- Zimbabwe’s banking and financial industry reflects the overall health of the economy.
- The country has broadly experienced capital flight and negligible foreign direct investment during the last 2 decades.
- Policy inconsistency has undermined Zimbabwe’s banking and financial industry together with its capital account.
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Zimbabwe has been dubbed the sick man of southern Africa for the past 25 years. The country has seen capital flight and an outflow of foreign investment. There are numerous causes for this result. The primary cause has been policy blunders and so-called “flip-flopping” by government gatekeepers.
Like to the rest of the world, Zimbabwe’s banking system reflects the activity of the actual economy. Banks and other financial services institutions serve as financial mediators for real economy players. This indicates that banks serve as a vital link between surplus and deficit units.
In economic terms, this means that banks connect lenders and borrowers. As financial intermediaries, banks and financial services organizations will accept funds from individuals and organizations with surplus funds, also known as surplus units, and channel those funds to individuals and organizations with deficit funds, also known as deficit units.
Banks and financial services firms are essential to the economic growth of any nation. They allow the exchange of goods and services between households and businesses by offering a vital payment method that enables the free movement of products and services between households and businesses.
Strengthening the financial system in Zimbabwe
The Central Bank of Zimbabwe’s Monetary Policy Statement published in February suggested that the Zimbabwean banking system is sound. This is a welcome message from the financial system’s regulator and guardian. The fact that the key participants of Zimbabwe’s financial system have been certified as sound and fit for purpose by the central bank should provide present and potential investors with peace of mind. This was not always the situation. Zimbabwe has had a multitude of bank collapses, first during the banking crisis of 2004 and then seven years later, beginning in 2011.
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The 2004 banking crisis coincided with the appointment of the Reserve Bank of Zimbabwe’s then-governor. Dr. Gideon Gono was a trained accountant with private sector and development finance experience. Upon his inauguration, Governor Gono committed to clean up the banking industry, which at the time was purportedly plagued by indiscipline. Indiscretion is one way of viewing it.
Poor liquidity management afflicted the banking system in 2004 and caused the failure of a number of banks in Zimbabwe. In 2004, Zimbabwe’s first struggle with inflation was starting to take root. As it exists everywhere else in the globe, inflation undermines the business models of financial organizations.
The disparity between the interest they pay depositors to keep their money with them and the interest they charge for loans and credit advances is how banks worldwide generate revenue. While inflation is on the rise interest rates and amounts borrowed are gradually eroded therefore to remain ahead of the inflation curve banking institutions agreed that they would use depositors would be better kept in tangible assets.
In all honesty, this method is effective. In terms of liquidity management, it merely requires more from bank management. To protect value, banks tend to avoid fixed-income instruments in an inflationary climate. In 2004, this was the situation in Zimbabwe’s banking sector.
Unfortunate was the fact that bankers stole depositors’ monies and invested them in the most illiquid assets, but these assets were able to maintain their worth. It is reported that certain banks invested depositors’ funds on real estate, stocks, and even bricks. The problem with investing in these assets is that they lack liquidity.
This indicates that the assets cannot be easily converted to cash without diminishing their worth. Further complicating the problem is the fact that banks are financed mostly by depositor money which might be temporary in nature in the sense that they can be withdrawn on short notice.
What would happen to a specific financial organization with illiquid assets on its balance sheet and instantaneously callable obligations leaves nothing to the imagination. This situation significantly increases the likelihood that a bank will go bankrupt. This occurred in 2004 with Zimbabwean banks.
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Many fell bankrupt. The majority, if not all, of the banks that failed during this period were indigenous banks that had emerged during the 1990s period of financial sector deregulation. The second phase of financial hardship in Zimbabwe’s financial services sector began in 2011 and lasted until 2014.
Hyperinflation era
This period was especially distinct from 2004 in that hyperinflation had become a thing of the past at that point. At this time, irresponsible behavior on the part of senior management of local banks was responsible for their demise. This second round of bank failures was precipitated by inadequate corporate governance and a lack of checks and balances over loans to connected parties.
Today, related party loans refer to loans made by a bank to its officials and senior managers, as well as the family and/or business acquaintances of its officers and senior managers. As they are prone to being delinquent and costly to the bank’s business, these loans to connected parties must be closely monitored.
There have been occasions in Zimbabwe where an entire financial institution has failed due to related party loans. Moral hazard is the root cause. Why would a related party feel obligated to repay the loans they received from an institution with which they have a relationship? This is how loans went bad to the point where the losses drained their capital, causing the company to fail.
Today in 2023, the Reserve Bank of Zimbabwe, the gatekeeper of the financial system, has given the all-clear to the banks, saying that they are all financially stable. According to the central bank, financial soundness indicators include total assets, total loans and advances, net capital base, core capital, total deposits, net profits, returns on assets and equity, as well as loan-to-deposit ratios, non-performing loan ratios, and general liquidity ratios. The central bank has expressed satisfaction with these metrics, which have reported growth generally consistent with inflation forecasts.
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