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Tendai Marima
Tendai Marima
Tendai Marima is a Zimbabwean blogger and doctoral scholar at Goldsmiths, University of London.
Crunch time in Zimbabwe's banking sector
A liquidity crisis in the southern African country highlights the urgent need for banking and regulatory reforms.
Last Modified: 28 Mar 2012 07:56
After hyperinflation ruined the Zimbabwe dollar, the country now officially recognises five foreign currencies [EPA]

Harare, Zimbabwe - President Robert Mugabe may have wanted to party like a rockstar on his 88th birthday on February 21, but all he got was a giant crocodile cake with dozens of flaming candles. Well, not quite. Old Bob's comrades threw him a "modest" million-dollar nationwide party with plenty of booze, beauties, music and sport for attending crowds.

Up to three weeks after the big day, post-birthday competitions and concerts with songs remixed in praise of the Comrade Leader were still being broadcast on television. Extended celebrations and personalised songs are a nice touch for a vain and twisted propagandist, but behind Bob's pop and champagne lies a horrible financial mess and a potentially catastrophic food shortage.

"Evidently, Zimbabwe's bankers have not learned the lessons of 2003/4's banking collapse."

A week before Mugabe's big day, his cabinet officially declared a liquidity crisis in the banking sector. Although Minister of Finance Tendai Biti insists it's a "temporary problem", it isn't. When the government's inability to pay its top-heavy $400m Christmas wage bill and a major bank's illiquidity affects banking for months, it's a long-term problem.

And when state-controlled and international newspaper headlines scream, "2012 budget off the rails" and "[Zimbabwe] revenue crunch may shut government" because inflows for the first quarter fall below budgetary targets, it suggests a hauntingly familiar disaster could be in the making. Despite positive IMF growth projection - first family's rockstar extravagance notwithstanding - banks and industry are in for a very rough year if under-capitalisation persists.

Bankers behaving badly

On June 3, 2011, the Reserve Bank of Zimbabwe (RBZ) announced it had placed ReNaissance Merchant Bank under curatorship after filing for bankruptcy. Its founders allegedly misappropriated millions of depositors' funds to finance insider loans and the lavish personal lives of the bank's directors. The curatorship was initially for two weeks, but the RBZ's caretaker's role was repeatedly extended, with the latest extension expiring March 3.

Evidently, Zimbabwe's bankers have not learned the lessons of 2003/4's banking collapse - when, in just six months, 13 out of 25 financial institutions were either placed under curatorship, liquidated or administered by RBZ under the Troubled Banks Fund.

The current liquidity crunch stokes public fear of 2003/4 happening all over again. In January 2012, six of 26 commercial and merchant banks reportedly failed to meet statutory minimum capital requirements because some of these banks (Kingdom, ZABG and Royal Bank) had loaned money to the struggling Genesis Bank, which, if rumours are true, is on the brink of collapse.

In addition to the six undercapitalised banks, several other financial institutions are overburdened with debt. CBZ - in which, thanks to Muammar Gaddafi and a botched oil deal, the Libyan state has a 14 per cent stake - is perhaps the most critical. It's the nation's largest bank and receives the lion's share of deposits. Ten local banks own 30 per cent of CBZ - meaning that if CBZ struggles, the others will struggle too.

The government pays civil servants' salaries through this bank, but the delayed processing of December and January's $400m wage bill put a huge strain on the whole banking system. Because of its own liquidity problems, CBZ could not pay out salaries to other bank accounts, resulting in a temporary glut on inter-bank transfer payments.

Comparatively, Northern Rock, the UK mortgage lender, was in better shape in the days before it suffered a run and was subsequently nationalised than CBZ is now. Even though the Rock went down for too much high-risk lending, it had a good loan book. By contrast, CBZ has no money and $600m worth of dead debt or "non-performing loans".

CBZ also has a 70 per cent loan-to-deposit ratio and according to Lynton-Edwards Stockbrokers, it's a very risky position to be in, because if a major borrower defaults on a payment, it exposes the institution and depositors to serious financial risk. Worryingly, high borrowing ratios are the common trend for local banks, whereas international institutions have more conservative figures and healthier balances, thus making them more liquid.

RBZ to the rescue?

On a rescue mission last month, Zimbabwe dipped into its IMF Special Drawing Rights (SDR) General Allocation and withdrew $110m, of which $20m is expected to help the Reserve Bank resume its function as lender of last resort. The government has also ordered the repatriation of $71m from its offshore funds to help struggling banks and companies from defaulting.

From March 1, new limits on nostro account balances came into effect. Nostro accounts are deposits held by local banks in a foreign country in the denomination of that country to help facilitate international transactions. In the hope of easing liquidity problems, the government has directed local institutions to maintain in their nostro accounts a maximum of 25 per cent of their balances offshore, and bring the rest back into the country.

As part of its "raft of measures", the government has also proposed the introduction of plastic money, or tradable paper, backed by statutory reserve. Though tradable paper may temporarily solve circulation problems, the trouble with any sort of locally regulated alternative tender is a man called Gideon Gono, the Reserve Bank governor. The last time Zimbabwe experienced a similar monetary crisis, he authorised the printing of lots and lots of money backed by nothing.

Naturally, inflation mutated into world-record hyper-inflation, peaking at 231 million per cent at its worst. On several occasions Gono slashed zeros from the Zimbabwe dollar and printed higher monetary denominations, but all these efforts came to nought. The best cure was to kill the dollar and find new money because the country couldn't manage its own currency.

Introducing alternative tender as additional money is not what's needed now. That would give free rein to those, such as Gono, who openly long for the return of the national currency. Tradable paper whose circulation is controlled by the central bank might then be seen as a restoration of the governor's authority and influence.

"Bad banking practices and weak fiscal regulation threaten to reverse and destroy the gains of past years."

More money, no problems

Since the temporary death of the Zimbabwe dollar three years ago, the country officially recognises five foreign currencies. These include the euro, the British pound, the US dollar, the South African rand and the Botswanan pula. The adoption of Western currencies as legal tender amusingly contradicts Mugabe's famous anti-West, "Look East" stance. To remedy this and other fiscal woes, there's serious talk of adopting the Chinese yuan as a sixth currency.

Before the adoption of a more stable multiple currency system, a badly executed land reform programme in 2000 and a series of regressive fiscal policies in subsequent years had wrecked the national economy. Since dollarisation, Zimbabwe now enjoys single-digit inflation, which is currently stable at 4.3 per cent.

Zimbabwe's imperfect monetary system has provided economic stability, but its ability to withstand the knocks is severely tested by the banks' liquidity problems and a growing shortage of physical cash in circulation. Bad banking practices and weak fiscal regulation threaten to reverse and destroy the gains of past years, and if Zimbabwe's banks are going to stand strong in 2012, the government needs to act quickly and firmly.

For starters, stricter regulation on how institutions use depositors' funds is critical, as is resolving issues with the national inter-bank transfer system which jams up every time civil servants' bonuses, delayed salaries and benefits pile up. From the banks' perspective, the RBZ needs to design more investment-friendly policies that attract foreign direct investment and to ensure the large foreign reserves held by local banks outside are willingly brought back as a sign of confidence in the economy and the banking system.

The same is true for at least $2bn circulating outside of the banking system on the black market or illegally taken outside the country. 2003/4's domino collapse of financial institutions shattered people's trust in the banks, so the black market and the practice of taking money out of the country became more lucrative and safer alternatives to banking.

But these informal and sometimes illegal alternatives were some of the root causes of hyperinflation and 2003-2008's periodic cash crises. If the figure of unaccounted money grows to more than $3bn, the current total circulating in the banking system, liquidity will tank and banks will have chronic money shortages, prompting cash hoarders to resume buying and selling currencies at extortionist rates. To avoid such a disaster, the RBZ and banks urgently need to adopt more fiscally prudent policies and stronger regulatory measures to address the current liquidity problems.

Tendai Marima (PhD) is an independent correspondent and researcher currently based in Southern Africa.

Follow her on Twitter: @KonWomyn

The views expressed in this article are the author's own and do not necessarily reflect Al Jazeera's editorial policy.

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