FOLLOWING the recent monetary policy measures, social media has been awash with public outcry on bank’s conduct, mainly highlighting the exorbitant cost of banking in Zimbabwe.
Reports from most people, as well official data, indicate receding deposits and increased withdrawals as economic players prefer “under the pillow” banking to traditional banking.
Nevertheless, banks in Zimbabwe have been registering substantial financial and operational growth over the past few years. This then prompts a look into this development.
The government, in the recent policy changes, announced a change in Intermediated Money Transfer Tax (IMTT) for United States dollars (USD) transactions, increasing the rate from 1% to 2%. Subsequently, banks rolled out a deduction programme across account holders, backdating the policy on a pro-rata basis. This ignited backlash as clients woke up to notifications of yet further account deductions from banks.
Understanding the reason banks in Zimbabwe have grown infamous for commissions and taxes is imperative before deciding to bank with regulated institutions. Traditionally, banks across the globe employ various strategies to earn profits, with the main source of business being deposits. Banks borrow money from depositors by offering them interest on their savings accounts, certificates of deposit, and other deposit products.
Banks lend out these deposited funds to borrowers (individuals, businesses, etc.) at a higher interest rate than they offer to depositors. The difference between the interest paid to depositors and the interest received from borrowers constitutes the bank’s profit, and this spread is crucial for their revenue.
It is important to note that banks thrive when interest rates are falling as this maintains the interest rate within a lucrative spread, paying low rates to depositors, while lending at higher rates, which are still economic. In-part, the deposits are also channelled towards financial markets as the banks engage in investment banking, trading, and other capital market activities. Part of the other capital market activities, include underwriting securities, facilitating mergers and acquisitions, and managing investment portfolios.However, due to years of hyperinflation, currency devaluation and inconsistent policy changes, Zimbabweans have significantly lost the risk appetite to keep money in their formal bank accounts. The banks now only serve as vehicles for moving money from one to another. This justifies the growth trend of depositors as reflected in the Reserve Bank of Zimbabwe (RBZ)’s records.
It is key to note that the increasing depositors’ book, according to RBZ, refer to money being deposited for immediate transaction and not savings. Therefore, while deposits may be rising, savings have depleted to alarming levels, thus leaving banks with minimal balances to lend. As a further blow, financial markets activities are also less viable as inconsistent policies and currency devaluation have eroded viability of financial markets in the country.
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Most high-liquid institutions like banks have since diverted investable funds into alternative investment portfolios that mainly include real estate, with most banking companies opening real estate subsidiaries to hedge value as financial markets plunge.
In a bid to survive the onslaught of the topline, Zimbabwean banks have shifted strategic focus to other activities that do not entirely rely on prolonged savings, and that is, commission income.Banks charge fees for various services (e.g., wire transfers, ATM usage, account maintenance).
To appreciate the rate at which banks are running dry of savings and deposits, it is important to note that the economy is over 80% informal, while 85% of transactions in the economy are USD-based. The informal sector only dwells on cash transactions, and this means most local transactions by-pass formal banking channels. Going forward, the prevailing currency crisis will remain a hindrance to increased banking activities, while informal market activities mean increased cash-transactions. Therefore, the cost of banking in Zimbabwe is projected to remain high for the foreseeable future.
- Duma is a financial analyst and accountant at Equity Axis, a leading media and financial research firm in Zimbabwe. — twdumah@gmail.com or tinashed@equityaxis.com, Twitter: TWDuma_
