Banking sector needs more reforms

Reserve Bank of Zimbabwe

Reserve Bank of Zimbabwe

Christopher Farai Charamba Review Correspondent —
On Monday this week, the Reserve Bank of Zimbabwe issued a statement on the reduction of cash withdrawal charges. With the prevailing cash crisis, cash withdrawal limits have been reduced to as low as $40 at some banks, but withdrawal charges remained as high as $3,50 and $4 per withdrawal.

The disproportionate relationship between the withdrawal limit and withdrawal charges meant that it was costing bank customers a hefty amount to have access to their own money.

The move by the RBZ is therefore a welcome one and was in fact long overdue. This issue of bank charges has been a major concern for a number of years.

In July 2012, the then Finance Minister Tendai Biti, mentioned in his Mid Term Budget Review that his Ministry and the Reserve Bank were working on detailed measures aimed at reducing bank charges which would in turn reduce the cost of banking.

He called the situation “voodoo banking” where Zimbabweans were subjected to “high interest rates on loans and (a) total absence of any interest on deposits”.

During his 2013 budget presentation in November 2012, Biti again reiterated the problem of exorbitant bank charges, and said Government was looking into the issue.

Banks, Biti said, were making 55 percent of their income from non-interest income. Non-interest income is bank and creditor income derived primarily from fees including deposit and transaction fees, insufficient funds fees, annual fees, monthly account service charges, inactivity fees, cheque and deposit slip fees, et al.

This is a problem because banks should be making money from lending money at an interest rate than the cost of money they lend.

Bank statement indicating normal bank charges for $50 0r less withdrawals have become the norm

Bank statement indicating normal bank charges for $50 0r less withdrawals have become the norm

The fact that bank charges have been high and people do not make interest from saving their money in banks has left banking unattractive for many Zimbabweans.

Charity Moyo (34), a vendor in Harare, said she does not use banks because she does not see any benefit in doing so.

“I operate a cash business and so if I put my money in the bank there is no guarantee that I will get it out. You can see the long queues that are at the banks right now where people have to spend all day to only get $50. I cannot afford to do that so why bank my money?

“Another issue is that it is too expensive for me to use the banks in this country. There are monthly charges and then charges to take my money as well. I do not make a lot of money so I would be losing the little that I have with all the charges.”

Moyo bemoaned the fact that she could also not get anything from her savings if she were to bank. She said she was better off joining a money savings club, known as a “round” with her friends and colleagues because she would earn something from that.

“My friends and I have a round going and it has been beneficial to me. There are four of us in the one I am in currently and we put in $100 each. So every three months I know I am getting an extra $300 with which I can then buy something for my home or pay school fees,” she said.

The unattractive nature of banking has left a significant portion of the adult population in Zimbabwe unbanked.

People queueing to withdraw their daily

People queueing to withdraw their daily

According to the FinScope survey of 2014, only 30 percent of the adult population in Zimbabwe used banks. That leaves 70 percent or 5 million people out of 7 million unbanked. For those that do use banks, 81 percent of them use them primarily for transactional products.

In contrast, 37 percent of adult Zimbabweans use informal mechanisms for managing their finances. For these people, 62 percent, the main drive was as a means of saving and belonged to saving groups.

These figures are concerning particularly when there is a push towards cashless services. Having a large unbanked population means that certain cashless services like POS machines would be unavailable to the masses.

With current interest rates on loans averaging around 18 percent and virtually no interest on savings, banking is not a viable option for a majority of the population, outside of being able to receive their salaries.

In the past when one put money into their savings account, they would earn interest on the amount they initially deposited. Today one is likely to have their initial deposit eroded by bank charges before they touched any interest. Such a scenario is unlikely to bring people into the banking hall with their hard to come by dollars.

Another problem is that banks in Zimbabwe have proven to be unreliable and therefore do not inspire confidence in the masses. Banks like Trust Bank, Interfin Bank, Tetrad Investment Bank, Allied Bank and Royal Bank of Zimbabwe all closed and liquidated while still holding people’s money and are yet to pay their depositors back.

The banking sector therefore needs a transformation and to make their services more attractive to the public in order to bring in the unbanked population, many of whom operate in the informal sector.

According to a local economist, Daniel Ndlela, the current banking system in Zimbabwe is not conducive for the population and actually chases away potential customers. He said the fact that there was a challenge to access money from the banks made it unlikely that people would turn to banks to keep their money.

“One of the big questions you will have to ask is who is going to put their money in banks particularly from the informal sector and especially when you can’t then withdraw the money?

“Right now only people who are forced to have bank accounts on the basis that they are employed are likely to have bank accounts. But you will also find that as soon as they get paid they are taking their money out of the banks,” he said.

Mr Ndlela added that while the move to reduce bank charges was necessary it was not enough to attract and retain customers in the banks.

“Bank charges were certainly part of the problem but their reduction needs to be accompanied by inclusive financial services. You need to provide other products that make it beneficial for people to bank their money and not turn people away

“People should be able to get loans at favourable rates and find a good reason to bank their money,” he said.

Mr Ndlela acknowledged the fact that people would rather stay out of the banking sector and use informal options like savings clubs because there were more favourable conditions outside the banks.

“What you will find is people will choose informal options because they suit them. Theoretically, even if you have a saving club, it should be favourable for you as a collective to then bank that money and make it grow.

“But for that to happen, there needs for positive interest rates, low charges and for people to be able to retrieve their money.

“Right now if someone has to go to a funeral and needs $500, even if they have over $2 000 in their account, they won’t be able to get it. They will only get $150 if they are lucky and most likely $50. So it makes no sense to put money in the bank,” he said.

Another economist said one of the first hurdles that left a sizeable number of people unbanked was the fact that there are so many restrictions and requirements that made it difficult for one to open a bank account.

“Previously you would only need your address and ID to open an account, but now there are a number of other things that I think are prohibiting people from being able to open accounts.

“People in the informal sector might not have adequate requirements in terms of registering the business, and other paper work to then open a bank account for their businesses and thus they remain outside the sector,” he said.

He added that some people have opted for other alternatives such as mobile banking rather than opening a traditional account. Banks, he said, would have to find alternative ways of advertising their products and make it easier and less tedious for people to sign up.

He said if banks wanted to attract people they would need to reform the way they currently conduct their operations. “It makes no sense for someone to try and deposit money in the bank because there is very little to no interest on savings,” he said.

“Banks need to pay decent rates on savings if they are to attract people to save. So if you have a few thousand dollars that can be left in fixed deposit then it should earn some money otherwise you’re not going to put it there.

“A problem that needs to be acknowledged is that very few people actually have sizeable amounts of money to save or leave in the bank long enough for the bank to then lend it out and earn something off it. It’s likely that they will withdraw it as soon as it is deposited, so the bank won’t use it,” he said.

In this regard, he said, there should be some sympathy for banks because they are operating under stringent conditions.

“When it comes to giving out loans, banks have a difficulty of non-performing loans. This means that they are not earning interest on the loans and it is likely that the individual who took the loan is going to default. Banks have become casualties in this situation and are also looking for a means of survival,” he said

Zimbabwe National Chamber of Commerce CEO Chris Mugaga said banks in Zimbabwe needed to transform themselves to suit the environment they find themselves in.

“Our banks are operating in a small scale economy and therefore need to understand their situation and adapt to it.

“Banks should be specialising in business advisory. Each bank should have a division that advises the small scale enterprises in this emerging economy we find ourselves in.

“These small scale enterprises do not thrive on collateral for loans and so banks should be assisting them in finding alternative means of obtaining loans. They are cash generating businesses and there should be ways to finance them.”

Mr Mugaga applauded the move by RBZ governor John Mangudya to reduce bank charges saying it was not sustainable for banks to rely on non-interest income.

“What banks were doing is compensating for their understatement of loan loss provisions. This was then covered with bank charges. Because banks have a lot of under-performing loans they needed an alternative to make money and they chose charges. This however, could not continue.

“It’s high time banks appreciate the need to transform in an economy characterised by deflation. In a deflationary environment such high bank charges do not make sense and actually affect people because they do not adjust for price changes,” he said.

Mr Mugaga added that it was important for banks to work on their savings options to benefit their customers but also the economy as a whole.

“No economy has developed without savings ratio which is substantive. We say that we want FDI to help develop the economy but we must also have a sizeable savings ratio and right now it’s probably around negative 11 percent which is not sustainable.

“So all things being equal, we need to start practising real banking in this country. Banks should move from transactional banking, where people use the bank to withdraw their deposits, to relationship banking that allows people access to other services the bank has to offer,” he said.

This year the RBZ launched the National Financial Inclusion Strategy. In it, they seek to increase the level of access to formal financial services in the country from 69 percent to 90 percent while improving the proportion of financially included small businesses to 80 percent by 2020.

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  • Mangena

    There’s need to seriously look at the interest rates as well. Banks have been charging interest rates as high as 25% since dollarisation. Micro finance institutions operating in Zimbabwe are actually not supposed to be legally lending at rates as high as 5% or 10% per month. That is usury. It has been viewed as anti social since time immemorial. The RBZ should monitor these sinister operations as they have had an extremely negative socio-economic impact. Banks that have charged high interest rates and have been unjustly enriched at the expense of the rest of the economy must pay restitution. In developed countries some of the practice we turn a blind eye to can lead to heavy penalties and possible deregistration. We must set up a commission of inquiry into operations of financial institutions since dollarisation and return properties of people that were auctioned during this period of madness.