adminAlbert Norumedzo Business Correspondent
THE Monetary Policy Statement came at a time when the banking sector is recovering from falling confidence levels caused by uncertainties in the local environment as well as vulnerabilities in some banking institutions that have seen depositors failing to access their money.
Economic stakeholders are anxiously awaiting a feasible solution to the current prevailing liquidity drought that has crippled the economic trajectory.
Since the inception of the multicurrency regime the Central bank has been unable to perform its role as lender of last resort and redirect economic fortunes through monetary policy tools.
Liquidity remains the missing piece in all economic thrusts that have been tabled to answer the country’s economic woes. The Monetary Policy statement as expected nobly pledges its allegiance and hope in Zim Asset as a tool for economic growth and recovery but fails to comprehensively answer the critical question which remains, where is the money?
Little was shed on the progress of the US$100 million facility meant to revive the interbank market. A lot of questions remain in dire need of answers.
For starters: Is the US$100 million going to be enough to influence interbank activity to the levels required to stir economic growth, against an aggregate loan book of around US$3,1 billion as at December 2013? How much of a difference will US$100 million make.
Though it is a step in the right direction there is need to mobilise more funds to revive interbank activity. Zimbabwe requires an estimated US$33 billion to circulate in the economy up to 2020 for solid economic growth and recovery to be guaranteed. In light of the economy’s funding needs, there still remains a huge funding gap.
Another issue that market players are pondering on is the issue of cost, at which these funds will circulate in the interbank market.
Given the country risk and current levels of National Debt with reference to both external (US$10,7 billion) and internal debt, it is prudent to assume that the cost of funds to the Central Bank will be reflective of the inherent risks which will in turn be reflected in the Interbank Market.
The Central Bank transferred its debt to Government which is already riddled with both local and external debt overhang. This may discourage future participation to Treasury instruments if such debts are not honoured.
Currently obtaining rates average around 16 to 20 percent on maximum tenures of three years. Such terms have made debt antagonistic to the economic goal of industry revival as it remains too expensive and too short.
However, another angle would be to let pricing be set by free market forces as any form of intervention not backed by financial muscle on the part of the RBZ would further fuel the liquidity crunch if the prescribed Bench mark rate is unsustainable vis-a -vis the cost of funds.
The extension on capitalisation deadlines and the scraping of the MOU (which could be taken as a sign of policy inconsistency by Market watchers) was expected given the currently obtaining macro-economic fundamentals (which demands that free market forces be left to play out).
Recent developments in the banking sector have revealed the need for adequate capital levels to underwrite more business and absorb losses and shocks without prejudicing depositors.
Banks that have been struggling to meet the capitalisation levels or submit credible and implementable capitalisation plans have in the past often been associated with cash flow challenges that have often compromised confidence in the sector.
It is against this background that capitalisation remains an issue of paramount concern in the sector. Failure to pay the due attention on capital levels particularly in struggling banks will extend fragilities leaving depositors exposed to undercapitalised banks.
Of interest remains the debate whether vulnerabilities across the sector were afforded due attention in light of the dwindling confidence levels in the sector. The MPS notes “the few troubled banking institutions are of a low systemic importance as they account for less than 10 percent of the banking sector Assets . . .”
This notion overlooks the dent these troubled institutions put on confidence in the sector thereby crippling its deposit mobilisation ability.
Escalating risk concerns in banking institutions could paralyse external credit lines. Leniency to maleficent risk management practices only fuels future systemic flaws that could ultimately prejudice depositors and other market participants. Stricter measures need to be quickly adopted to bring accountability in the banking sector and the proposal for criminal prosecution is a welcome thought, implementation however still remains elusive.
Aggressive on deck monitoring of risk management practices within the sector is paramount, a cosmetic stance towards non compliance will only plunge the system into meltdown.
A more proactive than reactive approach needs to be adopted in order to address key risk concerns before they culminate into system wide catastrophes. The public needs to have complete faith in the ability of the central bank to safeguard their hard earned money from abuse by bankers.
The motion to revive interbank activity will flop before it takes form if vulnerabilities and poor performing asset portfolios are not addressed because no bank wants to lend to a bank that is at risk of going under.
Despite the opposing forces that have prohibited the central bank from performing its duty as lender of last resort, there remains a case for the enhancement of the supervisory role to protect stakeholders.
Securitisation of mortgage loans into mortgage backed securities as proposed in the MPS can go a long way in enhancing the credit creation capacity of financial institutions. However, the escalating percentage of poor asset quality portfolios across the sector poses a credible cause for concern.
The creation of derivative instruments from poor underlying assets will inevitably lead to a systemic crush. Across the globe world financial markets crumbled at the mercy poor quality underlying mortgage backed assets.
With current non performing loans at 15,64 percent as at September 30, 2013, there is need to address asset quality before creating a secondary market for securitised mortgage loans.
After all is said and done, in the absence of liquidity, all manner of policy directed towards economic recovery and growth will remain confined to blue print form.
Albert Norumedzo is an Equities and Alternative Investments Analyst with a local bank, who writes in his personal capacity. Feedback can be sent [email protected]
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