Source: ‘Cash shortages an economic structural issue’ – The Zimbabwe Independent December 14, 2017
THE financial services sector has made commitments to extend US$1,1 billion to the agricultural sector this summer cropping season despite reluctance by banks to extend funding to farmers due to the untransferable nature of the 99-year land leases and failure to repay.
Zimbabwe Independent business reporter Tinashe Kairiza (TK) this week spoke to the Bankers’ Association of Zimbabwe (BAZ) president Charity Jinya (CJ,) on how local banks have been prioritising lending to various productive sectors of the economy and associated issues. Find below excerpts of the interview.
TK: Following the introduction of bond notes last year by government, what has been the impact on the operations of the banking industry?
CJ: Bond notes were introduced as part of a package of measures mainly aimed at stimulating exports. In that respect, we believe that the export incentive has improved liquidity for exporters, enabling them to cover some local costs. We have also witnessed marked growth particularly in gold deliveries to Fidelity Printers.
In addition, the central bank has advised the market that exports have responded positively. Registration of tobacco famers for the 2017/18 growing season has also grown partly in response to the increase in the export incentive for the tobacco sector.
TK: Would you say bond notes have helped ease the liquidity and cash crisis currently gripping the local economy?
CJ: The bond notes have contributed to the cash available, although the challenges have not been eradicated. We are still seeing long queues in banking halls. However, I must say we can only imagine what it could have been without the bond notes.
What we are experiencing, though, is not a liquidity crisis, but a cash crisis to the extent that clients cannot access cash as and when they need it.
It remains critical for bond notes and cash to be banked to help ensure the circulation of money in the economy.
TK: What measures are you taking as an association to manage the imbalance between deposits and withdrawal levels?
CJ: Banks have introduced cash withdrawal limits with the aim of equitably sharing the scarce cash resources available.
Retailers and other institutions that typically receive cash from the public are constantly being reminded of the need to deposit cash in banks, while individuals are encouraged to bank their cash to avoid the risks of keeping money in unsafe places.
Nevertheless, as long as the bulk of deposits into bank accounts are from domestic electronic transfers that imbalance will remain. This is why customers are urged to use electronic channels as a means of accessing their funds, for payment purposes in addition to being encouraged to develop export markets to earn real currency.
TK: Some banks last week started dispensing US dollar notes via automated teller machines. Would you say this reflects an easing of the cash crisis in the short term?
CJ: Some banks have been dispensing US dollar notes throughout this period, so I cannot say this was a new phenomenon. As bond notes circulation slowed, the bulk of the money in the country, which is in US dollars, was availed to the public though in limited quantities. Liquidity, however, remains high as banks are able to settle short-term obligations for clients as and when they arise. It is cash that is in short supply.
TK: With regards to foreign currency shortages, how are banks prioritising on the payment of foreign transactions?
CJ: Banks allocate foreign currency in line with the priority payments list which was published by the central bank in May 2016. The priority 1 items, for instance, include requirements for exporters.
TK: How much has the banking sector extended to the agriculture and mining sectors by way of loans?
CJ: For the 2017/8 summer cropping season, the combined commitments set aside for financing agriculture is approximately US$1,1 billion. As at 30 September 2017 direct loans to agriculture constituted 17% (US$620 million) of total commercial bank loans to the private sector of US$3,649 billion.
Banks also work to balance competing needs in the economy and as such resources are advanced to other sectors such as manufacturing, mining, distribution amongst others.
The level of advances to the agriculture sector typically increased from September to December in line with the cropping season. The market exposure to the mining sector during September was US$172 million. The major reason for the relatively low levels is that the sector heavily relies on imported materials which are in short supply owing to the foreign currency shortages.
TK: Would you say the local banking sector is in a sound state?
CJ: As BAZ we believe that the banking sector is sound with most business indicators improving. Assurance has also been given by the central bank which has oversight on all banks. The establishment of the Credit Reference Bureau and Collateral Registry has served to reduce risks of credit failure.
Notwithstanding shortages of cash and hard currency, which are more due to structural issues in the broader economy, banks are performing. Average liquidity ratios are over 60% against minimum requirements of 30%. Non-performing loans have been brought under control and are around 8%, down from a high of over 20% in the past.
We hope asset quality will continue to improve following the transfer of impaired assets to Zamco (Zimbabwe Asset Management Company) by some banks. Bank earnings are also in positive territory, which is good because we need strong banks to support economic recovery.
TK: Government recently announced an initiative to recover externalised foreign currency, how is the banking sector going to complement government efforts?
CJ: Banks are mandated to act on behalf of the Reserve Bank in conducting offshore payment in terms of the Exchange Control guidelines. The best way to complement government efforts is to ensure that all payments are made in strict accordance with the exchange control guidelines. Banks will be able to facilitate any repatriation of funds from offshore accounts through their banking systems subject to anti-money laundering requirements.
TK: Do you think the local economy is over-banked, that is, are there too many banks for the level of demand from clients?
CJ: This is best addressed by the licence-issuing authority which has an overview of the various capacities of banks. Having said that, as a principle, competition among banks is beneficial for customers as this serves to reduce costs of services.
We also recognise that there are still millions of Zimbabweans who are unbanked hence the emergence of non-financial institutions into an area hitherto a preserve of banks. The entrance of these players has provided even more competition, leading to a greater proportion of the market being banked.
TK: What innovations do you think local banks should adopt under this environment characterised by a severe liquidity crunch?
CJ: Firstly, it is important to clarify that banks have high liquidity levels in excess of the regulatory minimum. Most are operating at more than 60% liquidity levels against a regulatory threshold of 30%. This demonstrates that what the market is short of is actually cash and (nostro) balances in offshore accounts, and not necessarily liquidity.
The root causes are insufficient inflows from exports to generate balances in nostro accounts, an environment that needs to be conducive to foreign direct investment, from entities and individuals, multilateral support from agencies and countries and, flows from the diaspora. Banks need to have the instruments available in the form of lines of credit, offshore mobile and internet transfer services to facilitate transfers.
Cash shortages, again, are not a sign of poor bank liquidity, but rather a reflection of the structure of our economy in as far as day-to-day transactions are concerned. We have largely a cash economy which needs to embrace the available electronic payment channels.
As banks we need to continue to intensify investments into alternative payment technologies. There has been a massive migration from cash payments to electronic payments since January 2016 with electronic payments going up 20 times in that time period. This drive should continue so that we do not burden the economy with the inefficiencies of dealing in hard cash.
Greater use of mobile banking, internet transfers, point-of-sale transfers, RTGS transfers and SWIFT transfers for offshore payments continue to be encouraged. As more foreign currency becomes available, greater use of foreign card payments will be offered by banks as the technology is already available.