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A deeper look at the banking crisis in Zim
Tonderai Nyazika, The Independent (Zimbabwe)
February 15, 2008

http://www.thezimbabweindependent.com/viewinfo.cfm?linkid=12&id=12355&siteid=1

The issue of the Zimbabwe Independent of January 25 had at least four articles dedicated to the so-called "banking crisis". The next issue of February 1 carried follow-up articles on the problem the banking sector was facing.

Readers of the newspaper must have thought that a banking Armageddon was coming, for the articles spared no financial institution.

There was a deliberate attempt to paint a gloomy picture of the banking sector.

There is no doubt in the minds of financial sector players that the details which were published in these issues of the Independent were leaked from the central bank. Bankers are convinced that the Independent would not have been able to get these details without assistance from someone at the central bank.

It is pertinent to appropriately locate where the danger to the banking sector lies in the face of the "partnership" between the central bank and the Zimbabwe Independent in relation to this matter.

It is common cause that the banking industry's survival depends on the confidence of the customer. The assurance the depositor will be able to get their money on demand is what gives them confidence.

That is why many bank notes, including our own useless bearer cheques, have the inscription, "I promise to pay the bearer on demand" on their face.

As such any central bank that undermines that confidence will be committing suicide upon the very sector whose sanctity it should protect.

It is unprecedented desperation for a whole national bank to call reporters to see its vaults just to prove that there is cash in those vaults.

Geoff Nyarota once observed that the greatest problem with Zimbabweans is not their docility but rather their short memory. The cash problem that affected this economy started way back in late October 2007. At that time the monetary authorities in their wisdom or lack of it decided against a pragmatic course of action.

The Herald on November 21, 2007 ran with the headline: "Cash shortage, Gono speaks". In the story the paper reported that the governor had told business leaders and journalists that the central bank had adopted a "wait and see attitude with regards to the cash shortages". This was despite the fact that queues had become the order of the day at the time.

Later, the governor made a statement in which he threatened to change the currency and blamed cash barons for the cash shortages. The media revealed at the time that there was only $2 trillion of the $67 trillion which the central bank had released into the market that could be accounted for.

By unwittingly making this revelation, the central bank exonerated the banks because quick-witted Zimbabweans did their arithmetic and concluded that even if the so-called cash barons were not hoarding it, it would still not have been enough.

Sunrise Two was introduced in December but we all know that it did not solve the problem.

On January 19, 2008 it was reported by the Herald that "at least $13 trillion was yesterday released into the market as the Reserve Bank of Zimbabwe stepped up efforts to ease cash shortages".

This was soon after the introduction of the higher denomination bearer cheques.

Three days later, on January 21, the governor reported through the Herald that the RBZ was stuck with trillions of dollars which banks were not collecting. He invited reporters and captains of industry to demonstrate to them that the culprits were the banks.

On January 25, the Independent had a "scoop", detailing the misdemeanors bankers were engaging in to the detriment of the public. There was a field day on the banks, detailing the crisis each was facing and attributing the liquidity crunch to the "unlawful speculative investments" .

In simple terms, banks operate by taking deposits from natural and juristic persons as well as advance loans to the same. Advances made by banks in the form of loans are made from these deposits. These sit on a bank's balance sheet as liabilities and assets.

This system works well on the basis of confidence. However, as an instrument of managing inflation, central banks can reduce the amount of money in circulation through the use of reserve assets, commonly known as statutory reserves.

At that time the cash crisis started the statutory reserves constituted 50% of all deposit types whether demand or savings. For the simple man in the streets this means that if they deposited one dollar in a bank, 50 cents is taken by the central bank. This means that assuming a customer demanded their dollar, the bank would only be able to pay 50c. This is where confidence comes in.

Each customer, because of confidence, does not have to come and demand their money at the same time since the bank would definitely have a liquidity problem.

However, it definitely gets more complex than that since banks have to lend to the productive sector. Out of the remaining 50c a bank has to lend to the productive sectors of the economy. Assuming such an advance constitutes 25c of the remaining 50c and that the loan is for 12 months, it theoretically means that that 25c is tied for a whole year and will not be available to a customer.

That will leave the bank with 25c to do business and also meet the customer's cash demands. It is also from this 25c that banks have to buy security which they should lodge with the central bank to obtain cash. Such security is in the form of treasury bills.

In reality the situation is more complex than this but what I have described here is the basic framework. The liquidity problems were not only caused by market distortions but also steep statutory reserves which took away 50% of depositor's funds.

It is for this reason that the central bank in an unprecedented fashion released a first quarter monetary policy statement, which was made very quietly without the usual pomp and fanfare, in which he reduced the statutory reserves to around 40%.

After this explanation, readers have probably seen that the articles on the banking sector in the Independent were shallow and demonstrated a lack of appreciation of how the banking sector works. Whilst banks indeed had a liquidity problem, the explanations given were no doubt a red herring by the monetary authorities to shift blame on the cash crisis to banks.

A bank's balance sheet is fairly standard and the line items may be summarised with descriptions such as securities and investments. This balance sheet is supposed to be displayed in banking halls, which makes it public information.

Securities are fungible and negotiable instruments that represent financial value. These can be bonds, treasury bills, banker's acceptances, debentures and equity instruments, to name just a few.

When balance sheets are published, accounting standards require disclosure which is sufficient to show the true and fair view of the position of an institution. A number of instruments can be grouped under the line item securities and investments.

For a reporter to allege that banks were engaging in unscrupulous activities such as putting "depositors' funds in securities and money market instruments" is either a very naïve assertion or a deliberate act to mislead the public.

It is possible that some banks may have bought shares, but to claim that securities are akin to equities shows a lack of understanding of financial jargon.

In any case, it is banks that are dealers in the money market anyway.

The news reports also portrayed the seeking of accommodation as a very dangerous situation. One of the key functions of the central bank, apart from being a banker to banking institutions is to be the lender of last resort. This is the fundamental role of a central bank.

There is therefore nothing sinister about Zimbabwean banks getting overnight accommodation from their central bank.

The banking sector operates as a web with each bank depending on other. As such, a problem with one institution can affect several others. This is what is referred to as systemic risk or contagion effect.

Furthermore, banks owe each other money. In that light, to report that Kingdom Bank owes CBZ $10 trillion without seeking how much CBZ owes Kingdom Bank is irresponsible to the extent that it portrays imprudence on the part of Kingdom. The fact is that banks owe each other on a daily basis in the ordinary course of business.

There was anger in the banking sector owing not only to the dangerous behaviour of the officials at the central bank for undermining the confidence in the sector, but also the complicity of the Independent.

The paper should have known better to distinguish information from propaganda.

The banking sector is very complex. Writing stories on it requires journalists to seek a good level of understanding so that they appropriately inform the public. Anything short of that will mislead the public. This means it takes more than using dossiers from the RBZ's information department.

Doing so will give rise to the publication of misleading information which can kill the banking sector. A wholesale collapse of the banking sector spells doom for a fragile economy like ours. It will also affect everyone including newspaper publishing companies.

*Tonderai Nyazika is a pseudonym for a Zimbabwean banker who wrote this article in response to a series of stories published by this paper three weeks ago.

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