If you remember, the gallant RBZ announced that Zimbabwean banks were to start paying interest on savings accounts, effective 1 July.
The RBZ sounded proud of this development as we could tell from the tone of their address. That was surprising. Every single person to ever be associated with banking in Zimbabwe should have been ashamed.
Most agree that this move is unlikely to succeed in attracting deposits. That’s not the worst part to the story. If we examine the three-paragraph press statement we find ourselves face to face with some hideous truths about the this industry.
Banks forgot how to bank
Insert dog forgot how to dog meme in your mind
In a slightly-better-than-chaotic world, banks earn their bread from interest on loans advanced – interest income in bankspeak. Where do they get the money to loan out, you ask? Our deposits.
Yes, 5% interest for the depositer, then they loan out that money and get 20%. Not too shabby. Do note how important deposits are to them.
If that should be the main source of income for them, one is left wondering why Zimbabwean banks had to be arm-twisted to pay interest on deposits. The RBZ directed them to pay that interest last year but they couldn’t be bothered.
To be fair, they were probably too busy milking the population of their hard-earned Zimbabwe Dollars one transaction charge at a time but more on that later.
You’d be forgiven for thinking they would have been doing absolutely everything allowed by the law to attract deposits, interest on deposits being the bare minimum. You’d be wrong but forgiven.
Why banks are not in the banking business anymore
Failure and its consequences
Zimbabwean banks have failed in the business of banking before. Through ZAMCO in 2014, the government, using our tax dollars had to bail out these banks.
Thanks to a combination of risky lending practices and topsy-turvy economic conditions the banks were left saddled with Non-Performing Loans (NPLs). NPL ratios exceeded 20% against internationally acceptable 5%.
Put simply, the persons they loaned out to were failing to make their monthly repayments.
Remember, the money they loan out is not theirs. So, if the person they loan out to fails to pay it back they are left in the unenviable position of having to tell their depositors that the money is gone.
For an industry already dealing with probably the lowest depositor confidence ever recorded, that would have been catastrophic and so a bail out was arranged. The government took over the bad loans.
Side note: As Zimbabweans we should celebrate that this whole bank collapse-government bailout cycle has not been a more frequent visitor like it has been in other more developed countries. Bailouts tend to promote risky lending practices, banks cocooned in the knowledge that should they fail, the government will swoop in to save the day.
Since then, the Zimbabwean economy has never really stabilized for any meaningful period of time. Arbitrary fiscal and monetary policies continue to wreak havoc and so the topsy-turvy economic conditions remain.
This means the risk that loans will not be repaid remains high. The risk managers at these banks cannot in good conscience advise that they lend out as much as they would want to.
What’s at stake?
The banks cannot afford to be saddled with non performing loans which pose a serious risk factor on viability. This would lead to banks losing access to credit. Ultimately, the country’s credit rating would deteriorate leading to high borrowing costs if credit is even accessed.
It gets worse. There are so many businesses that could have been employing thousands that have not left the idea phase because of lack of capital. Seeing as small businesses are the largest employer in this country, the significance cannot be overstated.
The above partly explains why banks have not been in a hurry to jump back into the business of banking. However, the biggest reason is that they found a new income stream.
The new golden goose – service charges
The banks found themselves a window when the interest income door was shut. Why bother with the risk that you could lose the depositors’ money when you could just charge those depositors through the teeth for your services. Charge, they did.
It got so bad that the RBZ had to step in and restore a little bit of order but only after there was an outcry. The most egregious example being the flat withdrawal fee they were charging.
When the RBZ put a cap on the maximum daily withdrawal amount, the banks maintained the flat fee. This meant one could pay as much as 20% of the withdrawal amount as bank charges. I remember paying $5 in charges to withdraw $20.
Although we went back to the percentage-based charging structure, they had tasted the forbidden fruit and had found it sweet. Since then, Zimbabwean banks have relied on fees and charges to stuff their coffers. These charges have contributed up to 90% of their income. Crazy times we’re living in.
Scrapping of charges
If I were a banker I would be ashamed of this situation where if one deposited money into their bank account and left it there for a year, they would come back to a shrunken balance.
The RBZ is trying to remedy this by removing charges on savings accounts but it’s too little too late. Only a generation that never experienced the above first hand would ever willingly deposit their moolah in a bank.
The scrapping of charges only serves to slice bank revenues. The golden goose has been injured. Banks are not interested in loaning out and now their preferred income stream has been disturbed. Some banks might be in trouble come this time next year. Let’s remember though that transaction charges are still very much a thing so it’s not too bad.
Shame, shame, shame
I remember how people would ridicule a person who kept cash under a mattress instead of banking it back when I was a kid.
The opposite is now true. The only money that remains in a bank account is money that was received in electronic form and is yet to be withdrawn.
If the cash supply would allow there would not be a single electronic transfer in Zimbabwe. We would invest in personal armored vehicles and deal strictly in cash instead. The banking industry drove us to this.
The banks know this and so won’t bother trying to entice us to deposit our monies. That’s why they needed a Statutory Instrument to force them to pay interest on deposits.
They know it’s pointless, it won’t increase deposits but will only reduce profits as it is one expense they had forgotten about. Banks have as good as given up on banking.
It’s frustrating because the economy needs them to loan out to the small businesses which are the biggest employer in this country. If our economy is to rebound we need small businesses and the small businesses need loans.
You could call bank leaders shortsighted for not addressing this situation. Truth be told, there is probably nothing they can do to regain this generation’s trust. They might as well make a killing while they can and charge us till kingdom comes.
They can laugh about it on some golf course in ten years’ time. Long after the banking industry has long been dead and forgotten about – #deathbycrypto.