Bankers need to get back to basics

06 Aug, 2021 - 00:08 0 Views
Bankers need to get back to basics Reserve Bank of Zimbabwe

eBusiness Weekly

foreign currency auctions at the Reserve Bank of Zimbabwe (RBZ) have worked well and have done what was intended: stabilising the exchange rate at a level that reflects what the market sees as the correct value and providing the flows of foreign currency that importers, basically the productive sectors, require to buy goods and services that are on the priority lists.

But it is not perfect and to an extent is hampered by the deeply-ingrained desire of many to operate within a foreign currency business environment, a desire that has seen the total nostro accounts held by the banks rise to an incredible US$1,7 billion that is just sitting there, earning no one any money and hardly circulating.

This has seen the modest liquidity problem in the auction system, where it can take up to six weeks for an accepted bid to be paid out in US dollars.

The liquidity issue is not based on economic fundamentals. Zimbabwe runs a very positive current account, meaning that the inflows of foreign currency considerably exceed the outflows. Even this year, with outflows rising a little faster than inflows because, largely due to rising capital expenditure in both private and public sectors as everyone ears up for growth, there will be a positive balance of around US570 million.

And from all we know that positive balance is simply going to sit in nostro accounts although we should not discount the percentage that will sit in tin trunks and under mattresses, since some of the increased inflows are in the form of those small diaspora remittances to families. But with the clamp down on the liquidity in the black market, more and more of those small sums are now spent directly and so at least circulate.

There has also, according to Secretary for Finance and Economic Development George Guvamatanga this week, and Reserve Bank Governor John Mangudya fairly regularly over the past few months, been some cheating. We have importers trying to double dip in various ways, with Mr Guvamatanga noting that some exporters are managing to hide their foreign earnings and use the auctions for everything when they are supposed to run down their own earnings first.

The Reserve Bank has hit a number of the rule-breakers through its new found power to levy civil penalties, a process that can be almost instant in legal timeframes and fairly obviously these sort of investigations will continue.

The reduction in foreign currency needed to import food and the basic raw materials that food processors need has been dramatically slashed, with Zimbabwe now once again self-sufficient in maize, perhaps self-sufficient in wheat with any imports being trivial, and making inroads into the oil seed deficits, and all this is important when you look at the top 20 auction bidders.

So there is now growing pressure for that US$1,7 billion sitting in the banks to be put to some use. Mr Guvamatanga, who in his previous incarnation ran the second-oldest and one of the largest Zimbabwean banks, one with a reputation for conservatism, wants bankers to start being bankers instead of what amounts to strongbox suppliers.

He was strongly suggesting a return to trade finance, what most of our older banks once lived on and specialised in but which has tended to become very much a back number. Merchant banking used to be a huge business in Zimbabwe, more important in many ways than commercial banking, and it has tended to become the preserve of someone in a corner dusty desk.

Banking as a business is supposed to involve grouping deposits, paying depositors interest and lending a percentage of the deposits at a higher rate of interest, with the banker using the difference in rates to earn their income and cover risks. Obviously the more careful the banker the fewer the risks, especially when the banker knows their customers very well.

One way of improving liquidity in the auction system would be for bankers to take a risk-free step of lending to their customers whose bids are accepted and when the cash flows in from the Reserve Bank scooping it out for repayment. Since the bank has to process the bid application in the first place and is the one who is told of successful bids to then pass on the good news to the customer it is difficult to see where any risk lies.

Of course, from what we have heard from Dr Mangudya, there is a small minority of bidders who work very hard to distort the system, but once a bank faces a risk from a cheating customer it can do what it is required to do in any case and stop the cheating. With its own money involved presumably there will more enthusiasm to do this.

Mr Guvamatanga went further and suggested banks could be lending foreign currency directly to some customers to import. Not every customer would be a good risk, but for a start those who need to import capital equipment to boost exports would seem to be on the top of any decent banker’s list, since the bank will get its money back, in foreign currency.

Besides swathes of the mining industry and a number of industrialists, there is also the agricultural industry and the export crops. A lot of the tobacco industry relies heavily on off-shore financing. Why? In the end almost the entire crop is exported, the percentage retained for Zimbabwean smokers being very small.

Bankers and their customers, both contractors and the larger-scale farmers, would have to sweat a bit as they work out how any loan, which amounts generally to merchant banking operations, would have to be split between local currency and foreign currency components but generally a competent banker should be able to do this. If any modification of the foreign exchange banking rules is required a good case can be made and from the comments now being made obviously both the Government and the Reserve Bank will be eager to assist, with the only proviso being no cheating.

Banks need, in any case, to get back into agriculture. In the “old days”, when around 4 000 farmers controlled almost half the farming land, there was a very close relationship between banks and these farmers. Banks used to have branches in most small towns, specifically to deal with farmers; they had special units staffed by agriculture experts to assess farming operations and loan applications, and generally the system worked. You used to see men in shirt and shorts walking into a bank and being treated like something close to royalty.

We agree the A2 farms are smaller and there are a lot more of them, making it harder to visit all who seek a good banking relationship, but we cannot see that restoring farm-finance banking would be impossible, or even that difficult. The growing use of contract farming also opens opportunities, with the contractors being the prime customers but a bank would still need to be able to study Agritex reports of the farmers under contract. Even these loans could be split between farmers and contractors, since even every small-scale tobacco farmers, for example, now must have an FCA account, and a banker can always look at how any account it holds is managed.

The huge holdings of foreign currency in the banking system are not just a decent chunk of Zimbabwe’s foreign currency reserves, they are also a good chunk of what amounts to the capital holdings. Having that money idle seems a major waste.

No one wants to return to the cowboy days of banking, but all banks who weathered the hyperinflation and other storms are now very sound, very conservative in risk assessment and generally competent. They are making profits for shareholders, as they must. But they also show incredibly limited imagination, relying too much on consumer-consumption funding based on the security of regular salary checks, on very short-term business in general, with fee income being dominant rather than the income from proper management of their balance sheets.

Generally they need to get back into trade finance, using a modest percentage of those huge foreign currency holdings, with Mr Guvmatanga suggesting around 17,5 percent, showing he likes to think conservatively when it comes to banking operations. They could also take away some of the merchant banking business that is done offshore, with some foreign bank collecting the fees and the profits.

Operating at a loan to deposit ratio of 40 percent might have been necessary in the economic turmoil Zimbabwe once faced, when survival was the top priority. But now banks need to get back into more traditional banking operations, using their new-found experience and expertise and taking very seriously the mantra of knowing their customers. That customer knowledge and relationship needs to include the box ticking required by regulators, but only as the starting point. The real gains come working with customers, even advising them, and then taking a slice of the rising profits those customers make.

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