Vulnerabilities still prevail in the economy

the multiple-currency system and liberalisation of the economy set the tone for the resuscitation of the economy resulting in a stable macro-economic environment.
This facilitated confidence building and allowed scope for forward planning and budgeting by banking institutions, which had become impossible during the hyperinflationary era.

The financial sector was then able to help jumpstart the intermediation in the economy.
The sector has largely boasted a clean bill of health except some isolated cases of magnified vulnerability due to fraudulent behaviour by some errant bank managers and shareholders.
However, the banking system remains highly vulnerable with weakening capitalisation rising from non-performing loans, limited lines of credit and a tightening liquidity situation.

This is largely because most lenders are reluctant to pour money into Zimbabwe as they are taking a cue from International Monetary Fund and the World Bank.
The two Bretton Woods institutions have indicated that they would only support the country financially if it clears its arrears and embarks on critical political and economic reforms.

In the absence of such support and the challenges in the economy, banks deposit bases have remained short term and transitory in nature.
As such, banks have had to walk a tight rope by striking a balance between maintaining healthy liquidity levels and supporting industry, which has plenty of viable projects, through credit extension.

However, the balancing act has been compromised by the state of capitalisation of banking institutions.
Recent developments in the banking sector have spawned a disheartening trend manifested by the voluntarily surrender by Genesis Investment Bank of its banking licence to the Reserve Bank of Zimbabwe last month and the placing of Interfin Bank under curatorship a few months after Renaissance Bank also went under the same process.

Genesis failed to realise adequate financing from partners that the bank has been courting since 2009. The RBZ has since commenced modalities on liquidating the bank.

Interfin Bank Limited was placed under curatorship after it was declared unsafe.
According to the RBZ, the reasons underlying Interfin’s unsafe financial position include inadequate capitalisation, concentrated shareholding and abuse of corporate structures.

Other issues, which led to the fall of Interfin included high level of non-performing insider and related party loan exposures, chronic liquidity, income-generating challenges, poor board and management oversight and violation of banking laws and regulations.

The African Development Bank last month said the cases of these two institutions and that of the Renaissance Merchant Bank suggest that banking sector vulnerabilities still prevail in the economy, although the systemic effects of these cases is considered small.

The banking sector is also under spotlight after Indigenisation and Economic Empowerment Minister Saviour Kasukuwere called for all foreign-owned banks to comply with the country’s equity laws.

However, on the indigenisation of the banking sector, the RBZ has maintained its stance against the current equity-based indigenisation of foreign banks.
The RBZ’s argument is that the banking sector is already indigenised, given that only seven out of 26 banking institutions are foreign owned. The RBZ is advocating for a supply-side indigenisation model.

Against this background, there have been calls for the central bank to restore financial stability to enhance economic performance and wealth accumulation.
This will help banks to be able to prevent adverse disturbances or shocks. The reserve bank’s framework for promoting financial stability entails an ongoing comprehensive analysis of potential risk and vulnerabilities in the financial system.

These include low savings owing to low salaries and wages and low interest income against high operational costs.
This has worsened the liquidity crisis in the economy due to the short-term nature of deposits, the absence of an active inter-bank market and lender of the last resort facility at the central bank.

In a bid to restore the lender of the last resort facility, Minister Biti in the 2012 National Budget announced a US$100 million fund to revive this facility and inter-bank market trading.

However, financial stability is also based on external elements or preconditions. These preconditions have a direct impact on the effectiveness of efforts in practice.
External factors include sound and sustainable macroeconomic policies, a well-developed public infrastructure, effective market discipline and mechanisms for providing an appropriate level of systematic protection.

Notwithstanding some of the problems the financial sector is facing, the banking sector has noted significant improvements in the level of support by banking institutions to the key productive sectors of the economy since the introduction of the multiple-currency system.