Editorial Comment: Banks need to revert to core business

BANKS traditionally made most of their money on the gap in the interest they paid depositors and the interest they charged borrowers, with this enhanced as some of the money they lent out was shareholder funds.

This put banks at the centre of much of the economy, as the middleman and the risk taker in the mobilisation of savings and the direction of the needed lending to the business sectors that would make proper use of this money.

Savers avoided risk, since the bank bundled their deposits together then lent them out, so the cost of the few percent of bad loans was assumed by the bank and the savers could always get their money back.

Now Reserve Bank of Zimbabwe Governor Dr John Mushayavanhu wants banks to seriously return to this traditional function, partly because it is what banks are supposed to do and partly because it will make banks more resilient, to use the jargon, that is cope with economic up and downs.

The latest bank sources of income contributions at the end of last year, as shown in the latest Monetary Policy Statement by Dr Mushayavanhu, found almost half of all bank income came from revaluing foreign currency and property assets.

Technically this is income, but no one had to earn it; it just happened and basically it is income created via inflation, rather than any increase in productivity or active banking. It vanishes in better economic times.

So this is one reason why Dr Mushayavanhu, and other financial commentators, want to see more bank income from lending. This can be far more certain year after year, assuming the bank managers know their job and can calculate risks fairly precisely. Relying on rising property prices and the local currency going south to fund any holes in a set of bank accounts does not seem like a long-term good idea.

Of the half of bank income coming from operations, the interest income was around two thirds of the fees income, showing the dominance of fees and other charges when it comes to running banks. This also explains what are seen as over-high fees within Zimbabwean banking, despite the continued automation of services and the resultant cut in costs.

In his latest statement, Dr Mushayavanhu warned banks that others could take chunks of their business unless they started working on these problems.

When the building society sector was a lot stronger, ordinary people in need of a safe place for their savings and some basic banking services would open a building society account and get these simple services at no charge.

The compulsory positive balance made sure that they contributed, even if just marginally, to the pool of money being lent out and the lending interest rate was always higher than the deposit interest rate.

There was always some extra income from fees, but this was icing on the cake or often just recovery of costs, such as the small ledger fees charged on each transaction in an account, while the serious money was made from mobilising, bundling and lending out savings. While some corporate customers might want a range of services, most bank customers paid very little in service fees.

Yet this was a time when banks needed far larger staff levels than today, and far larger stationery budgets, as they coped with basic services such as cashing cheques or the nightly meetings when all banks sorted out the exchange of cheques deposited during the day.

There were also far more tellers on duty each day as almost all transactions needed to be done manually.

This is all, along with maintaining the customer ledgers, largely done by software these days, and that is far cheaper than having vast numbers of people having to handle every transaction, no matter how small.

Non-interest income started rising sharply in the 1990s and during hyperinflation was obviously the mainstay of the operational income of the banking sector, but this was supposed to be a temporary adjustment, not something permanent. Betting on bad news is not really a viable long-term economic policy.

The Reserve Bank has been pushing commercial banks to build up their savings rates and encourage customers to keep their money in a bank rather than under the mattress or lent to some sort of con artist.

Some progress has been made but banks are hardly falling over themselves to attract savers or even get their customers to open fix-term deposit accounts.

But customers do get messages inviting them to pay higher fees for certain types of debit or credit card and can, in most banks, pay even higher fees if they are reluctant to queue and want some sort of priority. Figuring out ways to raise fees rather than reduce them is not exactly what bankers are supposed to do.

Zimbabwe like most developing countries is short of capital. Pension funds can help with their automatic mobilisation of savings, but these days are excited about property investment and some equity investment rather than lending out money. Shorter term returns, the sort of thing required by most savers who are saving for something are wanted, and banks need to work out how to attract and use such savings.

The Chinese economic boom was largely financed by private savings accounts, as at least during the boom times Chinese people did not borrow money but paid cash, and so needed to build up their pile of cash through sensible savings. The banks mobilised these millions of savings accounts to profitably fund the productive expansion by credit worthy entities with good ideas.

There are several reasons why Zimbabweans and Zimbabwean businesses can be wedded to cash and some of the reasons for not using banks can be pretty weak. But one reason that gets on everyone’s list is the cost of running a bank account, that is the fees charged by banks. And here the over-reliance on fee income is obviously a major factor.

Banks would be more secure if they earned more in the interest gaps by encouraging more savings and lending to more credit-worthy businesses, as this sort of income does not depend on customers willing to accept high fees but rather on economic fundamentals.