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.