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BANKS across the globe are known as the engine that drives the economy as activities in any nation cannot be smooth sailing without the flow of money and lines of credit.

Historically, the economies of all market-oriented nations depend on the efficient operations of financial institutions, mainly banks.

The relevance of banks in the economy of any nation cannot be overemphasised given its function of financial intermediation. Among many roles, banks facilitate capital formation, lubricate the production engine turbines and promote economic growth.

Banks are also expected to spread and transfer risks, some which should be borne by the Government, especially in funding sectors such as agriculture. Under normal circumstances, banks are expected to be more efficient in the allocation of scarce financial resources in an optimal manner.

In that regard, banks are an indispensable element in the economic well-being of a nation as it oils all the engine cogs.

Sadly, for varied reasons, banks in Zimbabwe have not been performing the desired role in improving capital formation and promoting economic growth through lending.

Capital formation derives from savings accumulation. When savings accumulate, it will lead to an increase in gross domestic investment and will eventually lead to GDP growth.

This, however, is an area where banks seem to have dismally failed, attracting only demand deposits instead of the useful long-term deposits.

Some banks are even moving away from wholesale funding, preferring instead to get cheap retail funding, which unfortunately, they are failing to deploy into the productive sector.

The Reserve Bank of Zimbabwe has had to intervene, introducing a seven percent savings bond to try and mobilise resources for the productive sector — a role banks should be playing.

On the lending side, banks are also not doing enough to spur economic growth through credit creation. In 2017, banks reduced lending to the private sector, choosing instead to invest in Government instruments such as Treasury Bills (TBs). An analysis of the 2017 financial results shows that banks have piled most of their cash into TBs and in the process crowding out the private sector. In 2017, net credit to Government, mostly through TBs was up 70,45 percent to $6,27 billion, while credit to the private sector rose by 6,97 percent to $3,71 billion, an unhealthy situation indeed.

This begs the question: Who will lend to the private sector if banks bury themselves in the sand of TBs like ostriches?

Finance and Economic Development Minister Patrick Chinamasa is on record as saying excessive Government borrowing leads to poor performance of the private sector and, in turn, diminished future tax revenues.

“This is creating a vicious cycle,” he said.

Reduced lending to the private sector has, however, not been without its reasons. Banks argue that subdued lending is a result of worsening economic financial conditions of their corporate borrowers as well as persistent slowdown in economic activities.

This, banks say, increases the risk of acquiring bad loans — this has happened before.

Thus, in a bid to survive and maintain adequate capital levels, banks have tended to de-risk and invest in more secure TBs.

We, however, believe banks should be doing more and come up with products that will enable Zimbabweans to save and corporates to borrow.

When faced with cash challenges, banks were able to come up with new systems and ICT capabilities that helped them record phenomenal growth in non-funded income.

Likewise, faced with struggling companies, but in desperate need of funding, banks should be able to structure finance deals that can help fund companies and extricate them from the current situation they find themselves in.

They have done it before with Lobel’s, a company they helped revive other than selling off its assets and shutting it down.

Such similar arrangements are key and will help save many firms that have ready markets for products locally and abroad, but lack working capital.