HomeOld_PostsVital to regenerate confidence in banking sector

Vital to regenerate confidence in banking sector

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By Charles T.M.J. Dube

IN last week’s instalment, we concluded there was nothing wrong with Bond notes.
It was a question of confidence in the Reserve Bank of Zimbabwe (RBZ) and commercial banks stupid!
I contended the populace lacked confidence in the commercial banks because they acted primitively.
In this week’s article, we demonstrate how primitive our banks are, despite the fact that by its very nature, commercial banking is about reaping where you have not sown.
Banking 101
At most universities, commercial banks are given as financial intermediaries only, who enable money to flow from households to borrowers, while the central bank creates the money in circulation.
If the truth be told, commercial banks actually create more money in a modern economy than does the central bank.
Take the case of Chimusoro who deposits his US$1 000 with a commercial bank.
In the absence of any limitations from the Central Bank, Nhamo, desperately in need of school fees for his child at Murehwa High School, could access the same US$1 000 as loan immediately from the commercial bank and pay Murehwa the same amount, who in turn could again deposit it with the same or other bank.
In loaning out money to Nhamo, the commercial bank simply opens a deposit account for him.
Meanwhile, the deposit made by Murehwa High becomes again available for lending by the commercial banks, which simply deposit the amount in Rufu, the new loan-seeker.
From this example, you are already able to see how Chimusoro’s initial deposit of only
US$1 000 has been able to generate more money to the public and how this process would go on and on.
However, this process, in practice, is set limit on by prescriptions from the central bank.
This is done by way of directives to commercial banks to keep a certain percentage of their deposits invariably referred to as the reserve ratio or capital adequacy ratio, depending on the regulatory regime.
In the presence of the reserve ratio, the expansion in money supply by commercial banks is restricted to a maximum determined by the money multiplier which can be expressed as M= 1/R , with ‘R’ as the reserve ratio.
Where the reserve ratio is 20 percent for instance, that means banks have capacity to increase M1 (currency in circulation) by a multiple of five.
In our example it would mean commercial banks being able to expand the initial deposit up to US$5 000.
The banks will be making interest from these generated loans.
That is classical banking for you and why banks should be able to give you interest in a functional economy, unbridled by greed, piracy, a predator instinct and all that defines who we are at the moment.
Enter the cowboys in both central and commercial banking and then so ended prudent and responsible banking/financial management to the detriment of us all.
Traditionally, commercial banks are one sector where, when they demand employing a graduate, their interest is never confined to specialisation in training.
That is why you would find scientists, medical doctors or even Shona or religious studies graduates employed as bankers.
Their interest was more in trainability, potential and aptitude.
Banking was one sector where you rose through the ranks.
A back office clerk, with five ‘O’-Levels did not get shut to the idea of one day ending up an accountant, branch manager or even general manager as long as he proved himself.
These guys might not have had the degrees, but they had the ethics and professionalism.
Our money was safe with them and they also lent it responsibly, which kept the economy vibrant.
And now, what do the cowboys do, which they must stop doing to regenerate confidence in the banking sector?
You have the answers, but I will just pick little of what they began to do.
If bankable projects came their way, some of them began churning them to their friends and families with all the requisite financial support using depositors’ funds, with little or no collateral at all.
Because there was no passion and ownership, such loans invariably became non-performing.
After exhausting their friends and families, they turned the lending portfolio to financing their lavish lifestyles.
As if that was not enough, they then moved to form their own banks or influencing friends with capital to do so in return for top managerial posts.
Needless to mention that at zero ethics, such friends’ clique banks took insider loans and immoral banking practice to unsustainable levels, leading to their eventual collapse.
While the parallel market had always been there in the foreign exchange market, these cowboys, with access to depositors’ funds, took it to unprecedented levels.
Instead of using shareholders’ funds for prudential lending, they used their degrees and MBA’s to hunt for opportunities for arbitrage.
They also sought to build their own political careers through patronage, lending to politicians and their side-kicks.
Not wanting to be outdone, their central banking counterparts, who had no direct access to depositors funds, began expanding M1 (printing money), releasing it straight to border posts and other parallel market trading points to mop out foreign exchange from enterprising citizens.
In the circumstances, productive economic activity became the first victim as all with economic muscle moved to arbitrage, driving inflation to record-breaking levels.
Too much money chasing too few goods.
The same primitive bankers, driven by the same predator instinct, have not drawn lessons from the last round and continue to disincentivise the public from banking as they are not satisfied in making their money from normal commercial banking practice which includes offering interest to the banking public to attract savings.
They are even too jealousy to release initial deposits/savings at par value, but would rather reduce initial deposit values through a plethora of charges under differing names.
They have an unashamed sense of entitlement to sharing in the banking public’s savings despite the intrinsic inbuilt money mechanism offered even by the Banking Act itself, let alone the various financial instruments from which they derive income.
It is the same unashamed instinct we see across the economy in all who handle otherwise public assets.
The banking sector is supposed to be the nerve centre of any running economy and this they do through attracting savings and diverting such savings as loans to projects and programmes that bring growth and vibrancy to the economy.
If you have the misfortune of schooled primitives manning them, then they will become catalysts to an economic comatose.
People have lost savings and pensions all because of these predators.
This is no laughing matter and some of us have had to start from zero many a time.
It is not about the US$, Z$, SAR or Bond notes.
It is about the economy.
It is also about policy consistency and ethics.
It is about ubuntu/hunhu.

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