23 November 2011

Zimbabwe: Islamic Banking - Growth Solution?


Since dollarisation, we have been fed various statistics that imply that things have improved since the hyper-inflationary days.

In particular, "growth" has been recorded in various sectors of the economy. To be fair, there, indeed, has been improvement in several areas. Supermarkets are full, companies are no longer compelled to resort to illegalities to remain operational, money is not littering the streets and some semblance of a normal economy is present.

To the mind of the ordinary citizen, though, the most telling sign of improvement or growth is simple: an improvement in their standard of living.

If a survey were to be conducted right now, how many people would claim that their standard of living has improved? In general, it would seem that all that has happened is a reshuffling of the problems and the economic environment.

Under hyper-inflation, there was too much money chasing too few goods. Currently, there are plenty of goods, and no money to buy these with.

Previously, those in formal employment were singing the blues while the informal sector thrived. Now, the reverse is probably true, although even formal employment is now on shaky ground, as companies are inexorably succumbing to the liquidity crisis.

In essence, it would appear that while the hyperinflationary menace was uprooted, the underlying problem, that of a sick economy, was not addressed. The fact of the matter is that Zimbabwe's economy has been sick for a long time, probably from as far back as twenty or more years ago.

When one looks at our 1996 statistics (1996 is touted as having been the best year ever in Zimbabwe, from an economic point of view), even then the country was heavily dependent on external balance of payments support. In fact, the economic structural adjustment programme was embarked on in the early 1990s to try and address the problem of a non-performing economy.

Several attempts have been made at re-inventing the wheel, insofar as getting Zimbabwe's economy to tick is concerned. "Thinking outside the box" was a popular phrase in the last decade, but all that resulted from this was weird situations such as a dollar in hand being worth more than two in the bank, and sitting at a corner and trading money becoming vastly more profitable that doing an honest day's hard work.

Although copying was and is always discouraged from a scholarly perspective, sometimes it is exactly what is needed in order to get the right answer. It is no secret that the best-performing economies outside of oil-producing and other countries with similar natural endowments are those that have a broad-based economy.

The more self-sufficient an economy, the better off its citizens are. Such economies also typically do not run deficit positions on their national accounts.

Although it may not have caught the eye of the general public, American economists have for long been arguing against the running of continuous deficits.

But for as long as the party continued, no one was willing to think about the hangovers that would ensue.

Running a national deficit should only be undertaken for strategic reasons, or to facilitate capital expenditure. Unfortunately, that principle has been lost here, and deficits are run to facilitate recurrent expenditure with no expectation of fu-ture gain.

Apart from the macro-economic issues, however, the-re are micro-economic issues to do with the general business attitudes currently prevailing that also militate against the economy's recovery.

Short term thinking is perhaps one of the worst such attitude. Since dollarisation, all de-posits are said to be "short term", incl-uding investments by pension funds and other players whose activities are clearly long term in nature. This tendency is fuelled by the speculative mentality of yesteryear, where one had to have money on hand to "take advantage of opportunities".

No one wants to think long term, even when their mandate dictates that they should. In light of this, companies are now unable to raise funds through any other means than borrowing. With borrowing rates totally out of sync with rates of return as shown by economy-wide profitability and growth statistics, all this does is create an ever-deepening hole for our already-frail industrial and commercial sector.

Ironically, these companies being de-prived access to reasonable finance are the self-same employers of the members of the pension funds demanding unreasonable rates of return from the money markets.

It is with such scenarios in mind that one is drawn towards models such as Islamic banking. Islamic banking, which is based on Shariah law, bans the charging of interest on monies lent.

Instead, the lender is obligated to participate in the profits or losses of the borrower. This banking model arose out of the need to protect borrowers from usury.

While Shariah law is sometimes criticised as being harsh, when one looks at issues such as ours, you begin to understand its social and even economic sense.

Several banks already do transactions on a profit-sharing basis, within the realm of structured financing, but perhaps it's time that this concept became more pervasive.

Without putting in place such measures, companies are going to be drained of resources through unviable financing arrangements, and in the end, even if the banks report profits initially, eventually even they will have no customers, and their overheads will consume them.

A lending model where the bank's participation is in profits and not just a fixed levy on the borrower also ensures the bank is more involved in the customer's activities. While this may seem invasive, it could actually improve recovery rates.

Currently, banks are mostly only interested in holding collateral, rather than truly understanding what a customer is up to.

Although the banking sector has a part to play in making their products more suitable to the prevailing economic circumstances of borrowers, and more cognisant of the medium to long term impact of their activities, the companies themselves are also to blame.

Reluctance to issue equity is one of the major reasons why several of them are in dire financial circumstances. Issues like upgrading of equipment can be addressed by bringing on board technical partners or obtaining vendor financing, but no investor is going to go into such a transaction if it will result in the company having a lopsided (over-borrowed) capital structure.

As Zimbabweans (and perhaps even as Africans, generally), we have a strong tendency of wanting to retain control, or wanting to be known as the owner of something.

This is what has resulted in the stagnation or even downfall of several previously enviable institutions.

Working within group or communal structures often results in one member usurping the project and exploiting it for personal vantage. Without learning to think collectively and for the common good, it is going to be very difficult, if not impossible, to implement the sort of strategies needed to uplift us as a nation.

Concepts such as Islamic banking encourage the development of a communal and mutually beneficial mentality, unlike the rigid, impersonal and often conflicting nature of ordinary lending as we know it.

Perhaps as a nation we need to think deeply about such things.

Farai Mutambanengwe is the managing director of Adway Financial Services (Pvt) Ltd.

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