adminLinda Tsarwe Business Correspondent
At the beginning of this year the Reserve Bank of Zimbabwe and the Bankers Association of Zimbabwe signed a Memorandum of Understanding which essentially put a cap on interest rates and general bank charges. The agreement took effect on February 1, 2013 and was set to endure for a year, with a provision for a six-month review from effective date or when it is deemed necessary due to compelling circumstances.
Close to 10 months down the line, the agreement has been cancelled. The RBZ cited the review as necessary due to the operating environment as well as representations from BAZ. The MOU will no longer be applicable with effect from December 1, 2013.
From an RBZ perspective, the MOU with banks was necessary, following a public outcry of high bank charges.
Furthermore, the RBZ is unable to act in the capacity of lender of last resort and is not able to use the primary instruments as reference points for the setting of interest rates.
The use of multiple currencies has incapacitated the RBZ to influence money supply through various monetary tools. Therefore, to bring some sort of a balance between the banks’ needs and the plight of their customers, it was necessary to craft such an agreement, which was hoped would be ideal for both parties.
However, this did not turn out to be so. A cap on interest rates and charges for banks is essentially a form of price control. History itself has shown that price controls do not work, regardless of how well-intentioned they are.
Arguably, it is always ideal to leave price determination to the market, with minimal regulation. Our environment has proven this to be true, considering also how we have been hit by liquidity shortages.
Most banks have temporarily frozen lending due to the unavailability of funds.
Generally, the market is dry and clearly, a regulation of interest rates is not even necessary.
Furthermore, costs of funds continue to be expensive as a few have managed to acquire credit lines which are relatively cheaper than the local deposits.
At macro level, there has not been any significant inflow of foreign investment, and this also works out for the worst for the banking sector.
As a result of the difficult lending environment, main income for banks has shifted from the traditional interest income to mainly non-interest income.
Since dollarisation, banks have been leveraging on fee income, which has supported them at the times when net interest income is low or for some even negative.
After the MOU, BAZ reported that the banking sector could lose close to US$40 million on an annual basis, as fees and other non-interest income were lower.
This, of course, is not to justify high bank charges, but it is common knowledge that it is not business as usual.
In a normal environment, banks would be aggressive in the market, doing their core business of lending.
Currently, banks are unable to do so due to a number of reasons, chief among them liquidity shortages and a high default rate due to over-borrowing and poor operational performance.
To survive, they have to generate income through other sources such as fees.
Rather than imposing ceilings on bank pricing, it would have a more long-term effect to tackle the root problem of the consumer, which is that of low income earnings.
Bulk of the workforce is earning income below the reported poverty datum line which is close to US$600.
This means we are looking at the huge part of the population working on a strained budget. Bank charges do not add any joy to any already stressed income.
The greater number of the banking customers will be very sensitive to bank charges, regardless of how much lower they can become.
Borrowers, on the other hand, will also cry foul on high interest rates.
However, it should be noted that most banks do not have long-term money, while such borrowers are planning to recapitalise their businesses using such funds.
Clearly, the tenor of funds is wrong for their intended use and hence that money will always be expensive even if banks were to trim off some percentage points from their interest rates.
Putting a ceiling on the prices is only dealing with the surface problem of the consumer. What needs to be addressed is how we ought to increase productivity as a country through various sectors.
Cheap direct investment will alleviate the crisis of borrowing short-term money for capital expenditure. Capacity utilisation is increased and this will in turn work out for the general workforce who gets rewarded through higher wages and salaries.
Bank charges will constitute an immaterial component of their income, which they will probably to recognise.
The syndrome of not dealing with the root issues is not in the banking sector alone.
Currently, various industries are calling on Government to impose higher import duties on products such as milk and fowls. Their argument is foreign products are cheaper and hence are making the local products uncompetitive.
Without disregard to the need to protect the local industry, it does not solve the problems that we have in our manufacturing sector. What it only does is impoverish the consumer more, who is already working on an overstretched budget, through higher prices.
The influx of imported goods resulted after the fall of the local manufacturing sector. Without adequate recapitalisation, these companies will continue to operate on costly inefficient machinery.
Protecting the industry from imports might increase the price of foreign goods to the levels of those produced locally, but will not solve the critical issue of funding the manufacturing sector. It only means inefficiencies are perpetuated and the consumer is left worse off.
As a country we have been rated negatively as an investment destination due to many reasons, among them policy inconsistencies.
Many of our policies are very short-term or are prone to reversals at any point in time, which makes it difficult for any willing investor to make long-term investment decisions.
Banks, in particular, are a sensitive participant to the well-being of the economy.
An up and down swing of their regulation, is not favourable, considering the nature of their clients.
In our operating environment, pricing is better left to the market and policies focus on how to tackle the root issues such as low income earnings.
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