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.
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