IN any country the banking and financial sector has been at the heart of economic growth since the dawn of civilisation. This could not be truer in Zimbabwe, given that the economy is predominantly cashless and almost all transactions are facilitated by the national payments system (NPS).
The performance of this sector is so pervasive that its performance is positively correlated to economic performance. Policies in Zimbabwe have also been inextricably intertwined with this sector, from inflation rate targeting through money supply to supporting government programmes through banks. What this means is, in essence, an overview of the sector serves as a good proxy for the current state of Zimbabwe’s economy.
Zimbabwe’s banking and finance sector is, at the very least, quite unconventional. This is underpinned by myriad country-specific risks that often prompt the sector to respond in kind.
This year, the sector’s development revolved around improved regulation of transactions and mopping excess liquidity, all in an effort to contain runaway parallel market exchange rates in Zimbabwe.
Earlier this year, the central bank carried out an investigation into the abuse of EcoCash by illegal parallel market players who were alleged to be the force behind the black market exchange rates and, in turn, inflation rates. EcoCash had also been under scrutiny by the Bankers Association of Zimbabwe for performing the roles of a bank while disguised as a payment platform which allowed the platform to operate as a bank without the stringent restrictions, requirements and charges borne by a typical bank. This prompted tighter regulations by the central bank and resulted in mobile money platforms being mandated to scratch all agent lines and fully integrate with the national payments ecosystem.
As a result of this integration, banks and mobile money platforms can now fluidly facilitate transactions, and one can move funds from one mobile money platform to another with ease. It is also interesting to note that conventional banks emerged winners at the unfortunate expense of EcoCash on this directive.
Given that EcoCash had brilliantly tapped into the unbanked population that accounts for 47% of Zimbabwe’s adult population and mobile money operators’ 23% contribution to total transaction values in 2019, the integration has given banks unlimited access to potentially additional business without having to drop a dime for it.
The parallel market exchange rate that galloped from ZWL22,8/USD at the beginning of the year to record highs of ZWL120 during the year was the driving factor that underpinned CPI (consumer price index) growth from 563,9 points in January 2020 to 2124,0 points in August and prompted a response from the apex bank.
The RBZ began tightening money supply in the economy through a number of policies that include (i) introduction of the FX auction system for major players and SMEs, (ii) increasing the policy rate from 15% to 35%, and (iii) placing limits on daily transactions on both mobile money and bank accounts.
The auction system that was launched in June 2020 moved traffic from the parallel market as market participants accessed FX at favourable rates on the formal market. The parallel market ZWL/USD rate subsequently fell from a range of 95–120 to a lower range of 85–105, and stability in local prices has been observed ever since. These efforts were also complemented by an investigation into various stakeholders and investors on the Zimbabwe Stock Exchange,which took place during the month of July 2020 when the bourse was suspended, and the introduction of the USD-denominated Victoria Falls Stock Exchange.
Dual-listed counters, Seed Co International, PPC and Old Mutual Limited will be moved to the new exchange and prevent speculative black market pricing based on implied rates such as the Old Mutual Implied Rate (OMIR).
Complimentary to the auction system was the increase in the policy rate which addressed the flow of cheap money into the hands of speculative parallel market traders. However, it also limited the feasibility of various projects that required debt funding despite a significant gap between the rate and inflation rate figures.
The ability to create liquidity and push parallel market rates was also mooted by daily ZIPIT and mobile money transaction limits being imposed on users of the services. ZIPIT transaction were limited to ZWL$20 000 per day and $100 000 per month, while mobile money
transactions were limited to $5 000 per day. These policies have carried downside for local banks in the sector, whose interest-based earnings and loan book quality have been deteriorating in value throughout 2020.
However, these players have since responded by increasing focus on digitisation efforts which have plugged the drain in asset value.
In line with digital banking innovations by the global banking sector, local players have been rolling mobile banking applications which they are constantly beefing up with additional functions. The cost-efficiencies of technology have made it feasible for banks to fit a banking hall in the palm of one’s hand through these mobile applications. The migration to tech-driven models was further necessitated by the Covid-19 pandemic that saw the globe screeching to a standstill between March and July.
Lockdown restrictions and social distancing kept much needed traffic away from banking halls, and digital banking became the most feasible solution. Thus, the pandemic arguably incentivised the biggest leap in innovation in the sector.
As a closing remark, the sector has proved its importance in 2020 through these policies, and its players have risen above the challenges in ways that will change the way business is done in years to come. Local citizens and business entities can finally strategise without worrying about price shocks and suppliers can sigh with ease as the cost of doing business in the country improves.
Could this be the beginning of a new dawn for the sector and Zimbabwe as a nation?
Mtutu is research analyst at Morgan&Co.