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SMALLER banks are surviving by offering products tailor-made to suit the untapped market while
their larger counterparts are sticking to traditional customers.
This desire to be different in the way they do business is credited for bringing the unbanked into banking halls.
However, there are fears that they are pushing the innovation envelope too far in an environment where the lender-of-last-resort has been reduced to mere supervision and surveillance.
In a bid to mobilise deposits third-tier banks are enticing clients by quoting higher rates on money market deposits.
Statistics from the Reserve Bank of Zimbabwe (RBZ) show that the five big banks contributed 71% of the US$1,33 billion deposits as at December 18 last year leaving the remaining 21 banks scrounging for the crumbs.
While the heavyweight financial institutions are quoting rates averaging 15% for 60 to 90 day deposits, the weaker ones have made the rates juicier by picking the same liabilities at rates in the range of 25% to 30%.
Some are quoting rates as high as 35%.
“When annualised, the rates being quoted by the lightweight financial institutions are trading in the 28% to 41% range, investment rates that are very high by any standard,” said Kingdom Financial Holdings Limited (KFHL) in their market report.
For an investor such rates are enticing and the next action is to mobilise enough resources to meet the minimum capital requirements needed at different financial institutions.
The minimum investment on money market investments ranges from US$1 000 to US$5 000.
For an institution that is seeking huge deposits, such financial populism is a burden as it increases the weighted average costs of liabilities.
Worst to be affected by the ensuing market conditions are banks that do not have retail arms which can harness relatively cheaper deposits from the market, analysts say.
Institutions with retail arms can mobilise deposits on low interest rates. Interest rates on savings deposits range from 0,25% to 1% per annum and fiscal and monetary authorities believe such a low reward on deposits is discouraging long-term deposits.
Heavy reliance on the wholesale market by the weaker banking institutions is coming with huge costs as it trims the banks’ interest rate margins.
“The said banks are also facing extreme challenges in creating assets that can generate enough returns to cover the high cost of the funding liability as well as awarding reasonable profit margins,” KFHL said.
With default risk on the economy continuing to rise, the cost of funding for the overall banking sector is also increasing as the expensive liabilities are picked up to fund non-performing financial assets.
There is a liquidity crunch in the financial sector and analysts say the problem will persist until the economy receives a huge financial injection.
Overheating of the prevailing wholesale interest rates is working to escalate default risk whose widespread occurrence has got the potential to claim some victims in the foreseeable future, KFHL said.
Overheating occurs when capacity is unable to keep pace with growing aggregate demand.
Analysts are of the view that the current situation will claim victims, more so in an environment where the central bank cannot bail out institutions.
RBZ cannot play its lender-of-last-resort function because it is inadequately capitalised.
Thus RBZ will become a spectator if the sector were to face a crisis.
In the 2010 national budget, RBZ was allocated US$10 million. Although it is an improvement from last year’s US$1,5 million, the apex bank says the money is inadequate.
BY NDAMU SANDU
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