subject: The Zimbabwean Banking Sector: Solutions to The Common Challenges [print this page] The Zimbabwean Banking Sector: Solutions to The Common Challenges
An Overview of the Zimbabwean Banking Sector
At independence (1980) Zimbabwe had a sophisticated banking and financial market, with commercial banks mostly foreign owned, Makoni (2010). A central bank had been inherited from the Central Bank of Rhodesia and Nyasaland at the winding up of the Federation. For years the government did not interfere with the banking industry and there was neither nationalisation of foreign banks nor restrictive legislative interference on which sectors to fund or the interest rates to charge, despite the socialistic national ideology. However, the government later purchased some shareholding in two banks. It acquired Nedbank's 62% of Rhobank at a fair price when the bank withdrew from the country, now known as Zimbank. The decision may have been motivated by the desire to stabilise the banking system. The State in 1981 also partnered with Bank of Credit and Commerce International (BCCI) as a 49% shareholder in a new commercial bank, Bank of Credit and Commerce Zimbabwe (BCCZ). This was taken over and converted to Commercial Bank of Zimbabwe (CBZ) when BCCI collapsed in 1991 over allegations of unethical business practices. In the first decade, no indigenous bank was licensed and there is no evidence that the government had any financial reform plan, Makoni (2010). Later on as part of financial reforms aided by ESAP the Registrar of Banks in the Ministry of Finance, in liaison with the RBZ, started issuing licences to new players as the financial sector opened up.
To date the Zimbabwean banking sector comprises of the Reserve Bank of Zimbabwe (RBZ), various Commercial Banks, Merchant Banks and the Post Office Savings Bank. The RBZ is the Central Bank for the nation and is the Supervisor of all other banks, it guides and maintain discipline through its monitoring and policy set ups. Zimbabwe has 15 commercial banks, five merchant banks, four building societies and one savings bank. There are 16 asset management companies and 95 micro-finance institutions.
Extent of Challenges currently faced by Banks
Banking institutions are still struggling after the economy restoration. 10 out of 25 financial institutions have recorded losses in the first quarter of 2010 ending 31 March. The recorded losses were mainly caused partly by high non-interest expenses in the form of salaries, employment benefits and general administration expenses against that there is low income generation capacity. Despite banks like CBZ, CABS and Standard Chartered recording profits in excess of US$1 million during the first quarter, they also continue to face challenges, in actual fact they should be earning more than this if challenges are not as tough as they are.
According to Zimbabwe Banks and Allied Workers Union, as at 15 July 2010, banks that retrenched staff in the past year (2009) include Metropolitan (120 employees), People's Own Savings Bank (160), Standard Chartered (98, through voluntary retrenchment) Barclays and FBC (200 on voluntary retrenchment), Renaissance (5) and Tetrad (16). NMB also axed 75 non- managerial staff while CFX retrenched 61 non- managerial and 39 managerial staff. CBZ and Premier have also retrenched employees.
Challenges Zimbabwean Banks are Commonly Facing
Financial Challenges
The Zimbabwean banks are currently failing to get enough finance to enable them to run its business operations at the full capacity. The banks are struggling to meet the minimum capital requirement set by the RBZ, even under a phased plan given by the central bank. The plan was to pay half by September 30 last year and by March 31 to meet the fully prescribed capital levels. 15 out of 25 banking institutions had complied by end May. Paid-up capital requirements were set as US$12,5 million for commercial banks and US$10 million for merchant banks and building societies and more than 10 banks failed to pay up according to the phased plan. Low level of capitalization has also been identified by Brownbridge (1998), as a common challenge that is always faced by banks in developing nation especially locally owned banks.
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Liquidity challenges
To expand operations banks need adequate cash, and this can be found through many ways and it is these ways that are currently unavailable. Getting loans from other banks, foreign companies, the Central bank and deposits from individuals and institutions are possible ways to raise finance. Foreign currency is very scarce in the economy due to poor export performance and lack of international capital flows. Even solvent banks may not survive a run on deposits as they are also struggling to mobilise "less liquid assets to meet liquidity needs".
Volatility of deposits
The deposits to banks are very volatile and hence low profits out of them. This is mainly caused by a very high marginal propensity to consume of various economic agents who are earning low salaries and hence unable to save, this causes people not having money staying in their bank accounts except minimum balances. This has left banks having no money to invest and earn a profit. Major deposits are done by companies as salaries and wages of their employees who will then withdraw almost all of their salaries. The majority of workers are earning far less than the Poverty Datum Line especially those in the Public Service, making it difficult for them to save.
High Overhead Costs
Due to the low-income generation ability of the banking institutions, their earnings cannot match the overhead costs they are facing, especially salaries and wages given that they are not operating at full capacity. The cost of paying workers salaries that are in line with the cost of living is too heavy for the banks as they are not operating at full capacity and level of profitability is low. Even if they opt for retrenchment, the packages to be given to the retrenched workforce will be a challenge.
Cash-based Transactions Prevailing
Due to the foreign currency shortages in the economy, and the unavailability of alternative payments to business transactions, a lot of cash is in the hands of economic agents and they are not willing to have it banked. Every trade taking place is on cash basis and generally no credit transactions are preferable currently. Alternative methods for business transactions include credit transfers, cheques, direct debits and payment cards (debit, credit, prepaid, ATMs and POS networks).
Lack of lines of Credit
As banks like any other companies are willing to borrow elsewhere so that they expand business, the lines of credit are not available. The few that are there are of short term nature and hence very costly. The supply then cannot meet the demand. Small banks are the most affected as they cant meet the requirements for getting credit even in the foreign market.
Central Banker not Performing all its roles- Lender of last resort
Due to the fact that Zimbabwe has no currency of its own, it has adopted the multicurrency use and mainly South African rands and the United States dollars are used for transactions, the Central bank can nolonger perform all its roles especially being a lender of last resort. This gives banks a hard time to find sources of finance. RBZ's problems also meant that banks would not be able to obtain a refund of their statutory reserves for which they are entitled in case of a possible decline in their deposits because these reserves are not backed by international reserves. In normal environment, if liquidity tightens banks approach the RBZ for accommodation, then RBZ reserves the right to grant assistance on its own terms.
No active Interbank Market
Currently there is no active interbank market, implying that those banks with no collateral to the required conditions find it difficult to borrow so that they cover liquidity gaps. Lack of finances remains a big challenge to the banking sector, as they are not able to expand their business in line with current economic conditions and public demand for their services to be appreciable and internationally competitive.
Insider lending
Insider lending also has contributed to bank failures and still remains a challenge to the Zimbabwean banking sector and this often lead to bad debts. As an example most of the larger local bank failures in Kenya, such as the Continental Bank, Trade Bank and Pan African Bank, involved extensive insider lending, often to politicians, Brownbridge (1998). This is the same scenario with Zimbabwean banks which have no choice but to perform insider lending. Nigeria and Uganda also experienced the same.
Lending to high-risk borrowers through Adverse selection and Compliance to National Policies
Due to lack of investment opportunities, banks are now lending to high-risk borrowers through adverse selection and compliance to national policies. Various government bodies have negotiated with the banks to offer loans as part of Empowerment programmes to the youth and woman who have no collateral securities. Many of such groups have failed to return the loans as prescribed and hence are having losses. As the economy is from the depression, it is now difficult to distinguish and identify credibility of clients for loan purposes.
Entrepreneurship Skills (Excessive Human Capital Flight)
Due to the crisis there have been excessive human capital flight and hence those with great expertise have migrated to greener pastures. A lot of staff is lacking a lot of experience and hence challenges remains pinning the sector. Even some crucial staff have been lost through retrenchment as a way to avoid too much overhead costs.
Adoption and Use of Internet Banking by the Customers
Since the banking sector has adopted this kind of technology it is very worrying that its customers are not heavily using it. It needs strong awareness programs to the public so that they will maximize this kind of technology to their benefit. This challenge has been observed also by Chitura et al (2009), as bank technology advancement is not receiving appreciation by its customers.
Proposed Solutions To Banking Sector Challenges
Banks plays very crucial roles in the economy and therefore their success means also the better for the overall economy. As supported by Chen et al (2010), "Banking efficiency is essential for a well-functioning economy." Researches suggest that banks exert a first-order impact on economic growth and development (e.g. Beck, Levine and Loayza, 2000). When banks operate efficiently by directing societys savings toward those enterprises with highest expected social returns and monitoring them carefully after lending, societys scarce resources are allocated more efficiently. Therefore the banks challenges needs to be addressed both at corporate and national level for the benefit of the economy and financial sector. Bank failures have to be avoided as through the inter linkages of various sectors of the economy will transfer to inefficiency of other sectors.
The remedies vary from those to be implemented by the individuals banks themselves, collectively or in partnership, long term and short term remedies and national solutions to protect the banks.
Cost-Cutting Measures
As the banks are striving to map their way to recovery, and as far as the rate of profitability creation remains sticky at low levels, the only way to manage survival is through managing its costs. They should engage in minimizing their costs. Some banks have already started cost cutting measures through retrenchment of non-crucial staff and also offering voluntary retrenchment. This helps in reducing overhead costs so that they match the income generation capacity to current expenditure. Rationalization of branches is also one of the cost cutting measures which banks may take. According to the Shutdown Rule, any organization should shutdown if it can no longer cover its variable costs, hence the banks should make sure that they minimize the variable costs so that they can continue operating accordingly whilst they find ways of raising their revenue. They should also identify niche markets for their services to raise revenue.
Organizing shifts rather than Retrenchment of staff
As retrenchment may mean losing employees permanently, it may also mean future problems when right skills are in need. To conserve skills, the banking sector can liase with employees to be place in shifts, for example working two weeks per month, at a reduced salary and benefits. This ensures long term survival. The Barclays bank, apart from retrenchment, organized for such operations for certain staff grades.
Proposed Mergers
Certain banks who have strived to meet the minimum capital requirement, even after the scheme by the RBZ loosen the requirements, and have no hope to do so in the near future, should try to merge together rather than closure. Merging helps as you bring assets together and ensures survival, and in future you may also de-merge to retain your original brand. However this measure has its own disadvantages as it leads to further retrenchment of staff as there is duplication of work and various ranks in the organization.
IMF Solution
The IMF has proposed that banks that are not performing up to the required levels should close down and only efficient banks should remain in operation. According to my assessment it may be to early to announce bank closures rather all other alternatives should be given a trial. Bank closures will have many disadvantages to the economy ranging from raising unemployment rates and many other social costs involved. The inefficiency of the banks is not a result of their inability to operate but its following a national crisis emanating elsewhere. Bank failures mostly arised due to a liquidity crisis triggered by the economic meltdown, hyperinflation and mismanagement, hence it's a result of many factors.
Expanding sources of finance to International organizations
This is rather a task of the responsible authorities to negotiate on behalf of banks for international loans. This helps to relieve the scarce sources of finance in the economy and allow banks to cover liquidity gaps.
Developing alternative means of payments
The economy in general should find other ways to make business transactions other than direct cash only as this affect investment path. Business should resort to accepting credit transaction, use of cheques among other methods.
Conclusion
As far as the banking sector is worth to play a crucial role in the overall economy they are worth to be supported. The idea of closing inefficient banks may not be the right decision rather they have to be supported. The banking and financial sector links various economic sectors and hence have a strong link to the level of economic development. The government of Zimbabwe should promote and loosen the rules governing their closure so that no elimination is done to the sector rather it should be aided to expand its services. Banking and financial sectors are also technologically linked and hence moves the economy ahead. The solutions to the bank challenges rest in the hands of both the institutions and the government.
References
Brownbridge Martin (1998), "The Causes of Financial Distress in Local Banks in Africa And Implications For Prudential Policy," UNCTAD/OSG/DP/132,Geneva.
Chen Lin, Yue Ma and Frank Song (2010), "Bank Competition, Credit Information Sharing and Banking Efficiency," Department of Economics and Finance City University of Hong Kong Hong Kong, China.
Chitura Tofara, Dube Thulani and Runyowa Langton (2009), "Adoption and Use of Internet Banking in Zimbabwe: An Exploratory Study," Journal of Internet Banking and Commerce, April 2009, vol. 14, no.1
Corbell Tery (2010), "Bank Challenges Are Faced by Many Companies," The Biz Coach.
Kiyota Hiroyuku (2009), "Confronting the Global Financial Crisis: Bank Efficiency, Profitability and Banking System in Africa," Institute for International Cooperation Studies, Takushoku University, Tokyo, Japan.
Leornard Makombe (2010), "Zimbabwe: Struggling Banks Axe More Than 1,000 Workers. Zimbabwe Independent, 15 July 2010.
Makoni Tafadzwa Dr. (2010), "Overview of Zimbabwean Banking Sector (Part One)," Ezine Articles.
VOA (2010), "Reserve Bank of Zimbabwe to Restore Licenses to Three Forcibly Merged Banks," UTC Friday 13 August 2010.
