Is Zimbabwe over banked?

It seems the old adage that, “banks take the umbrella when it is raining and lends it when it is calm”, seems to be holding water.

Banks by nature thrive on confidence and trust ahead of economic facts and figures.
An average of 25 banks, in a US$5 billion economy with a US$10,7 billion external debt, and 85 percent unemployment makes an interesting subject for debate.

Developments in Africa are somehow unimpressive. Global FDI flows which declined sharply from its peak of US$2,3 trillion in 2007 to US$1,39 trillion in 2009, recovered by about 3 percent to US$1,43 trillion in 2010.

Zimbabwe, which is a small fragile developing economy account for a paltry share of global FDI flows.
In more specific terms, of the total FDI flows to emerging and developing economies in 2010, low-income countries accounted for only 2,5 percent.

It is also worth noting, that the attitude of direct, indirect and developing investors to FDI, has been changing, in relation to changes, in the macro-economic (and especially investment) climate and the overall policy environment in developing countries.

Accordingly, the changing pattern of FDI flows seem to conform, with the varying policy stances in developing countries, dating from import substitution in the 1950s and 1960s to the natural resource led development strategies in the 1970s.

Beyond the 1970s, FDI flows has tended to correlate positively with structural adjustment and transition to market economies in the 1980s, and the increasing role for the private sector in the 1990s.

From mid 1990s to present, the pace of FDI flows into banking and financial services, tourism and information and technology sectors has been outstripping the flows into the manufacturing and extractive industries, in the developing world.

Unfortunately, Zimbabwe could not revisit its strategy due to trade liberalisation, which led to the emergence of indigenous banks such as Trust Bank which was founded in 1995, NMB in 1992, Intermarket Bank, Royal Bank and Metropolitan Bank.

The Zimbabwean authorities forgot to introduce, banking laws, which would promote foreigners participation in those domestic banks, leading to, “one man showmanship” status.

It is pertinent to appreciate that, no modern bank can thrive without being integrated to the world financial system, where derivatives and other vanilla products are utilised, to hedge and manage risk.

Zimbabwe’s banking sector has dismally failed to be innovative which had seen them over relying on none interest income, such as bank charges, commissions, fees and fair value adjustments.

This leads to debate on whether we need 25 banks, or are the 25 banks, which needs the impoverished society.

A host of factors are considered, in determining the optimal number of banks. These includes the GDP size, the strength of the central banking system, the quantum of skilled labour and also the employment trends within a nation.

As long as FDI is depressed in the financial service sector, the future of banking is bleak.
For instance if we take the case of Mr Patterson Timba, he was learnt US$5 million by businessman Jayesh Shar at 9 percent per annum.

Clause 6.2 of the loan agreement dictate that in the event of default of any amount due in terms of this agreement, the default interest shall accrue at a flat rate of 3,5 percent per month.

Such a case study where a controlling shareholder of a bank would fail to honour such a minute gives credence to the argument of an overbanked economy is buttressed.

For capital importing developing countries, Zimbabwe included. FDI inflow is regarded as a mechanism for closing the financing (the savings/ investment and foreign exchange) gaps within the domestic economy.

FDI also contributes to improvements in productivity of domestic investment, since the involvement of overseas investors in management, tends to overhaul and bring in better management knowledge and expertise such as strategy formulation sales and marketing among other vital managerial expertise.

Moreover, although FDI inflow raises the capital investment base of Zimbabwean economy, it spares us from the burden of external debt service since it does not impose any future direct financial (debt) obligations on us.

Experience has shown that FDI further enhances access to more efficient technologies, as technology owners often seem unprepared, to make more productive technology available to a partner, unless there is a possibility of retaining a reasonable degree of management control.

Therefore with an almost wilting FDI inflows into Zimbabwe, there might be no need for all those banks, which offers generic products.

If church organisations, which thrive on a single objective God can afford to differ in both their spiritual and canal strategy to lure the flock, then why would banks fail to appreciate the role of innovation.

When Zimbabwe’s relations with the Western countries were strained, the Asian ties deepened but our banking model remained constant.

With the dominance of the Chinese and the Indians in this economy, their approach to banking remained opaque unlike the erstwhile colonisers who brought their western banks with them, to drive the appetite for African reserves.

Christopher Takunda Mugaga is an economist, is also the head of research at Econometer Global Capital, a regional finance and economics research firm. He can be contacted on 0772 340 353/ 0776 266 062 or [email protected]