Attention has never been so much on banks as it is now after the worst of the credit crunch. In the UK, MP Vince Cable, the Business Secretary, has recently been showing off threats to punish banks that are not lending, among the threats being a new profit tax on institutions failing to offer credit. In America, the Senate recently approved what is regarded is the ‘biggest overhaul’ of their financial regulations that would, among other things, give the government power to break up a bank that could be viewed as too big and whose failure would threaten the economy. In Zimbabwe, a government Minister was quoted recently saying that banks, foreign especially, that are not lending aggressively should leave the scene and open space for those that would be interested in lending. Equally, the monetary policy statement of Thursday last week bemoaned the high interest rate differential between loans and deposits, which, according to the RBZ, ‘undermines the whole essence of financial intermediation’.
Interestingly, the bankers had earlier hit back on policy makers from their annual conference in Nyanga, ironically stating that their lending is in overdrive and should instead slow down lest they plunge into serious bad debts. This is turning out to be a merry-go-round argument between the deaf and dump, but as always, the policy makers will have their way at the end of the day. Of late the banks in the developed world have come under pressure for their obscene bonus schemes and casino games with derivative instruments that created havoc in the global economy. And indeed the $550 million fine, paltry though, imposed on Wall Street Bank, Goldman Sachs by the US Securities and Exchange Commission on 15 July 2010 for civil fraud in the sub-prime mortgage derivatives did put an icing on how dangerous the casino games can get on a grand scale. Yes, the banks deserve to be disciplined and responsible.
The pressure on banks in Zimbabwe is likely to intensify at a time cash flow management has become the biggest headache being faced by corporates in Zimbabwe, and the continued unavailability of easy credit from the banks will keep tempers near boiling point. The basic argument on why banks should lend is logical. Banks mop most of the liquidity in the economy by accepting deposits and they have to play their part by redistributing these excess savings to those in need of credit to keep the economy running. Therefore when banks decide not to lend, the economy slowly grinds to a halt, and without any doubt, there is a reasonable level of lending expected of the banks for all the deposits they take from the public.
For Zimbabwe banks therefore to say lending is in overdrive when the loan-to-deposit ratio is only 61% can only be viewed as arrogance by the policy makers, and in future such statements can only be avoided to ensure that policy makers are not forced to act, for not acting would be viewed as blessing the same acts being viewed, incorrectly or otherwise, as unpatriotic and insensitive. Without doubt, as the RBZ has highlighted, the policy makers will descend on the charges that banks levy on transactions which are viewed to be ‘punitive’, and faced with a reduction in income from other income, the banks will likely consider lending a better alternative to generate revenue, and until then, the banks will realize that a 61% loan-to-deposit ratio is not ‘overdrive’ after all.
Zimbabwe is in a very delicate transitional phase, and without doubt economic patriotism has to be visible in most decisions that are being taken in all sectors, and the financial services stands right in the middle of the whole process. French President, Nicholas Sarkozy, when addressing the Euro Parliament in 2008, said “I don’t want EU citizens to wake up a few months from now and discover that EU companies belong to non-EU capital which has bought at the lowest point of the stock exchange”. This was at the height of the global financial crisis, and indeed company values were plummeting, and to safeguard their own, the EU was in a drive to ensure that EU companies do not fall into the hands of sovereign wealth funds of the Middle East and China and any other non-EU companies that had cash.
The IMF, which has long stood against wholesale printing of money for quasi-government interventions, became an unusual cheerleader as governments in the EU and US went into aggressive quantitative easing, and in the process of saving banks and the financial system, they threw a lifeline to their own companies. The US pumped over $700 billion, whilst the UK splashed over 850 billion pounds into the system. With the Zimbabwean government broke, devoid of lines of credit and sitting on a mountain of $7 billion in choking debt, the flexibility to engage into quantitative easing antics in helping the private sector doesn’t exist. The whole burden of Zimbabwe’s economic recovery therefore lies on the shoulders of the banking sector, and without much doubt, the banking sector would be expected to take bigger steps in playing its part.
And upon evaluating the acute credit crunch in Zimbabwe at the moment and the need to safeguard our own companies and prevent unnecessary take-overs by foreign capital or the courting of the strategic partners from a point of weakness, the banking sector has a very crucial role to play in ensuring that it plays its part in the recovery process, and indeed the biggest challenge any economy in the world can face is when the biggest banks are foreign banks. Pushing through reforms becomes a difficult task, and indeed some resistance by the foreign banks will not only be based on rationale, but rather the usual ‘head-office’ operating guidelines that will set country exposure limits, and for being foreign, these limits will not prioritize economic patriotism but rather safeguard their own solvency and reputation. And it doesn’t come with surprise that media comments about the Zimbabwean banking sector being in lending overdrive have been attributed to Barclays banks, which, ironically, made about $7 in non-interest income for every $1 it made in interest income for the 2009 full year, a clear sign that it surviving more from other charges and commission than from the normal lending business.
However, careful examination of the Zimbabwean banking model will require that more be done not only from the banks, but equally from the policy makers in setting a conducive operating environment. Acting blindly to satisfy the expectations of the economy can indeed set a dangerous path for the banking sector, more so when no one will be able to provide a lifeline in rescuing them when things go bad. For the love of being labeled patriotic and reasonable, banks can lend generously today but this can come back to haunt them in terms of bad debts. And in retrospect, the constituents of parties pushing banks to lend vigorously today will team up with shareholders and castigate bank management for poor insight and inadequate risk management policies, and sadly, more capital would need to be injected into the banks to cover for credit risk. In giving up dividend to cover for bad debts, and in worse instances of having to inject more cash to meet the regulatory requirements, shareholders will likely pass the stick to bank management, and the recent sacking of BP CEO over the handling of the US oil spill is testimony to how shareholders value their money ahead of any other sacrifice, good or bad.
Although shareholders in Zimbabwe have not been actively involved in general shake-ups of senior management over bungled-up operations largely due to the general blame on the economy and government over the years of high inflation etc, things ought to change, and surely management would need to take more responsibility for their actions going forward. When banks lose money in bad debts, the blame will never be on the bad borrowers, but will stick on management for poor insight and recklessness. Today the whole world blame the banks for poor judgment in propping the global sub-prime mortgage crisis, and many CEOs were sacked from some of the big global banks for being naïve. The same fate will befall Zimbabwean bankers tomorrow should debts turn very bad and write-down skyrocket.
If one evaluates the poor cash flows and serious competitiveness challenges facing Zimbabwean companies today, it is not difficult to see why bad debts are looming, and indeed there are many evident reasons already today that will be cited tomorrow to incriminate bankers for making poor lending decisions. It’s a catch 22 situation, and for the foreign banks, bad decisions they make today may require parent companies to bail them out as the view that they are already rich and healthy might preclude them from any future national bailout fund, if at all some miracle will happen in coming up with such a fund considering the fragility of government finances. And the RBZ has capped it all that it doesn’t have an appetite for more curatorships!
Valuable lesions can be lent from the recent global financial crisis, and that motivates the need for a balanced and very careful pressure in trying to influence bank activities. A prolonged era of cheap credit made indulgence in debt very fashionable. In some countries public and private sector debt-to-GDP levels stood above 300% just before the crisis in 2008, and at that same time, UK household debt as a percentage of disposable income was 160%. When the liquidity tightened, the pyramids collapsed and the fashionable debt came to haunt the very borrowers that had found peace in indulgence, and indeed the asset prices collapsed. The banks were worst affected with massive write-downs, and indeed many collapsed, including the famous Lehman Brothers. As if the losses on bank balance sheets were not enough, the blame quickly shifted to the banks, and indeed rightfully so. Today the global race to have more strict banking regulations is meant to address aggressive risk taking, and part of that is lending ‘recklessly’.
The road ahead is therefore not so easy for the Zimbabwean banks in general since they are now taking the primary risk of Zimbabwe’s economic recovery on their balance sheets. Every company reviving operations after years of stagnation and capital erosion is approaching the banking sector for lifeline, and the banks have to contend with many such experiments, most of whose operating models of yester-year are no longer viable. Those loans will most likely go bad, and if assets of such companies would have been used as collateral, realizing cash out of them would be the biggest challenge when everyone is having liquidity challenge. However the bankable credit needs of this economy are huge, and for the banking sector to justify loan-to-deposit ratio of 61% would be unreasonable, and indeed more reasonable lending should be happening on balance sheets.
The RBZ had not been capacitated financially to perform its market functions until recently and true to the point, the lender of last resort functionality was dead meaning banks’ liquidity was at the mercy of clients who would have borrowed. Only reckless banks would have gambled too much with depositor’s funds by lending more when they wouldn’t be sure of an exit avenue in times of liquidity crunch. On the other hand, the Government is not setting the risk free rate hence the risk is generally perceived to be higher than what it is, and in all logical instances, the banks have the right to keep significant amounts of cash on their balance sheets. If the government is not sure and confident about the future, the probably reason it wouldn’t define the yield curve, who are the banks to disregard such signs and plunge headlong in extending long-term credit? Such banks would probably not be able to live long to see the economy recover and be honored for their efforts in the turnaround process. Now that the RBZ has been capacitated with the seed fund to resume the lender of last resort functionality, more loans should be coming out of bank balance sheets as liquidity risk will be moderated.
Given the vital credit needs for the economy on one hand and the need to balance the credit risks for their continued healthy survival on the other side, banks stand in the middle of the whole turn-around process in Zimbabwe, and indeed their ability to balance the twin objectives will not only reduce undue pressure from policy makers and politicians, but will set a profitable path ahead of them as the economic recovery will kick in faster. Banks should not ordinarily take the wait-and-see approach as it constrains credit flow and hasten recessions, but Zimbabwean policy makers have an equally important role to play in ensuring that the market place has sufficient instruments to safeguard the banks. And until then can we raise expectations on the banks activities and demand better performance. With healthier banks, everyone is happy.
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