overview of financial services

OVERVIEW OF ZIMBABWE’S FINANCIAL SERVICES INDUSTRY PERFORMANCE


In the past few days the Zimbabwean based financial services companies have been releasing their results for the first six months of this year and so far the results have been consistent save for one or two; most banks are reporting profitability, improved financial positions and increased deposits. In fact this all round performance of the banking industry is the clearest indication of just how the effective the policies of the coalition government have been thus far. In particular, most of the chairman’s reports accompanying these results have singled out the multi-currency system as a key change that has resulted in an enabling business environment and have commended authorities for maintaining this system throughout the duration of the MTP. This multi-currency system or dollarization has enabled the government for the first time in years to control inflation to very manageable levels of around 3.5% below so far this year while the year-end target of 4.5% looks very achievable. This combination has been a massive boon for business, planning has become possible again while the inherent currency risk has been reduced to near zero as the currency we are using is basically an international one. Significantly most banks are now adequately capitalised in line with regulatory minimums and most seem to be adhering to the accepted corporate governance principles. In the meantime deposits have also grown from $2.3 billion on 31 December 2010 to $2.9 billion by 30 June 2011 perhaps indicating a return to a banking culture. On the down side however deposits still remain short term and it has been emphasised enough already just how badly this augurs for business prospects. Industry is in desperate need of medium to long term funds to finance or recapitalise their operations yet banks can only avail short term credit which does not help industrialists’ needs right now. It is unfortunate that some banks have been accused of certain ulterior motives because they are not lending to industry or agriculture and when they do lend its often short term. These accusations have led to threats and ultimatums as in the case of Standard Chartered and Barclays bank yet no amount of political pressure will force privately owned banks to unnecessarily risk depositors’ funds and shareholders’ value. The reality is that there is a problem within the system, a mismatch exists between the maturity of depositors funds which is essentially short term on one hand and the maturity needs of borrowers on the other hand which are long term. Clearly there is nothing banks can do about this now because any attempts to violate banking convention for the sake of resuscitating industry will back fire almost immediately as depositors will start calling on their deposits and the bank will have no funds to cover for this. In addition we have to remain mindful that it was that sort of approach to lending if not worse that caused the collapse of major financial institutions like Lehman brothers and Bear Sterns in the United States back in 2008. The collapse of these and others resulted in a world recession which nearly brought down the world economy as we know it and subsequently new banking and particularly lending practices have been formulated to avoid a repeat of this. The central bank is well aware of this which is why it has instituted its own prudent lending guidelines which must guide banks in lending consequently it would be inconceivable for any bank to flout these guidelines especially now when one bank that apparently did collapsed. The only way out of this would be to secure lines of credit which offer long repayment periods as well as an affordable rate of interest and it is the government that has the major responsibility in this regard even though individual banks can still secure such funding independent of government. The message from industrialists seems to be that economic growth would be much faster if this key demand is addressed and this should motivate government to do more to secure the offshore lines credits so dearly wanted. The other issue concerns the inactive internet bank market due to the absence of lender of last resort a function the central bank has not been able play since the dollarization of the economy. It’s a real Achilles heel but one which the banking industry will have to learn to live with because at the moment it would appear the return of the local currency is the only way the interbank market would become alive again. Yet everyone does acknowledge that the economy still needs time to consolidate gains made so far before we start discussing the resuscitation of the local currency. Additionally other problems like power shortages are also affecting banking operations and resolutions of these would be essential in sustaining high levels of economic growth. In the final analysis it has to be said a healthy banking system mirrors a healthy economy and in our case economic recovery has been very real government revenues collections are exceeding set targets meaning growth could faster than predictions. We have just had a successful tobacco marketing season and next season is poised to be better if the numbers registered to grow the crop is anything to go by. Mining too continues to benefit from high commodity prices and as such production will remain high. Therefore the important thing at this point is to avoid changes or acts that might disturb this momentum and hopefully this is a sentiment every Zimbabwean shares.