Harare — THE imminent merger of CFX and Interfin shows the route that more banks in Zimbabwe's financial sector need to follow.

While the opening up of the banking sector benefited the customer at first, breaking the cozy informal arrangements between a small number of banks, it has been apparent for some time that Zimbabwe is over-banked and that customers can run risks.

The Reserve Bank of Zimbabwe has, after dealing with some pretty gruesome messes over the last decade, minimised this risk by imposing a set of rules and enforcing minimum capital requirements for all banks and building societies.

And it is no good for any bank to complain about these minimum capital requirements. Throughout the world financial regulators are pressing for better capitalisation of banks following the 2008 and 2009 meltdown, with a serious world depression only averted by dramatic intervention by most governments.

But even these minimum requirements are only minimums. Many banks should have higher levels of shareholder capital if they are to be prudent in their operations. The RBZ has made it as clear as it can that if any bank runs into trouble it will have to face the music alone, and that means that while depositors can be rescued from the capital reserves, the shareholders will come out of a disaster with worthless shares.

The RBZ will presumably just facilitate the cleaning up of the mess. In other countries banks running into trouble have been sold for US$1 to protect depositors, while the shareholders had a whole dollar to share.

We all know of banks that have tiny branch networks, making it difficult to attract big corporate customers or even the individual who desires some flexibility in his banking. Outside the US, where laws banning banks operating in more than one state were enforced for years, most developed countries have just a handful of "high-street" banks. And now the US is moving towards a couple of handfuls of giant banks dominating the sector.

But the handful in most countries were the end result of a lot of mergers, rather than pure takeovers, as the requirement for a presence almost everywhere in a country overtook the advantages of personal service that smaller banks can offer. Mobile populations need to bank almost anywhere and will put up with impersonal service for that convenience.

Many of the smaller Zimbabwean banks were established by a single individual or a very small group of friends who not unnaturally wanted to benefit from the peculiar economic and financial conditions that prevailed in Zimbabwe in the late 1990s and early 2000s. But those conditions were an aberration and not only no longer apply, but are unlikely to apply again.

Banking has returned to being a slow growth industry with decades needed, plus considerable capital, to build up the sort of services that customers now require.

Even the argument that opening the banking sector allowed Zimbabweans to participate as owners no longer really applies. First the RBZ stopped major shareholders being involved in management, and now indigenisation rules will see the probable floatation of the remaining banks with large foreign ownership. In other words these big banks are going to have to expand their capital base by bringing in Zimbabwean shareholders, making them even bigger and more able to dominate the sector they already dominate.

So small banks are bucking world trends, with these trends likely to become the norm in Zimbabwe as well; they will see their share of capital in the sector diminish as shares in large well-established banks become available to local investors; and they will face the problem of being squeezed, having to rely more and more on those who find it hard to open accounts at big banks.

So we see only three options for the smaller banks.

One or two might migrate to being "boutique" banks, offering special services for well-heeled customers. But there are not that many seriously rich Zimbabweans who need such services, and bigger banks also offer extra services to their better-off customers.

Which leaves the options of mergers with similar institutions, to create a serious competitor to the older and bigger banks, or allowing themselves to be taken over by bigger banks in some sort of equity swap, the owners of the smaller bank having small shareholdings in the bigger bank.

Those who enjoy the excitement of competing in markets might well find the choice of merging with similar banks more compelling while those wanting security might find selling-out more satisfactory.

What will not be an option is a clutch of small limping banks fighting for growth in a market that gives its rewards to the big and richer banks.