A lender of last resort is an institution, usually a country’s central bank, which offers loans to banks or other eligible institutions that are experiencing financial difficulty or are considered highly risky or near collapse.
Zimbabwe has 25 operating banking institutions, comprising 15 commercial banks, five merchant banks, four building societies and one savings bank. The banking sector is now largely dominated by commercial banks following the migration of some merchant banks into commercial banking.
Finance minister Tendai Biti and central bank governor Gideon Gono yesterday reached an agreement in the capital that would result in the re-emergence of overnight lending, revival of the interbank market and ultimately improving confidence in the financial services sector.
The central bank was rendered redundant after government last year adopted the use of multiple currencies to stem unprecedented inflation. The central bank has an estimated US$1,5 billion debt incurred during the decade-long economic meltdown.
The decision by the Finance ministry to restore one of the core functions of the apex bank could be a response to numerous calls from International Monetary Fund and local banks which raised the red flag warning of an imminent exposure of banks in the absence of a lender of last resort.
Local banks are currently holding US$2 billion in deposits.
“As Ministry of Finance we are officially restoring the lender of last resort function of the Reserve Bank of Zimbabwe,” Biti said. “To us this marks the completion of a task we set out to do at the bank.”
He added: “We are providing amounts to the tune of $7 million which is consistent with the mid-term fiscal statement. We have got the power and discretion of increasing these amounts depending on how the lender-of-last-resort operation is going to operate…If there is going to be demand I can assure you that we can increase that amount from $7 million.”
Before the restoration of the lender-of-last-resort function, the apex bank in July scrapped statutory reserves as a stop-gap measure to reduce bank vulnerabilities and systemic risks.
The restoration of the function to the central bank — save for printing local currency — is also expected to reduce lending rates currently as high as 30%. This measure could again be a reprieve for depositors on the other hand as it is expected to increase depositors’ interest rates.
Gono said he was “pleased” that treasury had surpassed the central bank expectations after the former initially pledged US$5 million to revive the apex bank operations.
He said the bank — which during the Zimbabwe dollar era faced criticism of misappropriating funds held in foreign currency accounts — had set up a committee tasked with an oversight role of the lender of last resort funds in line with good corporate governance principles.
The central bank chief said the agreement would “add a tonne of confidence where there was a tenth of confidence”.
He expected the monetary development to boost transactions carried through the country’s national payment system.
The Real Time Gross Settlement, according to Gono, has since resumption last year in April facilitated transactions worth US$14,5 billion while cheques and internet banking accounted for US$200 million apiece.