THE core business of banking is deposit taking and lending. The lending function is what generates revenue and profits for banks.
Banks through “fractional reserve banking” or put simply through the lending process create money.
This is inherent in the core business of banking. Business institutions require debt finance from banks to fund various projects. Where do businesses get the money to pay for operational expenses before they realise any revenues?
The main objective of the ban is to reduce the supply of local currency. Why? It is because the government blames banks for flooding the financial system with excess Zimbabwe dollars (Zimdollar), which in turn is causing inflation.
Is it true? Yes, but it is not only banks but those who access the money from these financial institutions. Previously, the government made another knee-jerk reaction to the long-running financial crisis by suspending Ecocash and the Zimbabwe Stock Exchange (ZSE) but the problem persisted.
But will the banks’ lending ban achieve the intended goal? In principle, the suspension should yield results as an artificial shortage of Zimdollars is already felt and the demand for local currency will rise.
Bank deposits in USD are almost 30-40% of total deposits. With the 4% tax on USD withdrawals likely to discourage institutions from withdrawing in similar currency, withdrawals are likely to be more in local currency. Tax payments made in local currency will require the Zimdollar. As such demand for local currency will surpass the limited supply of USD. Hence, this may temporarily stabilise the Zimdollar but creating a disaster in the banking sector.
However, the stability of the Zimdollar is not solely on money supply. There are other competing factors such as low production. Businesses have been hard hit by Covid-19 for two years. Industry wants to retool and needs financing, so cutting off access to credit will affect funding of production and payment of workers, in the short term.
This may result in shortage of products, which then forces prices to skyrocket and, again, fuel the currency slide. Job losses are inevitable.
Banking institutions get about 20-50% of their income from lending. The government ban will affect this. A drastic change in the core business of the sector will weaken an already fragile financial system. And microfinance institutions without diversities in revenue stream will shake.
All this legitimises the parallel market and individuals or businesses will illegally operate with usurious interest rates. The government is turning a blind eye on other macroeconomic fundamentals that bring about stability on local currency.
The policy changes negate a possible down slide on production, and upsurge in unemployment and restrictions on exports. These have a significant bearing on demand of Zimdollars and stability, thereof.
Hence, with the expected negative effects, the government must reverse the lending ban.