Investigating foreign banks- noble idea, but...

Spreading like a deadly flu bug in winter, policy makers around the world are increasingly getting insecure without the levers to manage the allocative process of resources in their respective economies. In the UK, Vince Cable has been vocal in pushing for reforms that would compel banks to lend more to small British businesses that have suffered from lack of credit, failure of which the banks would be taxed more. And indeed the 50% tax to be levied on the banks themselves for bonuses above £25,000 is punitive enough considering the very big insatiable appetite for bonuses by bankers in Europe.

In the USA, having been burnt by the large banks gobbled hundreds of billions in fiscal bailout costs, the USA Fed Chairman, Ben Bernanke said “that a combination of tougher oversight and tighter capital requirements will take away the attractiveness” of banks getting too big to fail. This bears testimony to the fact that even in the USA, where capitalism and free markets ought to have originated, policy makers are getting worried about size issues in the banking sector. And indeed they are right.

The National Indigenisation and Economic Empowerment Board (NIEEB) in Zimbabwe is reportedly in a bid to investigate foreign banks that are supposedly not lending generously as their indigenous counterparts. This is not the first time that some banks have been accused of being unpatriotic and selfish. During the hyperinflation environment of between 2003-2008, banks were labeled the biggest enemies and saboteurs of progress for their roles in fueling the then illegal parallel foreign currency market and instigating stock market exuberance.

This time around, the accusations have changed, but the views that the some banks are not championing the good cause of the economy remain strong. The banks in Zimbabwe, having been the worst affected by hyperinflation, worse being a tightly regulated industry, have been under pressure from the regulators to comply with stringent capital requirements. The banks were arguably the worst losers during hyperinflation, for that which they held as trading assets, the ZimDollar, was that which lost value by the minute. And the indeed the death of the ZimDollar in 2008 bears testimony to the indescribable suffering and loss that the banks have gone through on their capital positions.

Had it not been the mischief of bankers in investing in properties and other value-preserving assets, today many would have struggled to meet the minimum capital requirements. And having survived, trading in an environment with low liquidity and acute credit risks after the dollarisation saw the bank treading carefully on, with the loan to deposit ratio at 33% in April 2009, justifiably so. By October of 2009, it had improved to 49%, but still low compared to regional standards and falling short of the requirements of the economy. NIEEB accuses foreign banks of not lending, their crime being that of collecting deposits from the struggling domestic economy and keeping them on their nostro accounts, like any other local bank of course since all this is foreign currency, in the process benefiting foreigners in the economies where these deposits sit. In the process, the watchful foreign banks whose country exposure limits are set outside the country, remain cautious and have kept their lending very limited, impacting largely on the loan to deposit ratio that currently sits around 62%.

The calls for banks to lend more towards the economy are very noble, for without reasonable flow of credit, the recovery process will be long and very fragile. The domestic credit markets are on the short-end, creating a huge dislocation for most corporates that need long-term debt to restructure their physical capital structures. And that failure to get long term debt, coupled with inefficient labour market and other structural ills, has seen the majority of domestic companies failing to compete favorably with regional and international low cost producers. The implication of this on unemployment and government revenue is a crucial aspect to tackle, and without important reforms that influence bank behaviors to tow the line of national vision and economic policy, Zimbabwe will wear the tag of the sick-man of Southern Africa longer than necessary.

Banks that are hesitant to lend stand in the way of progress, and indeed the unpopular quantitative easing that was adopted by the EU and USA in bailing out banks during the global financial crisis of 2007-2009 was specifically to ensure that credit would continue to flow in their economies to sustain growth and jobs. And the calls for foreign banks in Zimbabwe to be reasonable in their lending policies are therefore not far-fetched. The reasoning is straightforward. If some of the foreign banks in Zimbabwe have country exposure limits on loans they issue at any particular point in time and therefore stifling credit creation, they should equally have limits on the deposits that they take so that they allow those progressive banking institutions that wish to lend enough room to mobilize deposits and play their part in the re-building of the economy. It is retrogressive that country limits are placed by banks on loans they issue yet there are no limits on the deposits that they take.

Policy makers therefore need to come up with regulations that discourage such behavior. The Chinese state-owned banks protection experience has been influential in driving Chinese growth to this day where China is a global superpower, notwithstanding persistent biased criticism from such institutions as the IMF. The Chinese banking model is a very good learning point for developing countries, and indeed without sufficient levers to influence the behavior of banks toward lending, China would not be an important global player today.

Whilst it is true that the ongoing economic reforms in Zimbabwe cannot be implemented successfully without the support of banks, and that banks need to be more reasonable in their credit granting, it is equally important to note that the risks in the economy remain high, and indeed the economy needs healthy banks that will be able to stand the test of time. The Chinese example given earlier on how toxic assets on bank balance sheet have not derailed Chinese economic progress challenges this notion, but the striking difference will always be the huge surplus reserves that China has piled up that have been employed by the state to subsidize the seemingly unhealthy big state banks that have not taken the foot off the accelerator in lending.

The recent global financial crisis was instigated by the pile-up of toxic loans, and today the whole world join hands in condemning global bankers for having been speculative, irrational and stupid. For all the bad loans, never has the blame gone to the borrowers. Bad borrowers for that matter!! The bad borrowers have been exonerated, and the good bankers then that gave them easy credit take to the stand on charges of being greedy, naïve and reckless. The same taxpayers that benefited in the glut of easy credit don’t want to part with a dime in safeguarding the ‘bright’ weather friends, and indeed the fierce public protests and resistance that met bank rescue plans in Europe and US point to the fact that no matter how good banks make easy credit accessible, blame will never be on bad borrowers, but rather on the banks for making bad lending decisions.

And if the indigenous banks in Zimbabwe that are lending generously ahead of their foreign-owned counterparts begin to suffer huge bad debts and massive capital erosion, the blame will never be on the bad borrowers and the fragile economy. It will pin on their decisions, and sadly, unlike in the EU and USA, the Zimbabwe government has no fiscal space anymore for bailouts.

The scenario therefore that some foreign banks in Zimbabwe find themselves in is very delicate and precarious. But the economy has to move one and the time has come for everyone to play ball, including foreign banks even though they may be seeing other imaginary risks.

NIEEB, instead of looking at, and taking the fight to defiant banks alone, should rather take the government to task. If the objective of the Zimbabwe inclusive government is to influence the flow of credit in the economy, it should equally be concerned about the distribution mechanism that allocates deposits among the banks. Why would a serious government concerned about credit growth, knowingly aware that the indigenous banks are friendlier in generating credit, make payments for goods and services to such providers that do not bank with the indigenous banks? And would such a government and its Parastatals and other quasi-government institution ever award a tender to any service provider not banking with an indigenous bank? Is it too difficult to learn the BEE policies in SA whereby it is so difficult to conduct meaningful business if one is not compliant?

The government is the major spender in the economy today and Minister Biti’s budget later this week will confirm the same. And surely there could be other ways that the government, via NIEEB, can do to ensure credit flows more freely than taking the first step in supporting the cause of reasonableness by not banking with those banks that are viewed, correctly or otherwise, as hostile to the aspiration of reasonable credit growth. If the government is scared to stand and practice what it believes to be right, who will? Its time therefore that our government practice what it preaches, and indeed the $7 million seed capital injected by the government to kick-start the lender of last resort functionality at the RBZ, though a good step, is a pittance considering bank deposits above $2 billion. If therefore its genuine lack of fiscal space, why doesn’t the Minister of Finance, Hon Biti regulate therefore that banks whose loan-to-deposit ratios fall below a prescribed level remit a certain percentage of their deposits to the RBZ to augment the lender of last resort seed capital pool in a sweeping arrangement reconciled weekly or otherwise?

This will ensure that the economy continues to benefit from the same deposits the banks that are hesitant to lend hold. Policy makers need to be objective and unapologetic for the good cause of the economy that will create jobs and growth. Asked if the government of Britain was not worried by threats by some banks about leaving Britain, Vince Cable had an assuring answer. He said: "We have to make the British economy safe and we can't be blackmailed by constant threats (by banks) to walk away." Even in Australia, after it proposed an excess profit tax of 30% on iron ore and coal miners to benefit from its endowments, protests by BHP Billiton Ltd, Rio Tinto Ltd and Xstrata plc were futile and now they have been reported to have signed agreements in support of the new tax rate.

Zimbabwe Diamonds - Noble objective, sad betrayal

The ongoing Zimbabwe diamond mining saga that has seen the arrests of some Core Mining and ZMDC officials has attracted a lot of attention and opened a new chapter on the role of the state in diamond mining activities. Equally, the new licenses that have been reported awarded to Anjil, and Pure Diamonds and Sino-Zimbabwe continue to point to one sad story – the story of Zimbabwe losing confidence in its own people and indeed the inclusive government of Zimbabwe, against the spirit of true and unbridled economic empowerment, has been caught flouting its own commandments. If the inclusive government of Zimbabwe is already party to two licenses currently extracting diamond in Chiyadzwa, why would it be too slow and dull to learn and impart the knowledge to local partners in new licenses?

Worth noting in the new licenses is the fact that the element of foreign companies, or the need thereof to partner with such, has continued to take centre stage in the awarding of licenses in the diamond extraction in and around the Marange area. Whilst the inclusion of foreign companies in the diamond mining industry or any other industry in Zimbabwe is not a bad idea, it is so much bad and distasteful to imply and indeed act in confirming that Zimbabweans on their own cannot mine diamonds in the Marange area. Who does not know that the Marange diamonds are largely alluvial? Isn’t this the same place that lit Mutare with loads of US$ when illegal ‘panners’, armed with sticks, shovels and carry bags, extracted diamonds worth millions of dollars? And indeed they got the gems, and the story of the alluvial Chiyadzwa diamonds and the miracles thereof has been told, recited and indeed documented.

Why would the government therefore, against its own spirit of empowering its people, award and continue to award licenses to ‘foreigners’ to extract alluvial gems that sticks, shovels and picks could unearth? Alluvial diamonds, for what they are, remain and will always be alluvial diamonds, not requiring state of the art machinery to extract. Alluvial diamonds generally stem from diamond-rich kimberlite rocks that would have been eroded over time by rivers, with the diamonds being deposited downstream. Artisanal mining techniques have mined the Chiyadzwa diamonds, of course not to the broader benefit of the Zimbabwean economy, and indeed alluvial diamonds, in the general interests of Zimbabweans, should be left for Zimbabwean to extract. There is general talk, erroneous equally, that Zimbabweans alone cannot extract alluvial diamonds and would indeed need foreign partners with deep pockets to buy bull-dozers, excavators, front-end loaders and security fence to be able to extract diamond. This notion is regrettably ill-informed, unfair and indeed a prejudicing one. Since when have bull-dozers, excavators and so on been expensive when compared to the return on investment from alluvial diamonds?

For the record, the Zimbabwe's financial sector has capacity to syndicate more than sufficient resources to which-ever Zimbabwean would be looking for the capital to extract diamonds in the Chiyadzwa. Recently three banks, FBC, ZB Bank and Agribank have been in the market to raise a combined $37 million to finance the next agricultural season. Will it ever rain this coming season or we will have the worst drought? Notwithstanding that there are serious risks in funding agriculture, more so in an environment that is illiquid and dominated by big foreign banks that impose regrettable country risk limits that have been stifling the growth of credit in the economy, these three local banks have put up a commendable act. Whether they raise all the money or part of it is beside the point. What therefore makes the government believe that there is no local funding for alluvial diamond extraction when, in fact, poor ordinary Zimbabweans could, after years of hyper-inflation, amass the capital to extract the gems via sticks and shovels? What foreign expertise would be needed besides compliance issues with the Kimberly Process? Does Zimbabwe not have deposits sitting on bank balance sheets at over $2 billion today, with $1.3 billion of these in loans and advances? Why therefore would banks not lend to Zimbabwean companies in alluvial diamond extraction that does not require huge initial capital outlay?

The beneficiation of the diamonds is one area where Zimbabwe does not have expertise, and few would question the wisdom of the Zimbabwean government in awarding licenses to foreigners partnering local companies with the technical know-how and markets.

The time has therefore come when Zimbabweans need to be honest about themselves, their capabilities and actions that will take Zimbabwe forward in a non-prejudicial manner. Sarkozy, the French President, addressing the European 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”. Isn’t this economic patriotism where the EU protects that which is theirs, barring Middle-East and Chinese investors to grab EU assets at their lowest prices? Is it not Elysee Palace, the official residence of the French President, that is dreaded by big companies in France whenever they engage in big deals with non-French companies? In February of 2009, Eutelsat board members were summoned to Elysee to answer why they had chosen a Chinese ‘Long March’ rocket to launch a satellite instead of using a French firm, Arianespace. Why would therefore Zimbabwe, for its prized diamonds existing on the surface and not needing sophisticated underground equipment, enlist foreign capital that will see money leaving this country to sit in foreign banks and finance foreign interests?

Isn’t Australia proposing an excess profit tax of 30% on iron ore and coal miners? Surprisingly, after futile protests, BHP Billiton Ltd, Rio Tinto Ltd and Xstrata plc have been reported to have signed agreements in support of the new tax rate. Is this not Australia benefiting from its resources in a win-win situation? Why then would Zimbabwe, for what it can do successfully with its local capital and expertise, cede rights to foreigners in alluvial diamond panning? In the UK, Vince Cable’s ranting on excessive bank profits and threats to those banks not lending to British companies reveal the growing insecurity of governments worldwide concerning the ability to manage banks and financial resources in order to continuously influence the growth process. Equally, the Chinese state-owned banking sector protection experience that has been influential in driving Chinese growth to this day where China is a global superpower, notwithstanding everyday criticism from such institutions as the IMF, is an important learning point in global economics. On the same issue, the 01 September statement by the Fed Chairman, Bernanke “that a combination of tougher oversight and tighter capital requirements will take away the attractiveness” of banks being too big to fail bear testimony to the fact that any serious country today needs to have some significant influence in the way resources are allocated in the economy, be it in banking, mining or otherwise.

The Minister of Youth and Economic Empowerment, Mr Kasukuwere, and the President of the Affirmative Action Group, Super Mandiwanzira, have grabbed headlines championing the cause of able Zimbabweans in charge of their destiny, but surely their motives and what they stand for become very weak when licenses to alluvial diamonds extraction need foreign partners. The excuse that the foreign capital on alluvial diamond extraction does not have controlling stake is not a good one, and indeed Zimbabwe needs to re-look at its economic vision. Emotions have always boiled about foreigners owning shops and other small retail businesses suffocating local Zimbabweans. In the same breath, why would foreigners be allowed to take part in alluvial panning? If we can’t bar foreigners in alluvial panning, lets equally not bar foreigners in retail businesses. The law has to be fair to all foreigners, and more importantly, make sense. The Minister of Finance, Tendai Biti, will soon be presenting a fragile budget statement, with or without a deficit. Government revenue remains weak, and surely short of coming up with pragmatic changes to the taxation levels on key minerals such as diamonds and platinum, the fortunes of this economy will remain weak for long, and Zimbabweans will have themselves to blame. This new sad chapter therefore in the extraction of Chiyadzwa diamond is regrettable, and indeed the inclusive government needs to quickly re-look at its economic strategy.

Brains Muchemwa is CEO of Oxlink Capital (pvt) Ltd. Feedback: brainsmu@gmail.com. Disclaimer: The comments, sentiments and statements made in this article are that of the writer and do not, in any way, reflect the views of Oxlink Capital (pvt) Ltd.

Property Market in Zimbabwe: Struggling but with loads of potential

Its November already and a lot of progress has been made in the economy this year. The Zimbabwean policy makers have been emitting mixed signals for a long time this year regarding the economic growth prospects. The GDP growth forecasts for 2010, now pinned around 8%, have been revised up and down for the millionth time, unnecessarily at times, but the most important fact is that the economy is growing. Considering that the performance of banks generally mirror the strength of an economy, the mid-year results by the banks show that the economy is still in some trouble, and indeed more hard work is still needed to put it back on a comfortable growth path. And with that, the prospects on the property market, which hinge more on economy-wide liquidity, vibrant banks and the pace of economic growth, remain uninspiring in the short-to-medium term. Interestingly, the depressed revenue from the last Diamond sales have dented the high hopes of fast recovery that had been erroneously pinned on the diamond industry following erroneous forecasts on the value of the piles of 4000 carats that had accumulated awaiting the Kimberly Process certification before being off-loaded.

Mortgage lending has resumed on the domestic banks’ balance sheet, albeit on a very small scale and short time-frames. This contrast sharply in such mature markets like South Africa where mortgages take up significant proportions of bank balance sheets, affording reasonable activity and indeed liquidity on the property market sufficient enough to influence more predictable and sustainable long-term yields. As of June 2010, mortgages sitting on SA banks stood at $144 billion, about 45% of banks’ total loan book and this contrast sharply with our local scenario where mortgages are estimated to be taking less than 2% of the total banking loan book which currently stands around $1.4 billion. High disposable incomes, affordable debt options and healthy banks are the very important foundations that will propel the Zimbabwean property market to attractive heights. The low average wages that are below $300 per month, and indeed the absence of a significant middle class have created a huge gap in the property market in Zimbabwe, resulting in very small numbers being able to access reasonable mortgages to participate in the property market, and that has depressed activity and indeed the yields.

The dollarisation has arrested the incidences of high inflation, and with our inflation likely to hover below 5% per annum over the long term, the prospects of significant wage increases are remote, more so when the general economic growth prospects are not so bullish. The economic force that therefore pushes the majority of our low income people into the middle class is weak, implying that more innovative solutions by banks and developers will be needed to create solutions for the many homeless Zimbabweans with strong aspirations to becoming property owners.

At Zimbabwe’s average incomes below $300 a month, owning a $50,000 middle density house in Msasa Park, Tynwald or Westgate becomes a pipe dream if 10 year mortgages, at around 15% per annum, require that one pays around $843 a month. And for a bank to approve such a mortgage, one would need to be earning a net salary of around $2400 per month. Back then in 1990, this was a feasible feat as the national wage averaged $1,546 per month, and indeed this economy witnessed huge developments in the real estate that time as household incomes were strong and stable. However the current wage rates are so depressed to afford the general homeless people to set foot in the property market, and with government being the largest employer and suffering from constrained revenue, it will take a lot in direct policy interventions to re-ignite the property market.

How many Zimbabweans earn $2400 as net salaries today to drive sufficient demand for the property market? What then becomes the fate of low-income earners who earn below $1000 in net salaries per month? And in any case where would one find 10-year mortgages in a market that is illiquid and exhibiting high returns on the short term for the banking sector? These realities continue to stalk the property market, and without doubt, the persistence of the illiquid market and poor incomes will prolong the return of the property market to vibrancy levels.

On the other hand, the current liquidity crunch besetting the local banking institutions mean equally that very few banks have sufficient liquidity on their balance sheet to plunge into the long term that normally suit mortgage products. Currently the banks, for fear of liquidity challenges, have been cautious on lending, resulting in relatively low loan-to-deposit ratios of around 60%. The mortgage market therefore, considering its long-term nature, becomes a distant choice for the banks in such an environment, creating more dislocations in the vibrancy of the property market. With the government being the largest employer and unfortunately suffering from serious budgetary constraints and with civil servants’ salaries pegged below $300 per month, very little would be expected therefore from the employers in coming to assist the property market development.

The government has recently announced a 10-year $5 million mortgage scheme for the civil servants at 5% per annum. Considering the current civil service wages around $250 per month, the maximum that an applicant would probably get is around $9600 repayable over the 10-years if one goes by the conventional mortgage guidelines. This translates to 480 people or 0.2% of the total civil service workforce. Though a pittance, the most important thing is that the government, on limited revenue, has began on an important step, and if well embraced by the private sector, the property market is set to start coming up from the bottom-up approach. This speaks of the volumes of challenges that the government is facing in revitalizing the property market, and indeed the sad story is that more resources need to be availed towards the development of low-cost housing models in the economy to provide practical solutions to the one of the most basic human need- thus decent shelter.