Wednesday, 9 January 2013

My viewpoint: Finding a solution to the bank charges dilemna

Terence Zimwara

The government and the central bank have over the last few months raised concern at the high levels of bank charges or fees which, they claim hinder efforts to resuscitate the economy.
The downgrading of growth estimates for 2012 was somewhat linked to the shortage of affordable long term in financial services industry.
We have become accustomed to the so called liquidity crisis a situation arising out of the mismatches of maturities between liabilities or deposits held by banks and the long term needs of industry.
Both Minister of Finance and the RBZ governor have warned that if moral suasion fails they may be forced to undertake drastic measures to arrest this situation.
 Moral suasion is essentially an encouragement by authorities directed at banks to adjust or correct their practices.
This has been the approach by the central bank since dollarisation of the economy and this seems not have had any real impact as far as bank charges are concerned hence the threats by government.
So far reports seem to indicate that intention is to go the way of legislation if efforts like naming and shaming financial institutions that charge exorbitant fees fail.
Additionally the government late last year said all deposits of US$800 or less cannot be charged any transaction fee while deposits of US$1000 or more should attract an interest of four percent per annum.
However it is the legislating of charges that banks can or cannot levy on clients that may be (mis)construed to be a return to a command system and that can potentially shake confidence in the entire financial system.
The government has to find ways that are less disruptive but effective nonetheless.
To understand this whole fiasco one has get acquainted with what has been happening with the economy even before dollarisation.
 During the hyperinflation period of between 1999 and 2008 businesses including banks had to constantly adjust prices of their products to shield against inflation.
Banks were particularly in a peculiar position because they could not, according to the law hold onto excess non financial assets. This left banks particularly vulnerable because the considerable amount assets they held were in the then rapidly deteriorating Zimdollar.
One way banks could compensate for this was through the regular adjustment of the cost of providing their services.
However this along with the hyperinflation helped in driving people away from banks as it became costly to keep funds there.
The final straw for banks came when the huge Zimdollar balances held by many banking clients simply disappeared when the economy dollarized in 2009 and since then confidence in banks has remained low.
A significant number of former clients are reluctant to fully embrace banks preferring to keep their money outside banks.
Clients point to the high banks charges as well as the low interest on deposits as the prime reasons for them avoiding banks. The unresolved issue around the vanished Zimdollar balances is also another contributing factor.
Most people only use banks to facilitate the movement of funds and not for keeping funds.
Now this in unfortunately leaves little or no funds for long term funding something the economy is in desperate need of.
Clearly there is need to find a solution to this and authorities need to adopt an approach that not only punishes but one that rewards banks that endeavour to provide value to clients.
It is fair to say a number of decisions made by the central bank have adversely affected operations of banks. For instance earlier in the year the central bank directed that funds held in Nostro accounts had to be repatriated and this decision was met with resistance.
Banks had argued that the funds by the mere fact they were being held in Nostro accounts such funds could not be returned as they did not belong to local depositors. The central bank can use the issue of Nostro accounts as an opportunity to address the bank charges problem.
The central bank may link the amount of money held in Nostro accounts with the bank charges as part of a carrot and stick approach in trying to influence the level of charges.
To illustrate, a bank that heeds the call by the central bank to charge lower bank fees as well as improving interest on deposits will be allowed to have funds held in Nostro way above the legal threshold of 35 percent.
The higher the interest on deposits and the higher the will be amount a bank can keep outside the country.
This approach has a potential of achieving two things. Firstly confidence in the financial system by corporates will be maintained. The fear that their monies will be trapped or even raided will be done away with and the movement of funds will continue without legal obstacles.
Secondly and perhaps more importantly a savings culture will be encouraged. Ordinary people may embrace the banking system once more as it will not only preserve their funds but reward them as well.
These savings by individuals will collectively create a pool of funds that undercapitalised companies will tap into.
Whatever way the government decides to tackles this problem, the plan must at least offer some reward for institutions that choose to cooperate. A simple directive requiring banks to levy a certain fees may not produce the desired results.

Mobile money business- Regulation the missing link

Terence Zimwara

Zimbabwe has joined the latest innovation of mobile money services as mobile phone companies and others try to cash in on the so called unbanked part of the population.
Econet Wireless the country’s largest telecommunications company has taken the lead with its Ecocash platform. 
According to Econet Wireless Services chief executive officer Darlington Mandivenga at least US$100 million is transferred from the country’s urban centres to rural areas every month highlighting one very important aspect of this business- financial inclusion.
Other telecoms companies do offer mobile money services but their services remain limited due to their smaller number of subscribers. Concerns though remain about the apparent unregulated nature of this mobile money business.
On the plus side mobile money transacting actually helps meet the central objective of financial inclusion as well as ensuring financial transactions are conducted in the formal system.
Previously, estimates had variously placed the amount of money circulating outside the banking system at over US$3 billion and banks could not attract this money because confidence in the banking system as we know it is still low.
Mobile phone companies on the other hand are not associated with the poor reputation banks built for themselves during the 2000s. Their hands are clean so to speak hence the apparent embrace of this service by the general population as well as businesses.
However the question still stands: Who exactly regulates the mobile money business? Is it the Reserve Bank of Zimbabwe (RBZ) or perhaps the Posts and Telecommunication Regulatory Authority of Zimbabwe (POTRAZ).
POTRAZ is well placed since it is the regulatory body of all telecoms operators yet it does have the skill, expertise or legal mandate to conduct financial regulation.
RBZ is on the other hand is the only recognised financial services regulator but unfortunately mobile phone companies are not exactly governed by the Banking Act. Which is why many experts are concerned that if these companies remain unregulated a number of problems may lie ahead.
To illustrate, in Uganda the mobile money business has been successful with MTN Uganda leading the charge. However, this company recently suffered major losses when some its employees stole nine billion shillings (US$340000) after taking advantage of a hitch in the money transfer system.
If a bank were to suffer a similar fate then a central bank of that country would have to get involved in cleaning up the this company. The central bank may place the affected institutions under supervision or even force managerial changes to ensure customers’ funds are not further hit.
However, in this case the central bank of that country, Bank of Uganda (BoJ), could not intervene and MTN had to conduct its own internal investigation. After that the company said it had punished the offenders and that it had added new features to enhance safety of the platform.
However the public does know just how far the internal inquiry went or how much did the company actually tell about its losses.
In the absence of a well mandated regulator it is very difficult to believe that a profit seeking companies will always act with the interest of public at heart.
Such cases of fraud will still happen including in Zimbabwe  if the regulation of mobile money operators is not dealt with now.
In addition to a possibility of fraud, Zimbabwe has its peculiar issues that may yet play out again in this mobile money business.
The central bank and the ministry of finance have repeatedly clashed with banks over the fees they charge clients. The high service charges levied on clients as well as the low interest on deposits partly contributed to the loss of confidence in the financial system.
In fact most low income earners are still reluctant to embrace the banking once again because of these high banking charges and the nearly zero interest.
Already the government has declared that starting this year banks cannot charge fees for deposits of US$800 or less. However mobile money operators seem to be exempt from this yet there has been a clamour already by some that the transaction charges for transferring money seem quite exorbitant.
And the question that begs for an answer is how Econet and others, for instance, arrive at what they levy customers for using their mobile money service platforms?
This is very important because this is one issue that contributed to the erosion of trust in banks by the general populace most of whom survive on meagre incomes.
If the perception that the charges levied by mobile money operators, are exorbitant grows, then growth of this business will be curtailed in the long term.
The other question concerns the use of customers’ funds. Banks are allowed by law to invest deposits mobilised in approved assets like treasury bills, certificates of deposits, bonds etc.
Where does the mobile money operator invest or keep customers’ funds? If at all the funds are invested, how will the mobile operator share the interest earned?
Financial institutions now feeling the heat from government, are asking for mobile money operators to be regulated vigorously as well so as to ‘level the playing field’.
Their argument is that, mobile money operators are essentially conducting a banking business by another name, yet they are never asked to meet certain conditions like minimum capital requirements as do normal banks.
 Of course banks may not be pleased with the competition from the new players but their argument does have some merit.
Mobile money business is quite an innovation for Africa and the traditional western economies may not provide answers on how to get around this. Local financial experts will have to try and find a long lasting solution to this, otherwise this novel business might just get trapped in this straitjacket and not grow further.