The Sunday Mail
Clemence Machadu
Howdy folks! Happy New Year to you all! My apologies for being not available last week. I was in a faraway land that made me realise how lucky I am to be Zimbabwean.
More of that in future instalments. For now l say ‘blessed be the land of Zimbabwe’ as we always sing in our sacred national anthem. Folks, as we begin the New Year, it is important to zoom in on the financial sector to learn from the mistakes of last year and see how we can optimally progress this year.
Here we are talking about a very crucial sector which mobilises savings and allocates credit across economic agents. A thriving banking industry can minimise the risks and costs associated with doing business and significantly contribute to the growth and development of the economy.
Confidence in the sector during the early days of last year was partly affected by the different interpretations of the indigenisation stance for the sector by responsible cabinet ministers, much to the confusion of the market.
Even President Mugabe admitted, in his intervention to clarify the policy, that the contradicting intepretation “caused confusion amongst Zimbabweans, business community, current and potential investors, thereby undermining market confidence”.
He further clarified that the banking sector shall continue to be under the auspices of the Banking Act, and highlighted that the policy position was essential for the promotion of financial sector stability, confidence and financial inclusion.
The biggest lesson from that incident is that communication about the issues that have a bearing on the sensitive financial sector should never be politicised or used by cabinet ministers to show who has more power or final say.
When two elephants fight, its usually the grass that suffers the most. We don’t want any elephants fighting this year. The price controls imposed in the banking sector also call for further interrogation to see if it is the way to go.
Last year, the central bank capped interest rates at 15 percent and Government recently indicated that it will continue to monitor lending rates through their ongoing supervisory activities in liaison with the Bankers Association of Zimbabwe.
Last year also saw the central bank reviewing cash withdrawal charges downwards, with fees for electronic transactions also being rationalised substantially.
These are the price controls that we are talking about and the extent to which they are beneficial ought to be carefully understood. Following the imposition of these price controls, there has been talk of conspiracies that banks are taking money to the black market, with some folks asking where the resurfaced cash barons on the black market are getting the cash from.
And why is no one being arrested for selling cash on the black market? But let us first go to the mechanics of price controls in the financial sector.
You see, folks, banks ideally determine the level of interest rates they charge customers based on their anticipated risk.
That is why first time borrowers, startups and those with no credit record are usually regarded as high risk borrowers and are normally charged high interest rates. Banks do this to try and minimise their losses. Remember they are also in business and not charity.
Against the above background, the appetite for banks to lend to high risk clients when interest rates are capped is therefore very low, as banks will be unable to protect themselves from loss. As small entrepreneurs with high risk profiles continue to be excluded from accessing credit, their potential to grow is suffocated.
And when you look at the new economic setup, you will realise that most businesses are in the informal sector.
That leaves banks concentrating their lending to low risk clients which are very few. Ever wondered why just about every bank or business selling things on credit want to deal with civil servants?
I actually feel sorry for some civil servants who are left with nothing at the end of the month, having paid debts. Banks and those that sell on credit know that civil servants are low risk clients as the Salary Service Bureau just chops the money before it gets into the civil servant’s bank accounts.
Anybody thinking about a financial facility therefore wants to bombard civil servants with them. Can someone please protect civil servants and other low risk clients?
Folks, those who have lived in Zimbabwe between 2005 and 2007 know that price controls create shortages. Remember the days of the fixed exchange rate system when we still had the Zimbabwean dollar.
Take the month January 2009, for instance – when the official exchange rate was US$1:Z$22, the parallel market exchange rate was US$1:Z$2 trillion.
You could not get any foreign currency in the banks, although the rate was low. Banks took the show to the black market to ration the erratic hard currency where a higher rate was offered.
So thriving was the black market that even when new currency notes were introduced, they would be first given to the cash lords in the black market by the unsaid.
By capping bank withdrawal charges to one percent, we have seen bank queues growing bigger and bigger and withdrawal limits shrinking.
And the black market is apparently becoming a viable alternative, as more cash barons are sprouting, charging desperate people as much as 20 percent for them to withdraw cash from their bank accounts or mobile wallets.
The price controls in the financial sector have also resulted in some inefficiencies in the credit market as banks now subject the lending public to a rigorous bureaucracy and demanding a tonne of documentation in their quest to foster due diligence.
But at what cost? Most borrowers are really not prepared to be crucified for 30 pieces of silver with usury.
Misguided price controls on financial products might underminine the efficacy of monetary policy transmission, as is proving to be the case in our context.
It is very crucial for monetary authorities to have more control over the process by which asset prices and general economic conditions are affected as a result of monetary policy decisions. Otherwise the black market can hijack the show and start to make decisions that affect the whole economy.
As we speak, the black market has already succeeded in worsening the country’s competitiveness while our eyes are wide open.
While the foreign currency priority list that the central bank came up with last year is a noble idea, it has also fuelled black market activities and usage of informal channels for the settlement of payments.
If businesses at the top of the priority list actually face challenges sometimes in accessing hard currency, what about those at the bottom of that list?
They will obviously not even bother trying to go through the process as they simply resort to the parallel market contingencies.
Folks, this is that month of the year when the central bank announces the monetary policy for the year.
It is our hope that the central bank will find a way to deal with the proliferating black market that is selling financial products that should ordinarily be sold legally by formal players in the financial sector. The black market must simply fall!
Later folks!
