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Why Banks are not Lending More

DECEMBER 2 saw the announcement of the much-anticipated maiden National Budget Statement from the Minister of Finance, Tendai Biti.

It has been hailed as one which attempted to be as frank as possible. It gave credence to the realisation that despite the financial needs of the country as expressed by the requests of the various line ministries, revenue generation is still a far cry of the requirements.

The minister managed to significantly trim budget expenditure from the US$12 billion requested to US$2,25 billion. However, this is still much more than the revenue target of US$1, 4 billion.

What is pleasing about this is the realisation, or rather acceptance, that resources are scarce and that Zimbabwe has to start living within its means and increase them as rapidly as possible if it wants standards of living to improve. This despite cries that certain allocations were well below expectations. Nonetheless, this acceptance was not consistent across all sectors, specifically so for the financial sector.

From an investment point of view the minister did make a number of key changes which hopefully will act as a major incentive for investment into the Zimbabwean economy.

Corporate and personal taxes were reduced which should see aggregate consumption rising and so further stimulate demand in the economy. Increased growth will only come about with increasing use of resources much of which depends on much increased investment.

The idea there is to get a smaller piece of a larger pie but still managing to increase revenues.  Attempts were also made to curb revenue leakages by improving monitoring and tax collection systems.

These are all welcome developments and should they act in the manner anticipated, growth in the economy should be stimulated.

However, when it comes to the banking sector an adjustment in policy would be suggested. It is true that generally transaction charges in the banking sector are a bit on the high side and attempts to bring these down are commendable.

Additionally, it is generally accepted that total bank deposits in Zimbabwe are sitting at just over US$1 billion dollars.

By the Budget Statement’s own admission only US$15, 8 million of these are classified as long-term deposits. Still, with that, about half of the total deposits have been lent out to businesses in various forms.

On this, the minister alluded to the fact that banks should take a less conservative approach and instead increase the allocation of loans to about 80% of the deposit base. This is where I beg to differ.

Firstly, let us take it as fact that the banking system is run by unscrupulous, errant and greedy bankers.

Would they then not be motivated to dish out as much money as is possible to as many clients as they can?

On that basis alone would it not suggest that if that were possible, banks would want to loan out most of the deposits they hold to maximise profit? Then again, is the world not in a financial crisis as a result of over extending credit to maximise profits?

One could even argue that the 50% loans-to-deposit ratio is high given the current environment. With the greater part of deposits classified as short-term and borrowers willing to go as long as possible, the potential mismatch could be devastating should depositors require their money and borrowers not be able to pay on time.

That, in part, has been the reason a bank cannot have too many of its deposits out in loans if most of its deposits can be called in at short notice. In addition, the issue of lender of last resort has not been addressed by the authorities implying that should a mismatch occur a bank would have no recourse to accommodation from the central bank.

Pushing banks to loan out 80% of their deposits can only be achieved if the government can guarantee to pay back depositors’ funds in the event of a bank failure. At this stage, scope for this is limited by the scarce government resources.

If anything, Zimbabwe should be taking a leaf out of the global financial crisis.

The investment banking model where some institutions could operate without the government insuring depositors’ funds has shown it is subject to some pitfalls. The policy pronouncements seem to be pushing for this without due consideration for the potential downside.

The solution there lies not so much in raising public sentiment that banks should provide more loans to the would-be borrowers but instead deliberately looking for external support, foreign  partnerships and so forth to complement the efforts of the local financial industry.

Solving one problem by increasing the potential for another is not a permanent solution.

 

By Tich Pasi

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