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Sanderson Abel Business Correspondent
The banking system in an economy is analogous to the heart in the human body structure and the capital it provides can be likened to blood that circulates in it. As long as blood remains in circulation, all the organs in the body will remain sound and healthy. If  blood is not adequately supplied to any organ or part of the body, then that part will be starved of nutrients and oxygen and will become useless.

Similarly if finance is not provided to any economic sector, it will suffer and that sector will eventually fail.  However, the ability to provide the relevant financing is dependent on the ability of the banks to mobilise adequate amount of deposits in the economy and other foreign sources of funding.

Deposit Mobilisation

Financial institutions provide the system through which savers deposit their money  and borrowers can access those resources. The process by which deposits are transformed by the banking sector into real productive capital is at the core of financial intermediation.
Banks ensure the efficient transformation of mobilised deposit funds into  productive capital.

Deposit mobilisation is therefore a key first step in the financial intermediation process.  Banks simply cannot function without deposits from savers in the economy. Many developing countries suffer from low domestic savings rates. This is especially pronounced in countries like  Zimbabwe, where there is no domestic currency and we have resorted to a multi-currency system.

Domestic deposits traditionally  provide a cheap and reliable source of funds for development, which is of great value developing countries, especially when the economy has difficulty raising capital in international markets.

Studies around the world have shown that banks should fund more of their loan books with customer deposits in order to stand more robustly against liquidity squeezes and contribute to the stability of the banking system.

When banks resort less deposit funding and rely more on open market funding, this is widely seen as negative for financial stability.
Market funding requires that the bank continually rolls over bills and bond issues and renews its borrowings from other financial institutions.

In general these bond issues will be offered to both  domestic and foreign investors. These funding sources have generally proved to be less stable than customer deposits, and reliance on market funding has thus made the banks’ liquidity positions more vulnerable to external shocks.

In an effort to mobilise deposits in an economy, banks develop various forms of products that can be enjoyed by the clients.
The most important deposit products are those that make it easier for  clients to turn small amounts of money into “useful lump sums” enabling them to smooth consumption and mitigate the effects of economic shocks. These are typically provided by banks in the form of savings accounts.

Consequences of failing to mobilise deposits in the economy

Any decline in amount of deposits at the banks raises important questions about whether the banks will be able to remain successful and meet the credit needs of the economy.

Banks will typically experience a temporary liquidity dips due to a decline in the amount of deposits. The most important step for banks in addressing this problem would be to develop strategies that are consistent with the needs of the savers in the economy. When the deposit base in the economy shrinks, banks will respond in a variety of ways.

•  Banks will become aggressive in maintaining their local base of depositors and the underlying customer relationships. Banks will offer incentives to depositors in the form of higher interest rates and other attractive conditions  in order to retain depositors on their books.

•  Many banks will look for other funding sources and will compete more directly for market based funds. In this respect interbank funding becomes an option.

•  The banks  also look at ways of creating new funding sources and better ways to manage banking assets.

An option that banks can adopt is to lend on a more selective basis whenever funds are tight – either by raising credit standards or increasing loan rates and fees.

Although this strategy could result in better credit quality and perhaps higher net interest margins as loan demand increases, it could also mean curtailing the amount of credit extended to creditworthy customers.

On a broader level, this could translate into economic stagnation as some sectors grappled with working and long term capital challenges as they fail to access loans and overdrafts from the banks. Those who are lucky to access the resources run the risk of failing to repay as a consequence of the high cost of the funds.

It is important to keep in mind that every time one makes a deposit with the  bank, they are providing part of the lifeblood for the economy as it is deficit units of the economy that  benefit from the actions of depositors.

Putting the little resources that you have under the pillow implies that you are depriving a struggling household or a firm somewhere in the economy of a vital lifeline.

 Sanderson Abel is an economist who writes in his capacity as Senior Economist for the Bankers’ Association of Zimbabwe. He can be contacted on [email protected] or on 04-744686, 0772463008.