The debate around the efficacy of the financial institutions in Zimbabwe has been going on since the introduction of the multicurrency system in 2009. The main argument that has been put forward at various forums and in various forms, is the suggestion that the banks have been charging very exorbitant interest rates on loans and instituting high bank charges for their services. This has therefore created a need to have a conversation around the factors that really drive bank charges, fees and interest rates in the Zimbabwean system.
It should be noted from the onset that charges, fees and interest rates are prices that bank consumers have to pay for using the various services offered by the banks. The banking industry in Zimbabwe has been and has always remained a very competitive space; hence the most ideal method of determining the prices is through market forces of demand and supply.
All this happens in the unique context of the Zimbabwean economy, which on most accounts is running on foreign currencies.
In a normal economy, the first step of interest rate determination begins with the Central bank creating a policies aimed at ensuring stable prices (inflation control), achieving targeted economic growth, controlling the growth of monetary aggregates (liquidity) in the economy.
These issue are normally dealt with in routine Monetary Policy Statements or frameworks for a normal economy, with mechanisms or checks and balances also being put in place to ensure that the supply of money within the economy is neither too large (causing prices to increase) nor too small (causing prices to decrease) etc.
If the monetary policy makers wish to decrease the money supply, they will increase the interest rates, making it more attractive to deposit funds and reduce borrowing from the central bank. On the other hand, if the authorities wish to increase the money supply, they will decrease the interest rate, which makes it more attractive to borrow and spend money. This is possible in those countries where the Central bank is able to control the amount of money in the economy. It is important to mention that such central banks are also able to use other tools such as adjusting reserve requirements for banks and open market operations that involve the sale and purchase of government securities to also influence the levels of free funds in the economy, effectively setting the direction of interest rates.
The Zimbabwean situation is quite different given that our on monetary authorities are not in a position to control the amount of money in circulation given the multi-currency system that we are currently using. In our situation, other dynamics are coming into play to determine the various prices of financial services including the cost of money.
Currently the country is characterized by high liquidity constraints meaning that there is scarcity of funds. Under such circumstances, with the demand for that liquidity being high, the price for the funds tends to be high. It is because there are many people who are demanding the little resources that re available in the banking sector hence the discriminating or main allocative factor becomes the interest rate and other related charges. Economic theory contends that the market price converges at a point where the forces of supply and demand meet. Shocks to either to the supply side and or demand side can cause the market price for a good or service to be re-evaluated. In our case since 2009 when the multi-currency system was introduced, supply of liquidity (money supply) in the banking sector has been far outstripped by the growth in demand for loanable funds which has been increasing, resulting in the perceived high interest rates and bank charges.
One of the main issues articulated by economists and the central bank many times is the structure of the deposit base in the economy since the advent of the multicurrency environment.
It is key to note that one of the fundamental roles of the banks in the country is to mobilize savings. Banks and other financial intermediaries play an important part in this because they take the savings of surplus individuals and lend the money to deficit firms in the course of playing their financial intermediation role. If economic agents are able to bring to the banks their savings, this will increase the pool of money that the banks can lend hence pushing down the interest rates in the country. It is therefore important that the economic agents should increase domestic savings so that the financial institutions are able to bring down the interest rates.
Currently savings in the economy are short term in nature and hence, this is restricting the banks from onward lending. These short term or transitory deposits, cannot form part of the pool of resources banks can base their lending decisions hence these have little or no impact on the interest rates the banks will charge on lending to borrowers. Given also their short term nature, the savers are not able to obtain meaningful returns on these savings given their transitory nature as banks have very little time to make these funds productive.
The alternative to the domestic savings that the banks can use for onward lending to their clients are the foreign lines of credit. In other words if a country fails to mobilize domestic savings or they are limited as in our case, the country resorts to increasing the foreign indebtedness of the country in order to cover domestic investment and consumption demand. All countries with low internal savings rates must borrow from abroad, which results in an increased debt service burden. What this implies is that we become subject to the vagaries of those lenders. In our case we are poorly rated in terms of international debt repayment record hence any borrowing by locals comes with a risk premium which increases the cost of funds.
The current high cost of borrowing funds on the local market reflects in large part the huge country risk premium because most of the funds have been sourced from outside.
It is therefore important that all economic agents in the country understand the importance of domestic savings mobilization in reducing the cost of funds on the market. These savings form part of the necessary equity contributions by entrepreneurs into their own businesses that are then complemented by loans from banks. There is therefore a need for the citizens of the country to start using the formal banking system to increase liquidity in the country for the sustenance of economic growth. We need a national strategy to pool the resources circulating outside the banking system and harness them for productive use in the economy. Only then can we eventually pull ourselves out of the current liquidity bind.
Sanderson Abel is an Economist. He writes in his capacity as Senior Economist for the Bankers Association of Zimbabwe. He can be contacted on firstname.lastname@example.org or on 04-744686, 0772463008