Soiled notes cost banks

Zimbabwe has been using a basket of currencies since it stopped the use of the Zimbabwe dollar, whose value had plummeted against other currencies.
BAZ said the arrangement had pushed up the banks’ cost of funding and bank charges as banks tried to recover the costs.
“We have to get the soiled money back to the United States or South Africa. We are charged 1,25 percent of the amount repatriated,” said BAZ president Mr George Guvamatanga in a recent interview.

Ordinarily and in terms of standard practice, replacing old and dirty notes falls under the ambit of central banks. But the local banks have to go through the expensive and arduous process because the Reserve Bank of Zimbabwe is incapacitated.
The RBZ suspended such functions as lender of last resort and printing money after the switch from the Zimbabwe to the US dollar and other currencies in 2009.
This followed the devastating effects of hyperinflation, caused by a decade of economic instability in country.

Zimbabwe uses the South African rand, the Botswana pula, the British pound, the euro and the US dollar under the multi-currency regime. The US dollar is the reporting and dominant currency while the rand is the most common unit in the southern parts of the country.
BAZ said the cost of repatriating foreign currencies contributed a significant portion to the cost of money and bank services in Zimbabwe, which are considered “too high”.
Other factors cited for the high cost of money and bank services include country-risk profile, cost of capital, cost of operations and high utility charges.

Banks are quoting between 6 and 30 percent on loans and charge up to 1 percent in fees on transacted values. Penalty on defaulters can be as high as 58 percent.
BAZ contends that the interest range of up to 30 percent and bank charges of up US$2,50 per transaction were reasonable.
But BAZ said the high rates and charges were based on economic fundamentals and were in line with trends in the region.
Local banks also have to bear the cost of insurance and the storage of huge volumes of funds which, under normal circumstances, should be carried by the central bank.

The Government is still mobilising resources to recapitalise the central bank in a bid to restore its statutory functions.
But the absence of some of these functions has seriously affected the smooth functioning of the financial system.
The inter-bank market, for instance, has all but collapsed as banks fear systemic risk at institutional levels and lending rates have taken a spike due to the chronic tight liquidity situation.

BancABC economist Mr James Wadi said it was central banks job to replace soiled notes to prevent fraud.
“It is part of their duty to mop up currency that is no longer in good state and replace them with new ones,” he said.
But the RBZ’s hands are tied, as Zimbabwe did not enter into formal arrangements with countries whose currencies it uses for it to receive replacement for dirty notes.
As a result, Zimbabwe cannot formally obtain replacement notes and the banks have to make supply arrangements with correspondent banks.