THE liquidity crisis in Zimbabwe's financial sector could erode confidence and contribute to the collapse of local financial institutions, analysts have warned.

The country has been hit by a shortage of notes in the past few months, which some banking sector officials say is the result of Zimbabwe's foreign currency squeeze, which has made it difficult for the Reserve Bank to import special note paper.

But central bank officials this week attributed the note shortages to the hoarding of cash by the public and illegal foreign currency dealers.

The Reserve Bank of Zimbabwe officials said more than $200 billion could be in the hands of the public and the illegal dealers.

The shortage of notes has contributed to long queues at automated teller machines, which are often unable to supply bank customers with notes.

Some banks have also been forced to tell customers in their banking halls that they cannot supply them with money because they have insufficient notes.

Local analysts told The Business Daily that this could adversely affect the public's confidence in Zimbabwe's financial institutions, because they could not understand why sound banks would not be able to supply money.

The analysts said this could result in some customers holding on to their cash instead of depositing it with banks, because they were afraid they might be unable to withdraw the money when they needed it.

A decline in deposits would affect bank earnings, the analysts said, affecting their viability.

Some economists said the plight of local financial institutions could be compounded by Zimbabwe's worsening foreign currency shortages, which they said were also affecting banks' income.

They pointed out that those banks whose profits had been augmented by trading on the lucrative parallel market for foreign currency would be hit by the tightening of exchange controls.

Analysts say regulations requiring exporters to lodge 100 percent of their earnings with the central bank and those banning bureaux de change have contributed to a decline in hard cash inflows on the parallel market.

Economic commentator Jonathan Kadzura said: "Banks have traded on the parallel market for a long time and have cheated the public that they are doing well at the expense of good corporate governance.

"But now the greenback is no longer there and banks are left behind and subsequently their services alone cannot sustain the appetite for expenditure."

Analysts said it was necessary for the central bank to intervene to stem note shortages before they affected the stability of Zimbabwe's financial sector.

Banking officials say the panic withdrawal of notes has worsened shortages, as has the hoarding of cash for speculative purposes.

Commentators said some of the money was being used on the parallel market for foreign currency.

"Because of corruption, people are keeping money in cash and the money is going to the parallel economy," said National Economic Consultative Forum spokesman Nhlanhla Masuku.

It was not possible to secure comment from the Reserve Bank on its plans for resolving the crisis because central bank officials have not responded to written questions from The Business Daily.

However, the Reserve Bank is said to have this week ruled out printing more money against a background of declining economic activity.

Analysts said printing money would fuel inflation, which rose 228 percent in the year to March and is expected to reach 500 percent before the end of the year.

The analysts said the timely intervention of the central bank would avert the collapse of several financial institutions.

Kadzura said: "It would appear that the problems reflect the inability of the bank to conduct its role efficiently and effectively."