banks are forcing an insurance charge on their clients. This is underhand behaviour, all driven by survival motives.

An interesting but curious question would be to request for banks to demonstrate the few instances of funeral assistance they have provided over the last two years. More poignant is the complete silence of the banking community against the serious threat the nation faces from the Covid-19 pandemic.

One really wonders where the corporate social investment tenets of the sector lie and whether this will ever be demonstrated. One cannot be faulted for concluding that banks are only interested in profits and regard all else as unnecessary costs.

The real reason for this is that banks have run out of income streams. They lack innovation and now resort to fleecing the public with dubious charges. However, more disconcerting is that central bank supervision has allowed this scandal to proceed on their watch. The banks are largely no longer lending. They are not paying for deposits. Deposit growth in the country is negative, even with the prevalent high inflation levels.

On the face of this, all banks are reporting super profits to the pleasure of the regulatory authorities. In recent statements, the Reserve Bank has surprisingly expressed satisfaction at the soundness of the financial sector on the back of what looks like splendid profit.

Closer scrutiny of the financial results shows that 85% of the income is from non-core activities! This should be a cause for concern for the authorities. It is necessary for the regulators to scrutinise deeply where bank profitability is coming from.

Revenues are certainly not coming from banks’ core business. In fact, banks are guilty of speculative activities. After all, if the economy is declining (at 3% for 2019), with most other sectors declining especially agriculture, manufacturing and mining which are the backbone of the economy, it is implausible in such an environment for the banking sector to be sound and growing and returning super profits.

The banks’ lack of innovation has unsurprisingly fostered a culture that has seen the public shunning financial institutions. This is not helped by the excruciatingly painful long queues at banks’ doors for cash. There has been a widely held suspicion in the market regarding how cash vendors are accessing cash from banks at the expense of many bonafide customers. The conclusion is that it is the banks that are fuelling disintermediation in a purported quest for survival.

Members of the public simply no longer bank their proceeds and prefer keeping their cash under the pillow, both foreign and local currency. It is cheaper and more convenient even with the attendant risks!

The authorities are urged to reset the tone and call a spade a spade. The banking sector in Zimbabwe is not sound. It is only making speculative profits. The regulatory authorities actually do not have effective control of monetary policy due to the big proportion of unbanked transactions that are occurring.

The Zimbabwean economy is estimated at 60% informal and it is also estimated that about 90% of this is not banked. For the authorities to gain adequate control of policy and to increase the efficacy of their directives, they must reign in the banking sector which to all intents and purposes is almost errant.

Regulations should be enforced, in as much as there are standard bank ratios such as capital adequacy, and the whole array of measures encapsulated in Basel 1 and 11 on which it appears Zimbabwe is moving in the reverse direction instead of pushing towards Basel 111 that allows the authorities to also monitor and control revenue stream ratios.

Ugaro is a former expatriate banker based in several Sadc countries and currently works as a corporate advisory services consultant. He is the founder of Rucabel Investments (Pvt) Ltd, an investment company based in Zimbabwe. He is a member and past vice-president of the Zimbabwe Economics Society.

He can be contacted on +263 777 052 004, e-mail: misheckugaro@hotmail.com; LinkedIn: https://www.linkedin.com/in/misheckugaro; Twitter: @twitcagan.com. These weekly New Perspectives articles are coordinated by Lovemore Kadenge, immediate past president of the Zimbabwe Economics Society . — kadenge.zes@gmail.com or mobile +263 772 382 852.