Sanderson Abel
A bank is just like a heart in the economic structure and the capital it provides is like blood in it. As long as blood is in circulation the organs will remain sound and healthy. If the blood is not supplied to any organ then that part would become useless, so if the finance is not provided to any economic sector, it will be destroyed.
The ability to provide the relevant financing is dependent on the ability of the banks to mobilise adequate amount of deposits in an economy and other foreign sources of funding.

Deposit mobilisation
Financial institutions provide a system where savers deposit their amounts and borrowers can access these. This ensures an efficient transformation of mobilised funds into real productive capital. The process of deposit mobilisation is very important in many developing countries like the Zimbabwe where there is a multi-currency system.

Domestic funds 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 better withstand liquidity squeezes and contribute to the stability of the banking system.

Less reliance on deposit funding and greater reliance on open market funding is widely seen as negative for financial stability. Market funding requires that the bank continually rolls over bill and bond issues and renew its borrowings from other financial institutions, in general depending on both domestic and foreign investors.

These funding sources have proved to be less stable and relatively more expensive 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 facilities that can be enjoyed by the clients.

The deposit facilities make it easier for poor clients to turn small amounts of money into ‘useful lump sums’, enabling them to smooth consumption and mitigate the effects of economic shocks. It is important to keep in mind that every time you make a deposit with your bank, you are providing part of the lifeblood for the economy as deficit units of the economy are benefits from your action.

Putting the little resources you have under the pillow implies that you are depriving a struggling household or a firm of a lifeline. Dangers of Failing to Mobilise enough Deposits The decline in amount of deposits at banks raises important questions about whether banks will be able to remain successful and meet the credit needs of the economy.

Banks could experience a temporary respite 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 economy. Banks would become aggressive in maintaining their local base of depositors and the resulting customer relationships. Many banks would look for other funding sources and to compete more directly for market-based funds.

The banks would 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 would translate to economic stagnation as some sectors become grappled with working capital and capital challenges as they fail to access loans and overdrafts from the banks while those who access the resources fail to repay as a consequence of the high cost of the funds.

Sanderson Abel is an Economist. He writes in his capacity as Senior Economist for the Bankers Association of Zimbabwe. For your valuable feedback and comments related to this article, he can be contacted on [email protected] or on numbers 04-744686 and 0772463008

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