Banking public bitterness justified


Martin Tarusenga
Further to the public outcries made through pensioner organisations, as articulated by The Herald over the last month, against apparently high usurious loan interest rates, and high unjustifiable bank charges on various types of bank accounts, more startled and deeply suspicious members of the public have endeavoured to check if they have been treated fairly by banks in Zimbabwe.

A reputable building society advised its subscriber to paid-up permanent share (PUPS) accounts to forget about the money she had regularly deposited over a period of three years since 1998, and to move on. The building society cited inflation and the need to comply with the provisions of the demonetisation policy.

At the advice of the of the building society, this subscriber had invested in these PUPS specifically to meet education costs for her then two-year-old daughter, from the point the daughter would turn 18 years. After making the regular ZW$ deposits, at the time, worth significant value in US$ terms, she rationally expected some return at least equal to the US$ value of the Zim$ deposits, at the time that they were made.

In another fairness check, a unit trust run by one of the banks, advised its unit account holder that it had nothing to return for the ZW$7 000 000 that she had invested in the bank’s high interest unit trust fund, in August 2004 — inflation had “eaten” it.

The ZW$7 000 000 derived from pension benefits from her deceased husband’s pension fund and was worth about US$1 000 at the time of investment.

Then there are the banks that just folded unbeknown to their clients, as if they had set up with intent to defraud the clients that they owe, in deposits and other investments.

Clients coming to check the performance of their investments or to transact, learn to their surprise that the banks are no more.

A subscriber to one such bank placed ZW$1 643 727,99 one-month fixed deposit, on 1st of January 2007, only to come back to a bank that had folded by the end of the same January when they expected the deposit to have matured; while another such subscriber in the diaspora made a series of monthly deposits at the rate of ZW$8 000 into Class C tax free PUPs of another building society, since 2000, until December 2001 in preparation for the day she would come back home, in retirement.

The latter would learn in despair, anger and abandonment that the building society had gone into trouble and closed its doors in early 2003.

Unbeknown to her, the building society would be liquidated in 2005.

The fixed deposit, and the series of deposits in the latter building society, were respectively worth about US$410 and US$2 000, at the time the Zim$ deposits were made. The aggregate amount that banks took from the banking public and thus defaulted, must be an interesting piece of information.

These subscribers to bank services have to date not identified any easy recourse to securing their hard earned money, placed in, and swallowed by banks — they are bitter and will not forget, hence their call at the pensioner organisations.

They are just a few members of pensioner organisations, of the many calling with such appeals, exemplifying treatment of the general banking public by banks, and exemplifying public sentiments of the banking system in Zimbabwe.

Of course, it has to be examined whether such public sentiments are justified, taking into account the responses made by the banks, and the interventions made by the regulating authority, the Reserve Bank of Zimbabwe (RBZ).

Firstly, the defence that inflation “swallowed” these subscribers’ money, as proffered by banks, totally ignores, and contravenes the terms of the contract between the subscriber and the bank, explicit and implicit.

These financial contracts are entered into, on trust, with the fundamental underlying promise and undertaking that they will return value, in real (US$) terms or otherwise , no one would subscribe if it was made clear that the investment can go wrong, with the subscriber bearing all the brunt.

And in so making such an undertaking, the incumbent bank explicitly undertakes to skilfully engage all measures/techniques to return this value (of professional bank risk management) — otherwise it should not accept the funds from the subscriber.

Therefore, any fingering of inflation by banks are just strategies to divert attention from their poor performance in managing these contracts.

Turning to RBZ policy interventions, the public justifiably expects the RBZ to have put in place effective policies to protect the banking public against bank institutional power, against bank fraud, against bank negligence and against risks that bank contracts with the public highlighted earlier, are exposed to; including inflation risks, currency risks, credit risks, among others.

With regards to the latter risks, the RBZ should always anticipate these risks as closely as is possible, in order that mitigating measures are set up.

With the onset of inflation in the late 1990s, and with all the signs that the inflation would not abate, the RBZ should have anticipated that any long term deposits (for instance) made into banks in the inflationary environment would not be realised by the banking public, but would certainly enrich banks.

Several measures could have been put in place, including requirements to index such deposits, public warnings of the adverse impact of making long term deposits in such inflationary environments, a requirement for banks to develop effective protective indices and to explain and declare in writing, to clients how their investments with the bank could realistically turn out.

There is no evidence of such efforts in this direction, despite the many warnings of worsening inflation from the many commentators — the banking public are therefore justified in being bitter for the loss of their investments in banks on this count.

With regards to negligence and fraud on the part of banks, leading to bank failures and loss of funds by the banking public, there are internationally established measures that the RBZ should skilfully set up to minimise such bank failures, including best practice accounting, and the maintenance of capital by banks, which capital must explicitly take into account the risks arising from each contract that the incumbent bank is making with the banking public.

Capital requirements such as the latter are enshrined in the 3 versions of Basel bank regulatory approach.

As far back as 2006, the RBZ began announcing its endeavours to implement Basel II regulatory framework, and yet there is no evidence that this implementation made banks in Zimbabwe safer, considering that more 20 banks have failed since the mid 1990s, each taking with it public funds — the complaining public are again justified in being bitter on this count.

In its favour, the RBZ came round after the banking public lost their money through the bank failures and inflation, and set up the Deposit Protection Corporation (DPC) in 2003, it dollarised in 2009 and eventually demonetised away from the ZW$ in 2015.

While the DPC’s primary role is to compensate depositors of failing banks, it will not compensate bank clients of banks that failed prior to 2003, and any placements with banks that are not recognised as “deposits”. Turning to the demonetisation away from the ZW$, the RBZ January 2015 Monetary policy Statement pronounced that “. . . The significance of this (demonetisation) policy measure is to bring to finality to this long outstanding Government obligation to the banking public and to formally pronounce the demise of the local currency.”

The central bank steered away from stating the policy measure fully and categorically, outlining its objectives of stripping the ZW$’s status as legal tender, of switching to multi-currencies, in the process ensuring that value of asset holdings made in ZW$ was retained.

Instead it announced processes that were to be followed in demonetising, again steering away from explaining the rationale of the processes, and how the processes fell within the purview of demonetisation, as known elsewhere.

In particular the RBZ would not explain the basis of the exchange rate that would be used to convert ZW$ bank balances, and the minimum US$5 allotted to such balances. The demonetisation was essentially arbitrary, and tipped in favour of the banks. The banking public is again justified in being bitter.

  • Martin Tarusenga is General Manager of Zimbabwe Pensions & Insurance Rights, email, [email protected]; telephone; +263 (0)4 797020; Mobile; +263 (0)772 889 716
  • Opinions expressed herein are those of the author and do not represent those of the organisations that the author represent

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