Official figures show that currently banks are committing about 50% of their total deposits as credit to the productive sector, a figure which the authorities want raised to around 80%.
Although this call by authorities is clearly a noble idea as it promotes economic growth and development, it should however be noted that 10% of those deposits are taken away by the Central Bank as statutory reserves. This means that banks are left with 90% of the deposits to lend from.
Using the average loan-to-deposit ratio of 50%, the 90% deposits that can be loaned which are left after the statutory reserves have been deducted translates into an effective loan-to-deposit ratio of 55,6%.
Now with the advent of multicurrency system, the central bank is no longer able to perform the lender-of-last resort function as it is undercapitalised. This means that any banking institution that experiences a temporary liquidity shortage cannot seek accommodation from the central bank.
If a banking institution fails to cover its temporary liquidity gap by borrowing from individuals, corporates, institutional investors and the inter-bank market, it will surely go under.
In other words, it is now very risky for a bank to experience liquidity shortages as it will be very difficult to close that liquidity gap as it is also difficult to get accommodation from inter-bank or other sources due to the general liquidity crunch in the economy.
The burden of ensuring that depositors are always able to withdraw their cash, that is the keeping of adequate reserves, now falls squarely and fully on banks.
Prudent banks now keep large amounts of reserves (liquid assets) in their vaults of at least 20% up from around 10% during the Zimbabwe dollar era. This is because then banks had easy fall-back positions through the inter-bank market, and as a last resort, the central bank. This means that banks are left with at most 70% of deposits to lend to customers. Using the average loan-to-deposit ratio of 50%, the 70% loanable deposits translates into an effective loan-to-deposit ratio of 71,4%.
The forgoing suggests that a simple equation for bank reserves is as follows:
Reserves = Cash on hand or liquid assets (vault cash with banks) + Deposits with the RBZ (statutory reserves)
The question that begs an answer is: What is the purpose of deposits with RBZ (statutory reserves) in the equation above? Traditionally reserves have served two purposes: (a) to ensure that banks are liquid all the time so that they can efficiently service their clients (depositors) thereby maintaining confidence in the banking sectors; and (b) to control the money-creation ability of banks through the multiple-credit creation process, in a bid to control inflation.
This means that the statutory/liquidity ratio is also a monetary policy instrument. Given the advent of the multicurrency system these functions have been made redundant such that there is no longer any need for the central bank to continue taking this money from banks. Currently, the statutory reserves have become taxes, something which should be of interest to the Minister of Finance as it is another revenue source to be included in the budget. This means that banks are now overtaxed since they also pay corporate tax.
In the case of the first function, as already noted, banks are no longer benefiting in any way from paying statutory reserves as they do not get any financial assistance from the Reserve Bank if they face temporary liquidity challenges. These statutory reserves should be temporarily scrapped so as unlock more lending capacity to banks.
In other words, these funds are better left at the banks so that they lend them out to their clients (borrowers). The statutory reserve requirements could be re-introduced when the Zimbabwe dollar has been resuscitated as the central bank would be able to perform all its classical functions including lender-of-last resort.
In the case of the second function of statutory reserves (monetary policy instrument) the idea here is that bank loans create bank deposits which increase the total volume of purchasing power, that is, the quantity of money. This phenomenon is only an economic problem in a situation where a country uses its own currency as banks create money that is over and above what the central bank would have injected into the economy. Zimbabwe today does not have this problem as the central bank can no longer print money such that anybody who is able to create money like banks, as long as they are not Zimbabwe dollars, should be given the exalted status they deserve.
We have liquidity problems and we know that banks can create money by extending loans but we continue to limit their ability to do so. There is no reason for keeping statutory reserves at the moment. The creation of statutory reserves creates a win-win solution that will spare the minister the effort to look around for laws to force banks to increase credit to the productive sectors.
Using the reserves equation stated above, the proposal here translates into the following:
Reserves = Cash on hand (vault cash with banks).
This means banks should be left to manage the reserves on their own as the central bank is no longer able to play its side of the function. Continuing to take statutory reserves is now effectively a tax! –– Kingdom Stockbrokers.