Commercial Farmers' Union of Zimbabwe

Commercial Farmers' Union of Zimbabwe

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Is the banking sector really safe and sound?

Is the banking sector really safe and sound?

Thursday, 02 February 2012 16:44

By Linda Tsarwe

IT took a lot of effort to attract deposits back into the system after 
dollarisation. Coming from a background where most people had lost their 
savings in the banks due to hyperinflation, no one was willing to go through 
the same predicament again, especially with US dollars. As at November 2011, 
the banking sector had deposits amounting to US$3.3 billion, having grown 
from as low as US$1.4 billion at the end of 2009, signalling that confidence 
is slowly being restored. In turn, due to an increase in the deposit base, 
most banks resumed their lending activities which had been put on hold. By 
December 2011, the average loan to deposit ratio, including offshore lines 
of credit, was over 87%. Local banks have notably been the most aggressive 
when it comes to lending, while the international banks have been more 

Although deposits have grown over the years, the hot nature of these 
deposits has not really changed. As at November 2011, demand deposits 
accounted for 89.3% of total deposits, which limits long term lending. As 
such some banks managed to secure offshore lines of credit which are 
relatively cheaper and longer term. These have not been sufficient to cater 
for the funding needs of the whole country. One therefore wonders how these 
local institutions have managed to be so aggressive in lending. It is quite 
likely that these banks have a huge funding gap due to the mismatch of 
assets and liabilities on their balance sheets.

However, the core problem that has developed out of this aggressive lending 
is that of the high default rate. It was inevitable, considering that credit 
was available at every corner though not at the right price. If one has an 
active credit account at a furniture retailer, one with a clothing retailer 
and a loan at the bank; considering the levels of incomes that an average 
consumer is getting, then there is a strong chance that the consumer is 
over-borrowed. And now it seems like the bubble is about to burst as the 
brunt of over-borrowing is catching up with many.

It is reported that most corporates are failing to repay the funds they 
borrowed and are rolling over these facilities. Not surprising, since most 
companies had to recapitalise after dollarization and the only option was 
through debt as cheaper routes like rights issues failed to get support from 
shareholders. This has resulted in huge finance charges.

Loan loss provisions by banks have not portrayed a true picture of the 
events on the ground. The Ministry of Finance together the Reserve Bank have 
been quoted reassuring the public that the banking sector is safe. At a 
press conference held last week, the Minister alluded to the liquidity 
challenges in the economy as attributable to expenditure pressures during 
the festive season, which was characterised by ‘high volumes of high value 
transactions’. This argument seems somewhat disingenuous. If an account is 
adequately funded then why should the bank fail to honour its obligation?

At the CZI seminar and in the monetary policy statement, the RBZ governor 
further reassured the public that the banking sector was safe, citing that 
the bulk of the assets and deposits were in the hands of the ‘strongest’ 
banks. It, however, raises the question of which banks are being defined as 
the strongest? The papers were full of reports of ‘perceived’ strong banks 
that were failing to make payments to clients.

Although opinions differ on how financial authorities should handle a 
possible liquidity crisis, not acknowledging the problem is surely not the 
solution. It is apparent that most banks are failing to honour their 
obligations. Solutions such as staggering high value payments do nothing but 
make banking less flexible. According to the monetary policy statement 
presented by the RBZ governor on Tuesday, cash withdrawals now require a 
notice period, the length of the notice period being dependent on the amount 
involved. Only funds that amount to US$10 000 or less can be withdrawn on 
demand. So much for the convenience of banking! It would also be a hard call 
to convince the unbanked to trust the banks. No one needs a restrictive 
condition attached to their hard earned cash.

Essentially, we have gone back to a similar Zimbabwe dollar scenario of cash 
rationing. Such a move is in huge contrast to the claims that both the 
Governor and the Minister have been making about the banks being safe and 
sound. In fact, this only heightens the fears that the liquidity crisis 
could be worse than we think.

To ease the liquidity crunch, the Minister highlighted at  the press 
conference that US$120 million would be availed to the RBZ for the purpose 
of carrying out its lender of last resort function in addition to the US$7 
million announced in the budget. Further, the RBZ Governor mentioned in the 
monetary policy statement that a further US$80 million accessed from Afrexim 
bank would also be channelled towards the same purpose. A total amount of 
only about 6% of total deposits!  And obviously insufficient.

Can the RBZ really be relied upon to utilise these funds correctly after its 
history with the statutory reserves and the FCAs of gold producers? Both the 
Minister and the RBZ are now talking about issuing tradable paper backed by 
statutory reserves that most likely do not even exist. Essentially, it means 
the paper is worthless. The RBZ failed to honour the gold bonds created for 
gold producers at maturity. Will the tradable paper for statutory reserves 
be any different?

Instead of all this going back and forth, which does nothing but destroy the 
confidence that has been painstakingly built up in the banking sector, some 
hard decisions are required. Controlling banking by limiting transactions 
does not work and has proved to not work elsewhere in the world. It actually 
makes the situation worse by creating speculative opportunities. 
International banks that have been blamed for not aggressively lending will 
have the last laugh. Aggressive lending in this volatile environment just 
does not cut it.

All the signs seem to indicate that the credit bubble must eventually burst 
despite assurances by the authorities. Whether the authorities will 
eventually admit it or not is another issue. Only time will tell how events 
will pan out. But as indicated in the monetary policy statement, we should 
brace ourselves for the worst.


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