The Sunday Mail
Kevin Tutani
On June 15, 2016, Reserve Bank of Zimbabwe Governor Dr John Mangudya announced the reduction of bank service charges and electronic transactions. The charges will apply as follows: electronic transfers (from USc33 to US$2,10), Real Time Gross Settlement transfers US$5, ATM withdrawals up to US$2,50 and point of sale transactions at least USc10.
POS user charges were scrapped while merchant service commission now ranges from zero to one percent for local transactions, and monthly administration (bank service) charges now have a US$5 ceiling. All this will likely increase public use of plastic money. It is a timely intervention, and Dr Mangudya should be commended.
The move will restore sanity to local banking, also making it convenient for the informal sector to deposit funds. In excess of US$1 billion in cash, we are told, is circulating in that sector.
SMEs were reluctant to bank for various reasons, chief among them high charges. Including SMEs in formal banking channels will help resolve US dollar cash shortages.
The more cash becomes available, the higher the chances of interest rates eventually tumbling.
The RBZ should enforce various measures to address liquidity problems like embargoing trinket imports (non-priority, low value items) and curtailing cash externalisation. Globally, banks lend more money than cash at hand; that is the practice.
This, in our situation, resulted in the multiplier effect, which is the expansion of money supply resulting from banks being able to (issue loans). The size of the multiplier effect depends on the percentage of deposits banks are required to hold as reserves.
It is calculated by dividing total bank deposits in cash by the percentage of the reserve requirement. If, for example, the reserve requirement is 20 percent, for every US$100 in cash that a customer deposits, US$20 must be kept by the bank as a reserve and the remaining US$80 can be lent to other customers.
If the loan recipients deposit their loans (US$80) into another bank, that second bank will also keep 20 percent (US$16) as a reserve and will lend the remainder (US$64) to other customers.
Customers who, in turn, get loans from the second bank may deposit their loans (US$64) into a third bank and that third financial institution will lend 80 percent (US$51,20) to its customers as it also keeps its 20 percent reserve (US$12,80).
Eventually, the US$100 will create US$500.
How then do customers access their money if the banks created US$500 when there is only US$100 in cash? The answer is plastic money. Plastic money use allows the public to transact in amounts larger than the cash in banks. Plastic money includes ATM cards, mobile banking, cheques and RTGS.
Economies generally operate with a banking system with cash that is less than the deposits in bank accounts. Thus, as explained above, banks never have enough cash to support all transactions within an economy. Methinks that is why Dr Mangudya has been encouraging Zimbabweans to use plastic money.
In America, for example, US$15 trillion exchanges hands in the market everyday, but only 10 percent of it involves cash transactions; the majority is via plastic money.
Without plastic money, economies grind to a halt.
The RBZ should be lauded for measures to counter the cash situation.
Banks provided more funding to business than the stock exchange.
This is how important the banking sector is, and its stability cannot be overemphasised.
The general public should not be afraid to transact with plastic money.
Let’s keep pooling ideas and resources for Zimbabwe’s economic recovery.
Kevin Tutani is a marketing and economics graduate from the University of South Africa
