Banks must restrategise to survive liquidity trap

Takunda Mugaga Economic Agenda
The country’s banking sector has potential to grow 25 percent above its current size, if economic fundamentals are well managed.
This is a thriving and resilient sector, which is a marvel to watch given the virtually non-existence of money market paper in the sector. While it is true that about 14 of the 23 banks in the country have unimpressive liquidity levels, the possibility of bank failure is remote.

Much of the growth will come from innovation to fill the gap left after the decimation of the plastic money system and the embracing of cash-biased system. It is therefore gratifying to note that the sector has been attracting a number of foreign investors. Several banks are at advanced stages of securing investment that will assist not only in meeting the capital threshold levels set by the central bank but also to roll out new products which are in line with the changing dynamics of the economic structure.

One of the banks that has exhibited immense potential is Steward Bank. After posting an operating loss of US$24,5 million driven mainly by recurrent expenditures, the bank is still a star attraction within the business community.

Despite the liquidity challenges in the country, the market is definitely putting a premium on the bank picking up the pieces and moving into the black. Through the EcoCash save platform, the bank could possibly gain an additional 8 percent of the market share in the 2014 fiscal period.

The current campaign aimed at influencing informal traders to deposit money into the formal sector through the EcoCash platform presents the bank with an upside potential to reduce its loss by as much as 90 percent next year.

However, despite the huge potential for banks they still face major challenges such as volatile deposits while the asset of choice for most banks has been loans which are slowly but surely becoming strictly salary based. Matching assets and liabilities is also becoming quite a nightmare for banks and resorting to a mismatched book is compelling but fatal given the isolated state of the book.

The real enigma for the market has been that loans directed towards activities which do not necessarily grow the economy were posting much higher returns hence crowding out potential of the domestic industry to grow. In fact, it has been more productive for a banker to extend a loan to a trader who imports ICT products into the country ahead of a miner who is extracting minerals underground. This is despite the sad reality that the economy desperately needs a miner to grow as opposed to an importer of cellphones.

But with the liquidity challenges obtaining in the economy, a bank would rather grow its balance sheet rather than support sectors that promote economic growth. It is high time the sad reality of an ugly book be accepted, the mistake of post dollarisation was that banks went on an overdrive to lend and this has seen about 92 percent of banks adopting an extremely conservative attitude towards the market. The non-performing loans tapered off the appetite to take risks by most Zimbabwean banks thus creating a significant opportunity cost regime in terms of interest income, the trick lies in restrategising the model of banking and not freezing the essence of banking which is lending and credit creation.