30 November 2012

Zimbabwe: Decision to Test Banks' stability

Treasury is said to be finalising sweeping ammendments to the banking Act which will, among other things, see shareholders, being held responsible for bank failures, writes Paul NyakazeyaTHE stability of banks, which have been accused of charging punitive interest rates when lending while paying negligible interest on deposits, will be put to test following a proposal by Finance Minister Tendai Biti to drop bank charges on deposits of less than US$800.

Biti announced during his national budget two weeks ago that bank charges banks should cease charging interest on salary deposits of less than US$800. He also instituted a mandatory interest rate of four percent per annum on deposits of US$1 000 kept in a bank account for a month.

Analysts said doing away with bank charges would expose the financial services sector, especially smaller banks which have little room to manoeuvre in terms of expanding their income streams.

Banks typically derive their income from a combination of interest income as well as non funded income which includes bank charges.

Biti said government would regulate the financial sector and amendments to the Banking Act would be brought to Parliament soon.

He said it would become mandatory for banks to issue debit cards to all account holders irrespective of class of deposits.

A platform of e-banking would also be rolled out in 2013 so that there would be "no carrying of cash" in the economy.

At a post-budget breakfast meeting organised by the Confederation of Zimbabwe Industries, Biti said there was no going back on the measures which he said were meant to promote a culture of saving.

Biti also proposed that the Bankers Association of Zimbabwe and the Reserve Bank of Zimbabwe (RBZ) sign an MoU that defines the lending rate and deal with the issue of bank charges because banks should make money through selling money and not through non-interest income.

Treasury is said to be finalising sweeping amendments to the Banking Act which will, among other things, see shareholders being held responsible for bank failures.

The amendments would compel impromptu and mandatory stress tests, limit the number of shares an individual can hold in a bank as well as outlaw multiple directorships for banking institutions.

A total of 40 percent of the money available for lending in the country is said to be coming from National Social Security Authority and Old Mutual. Biti said he had agreed with the two institutions that this money should not be lent for more than 10 percent. Most financial institutions' interest rates are at around 40 percent.

Africa Investment Markets' executive director, Farai Dyirakumunda, said the current lending rates were a reflection of the cost of funds and risk associated with lending to local corporates and consumers.

"While different types of loans are offered at various interest rates, the high loan default rates in the market as well as the cost of interbank lending and other supply and demand factors all have an impact on the lending rates," he said.

He said banks operating in Zimbabwe had diverse funding bases, but most funding was sourced from deposits which were currently of a short term nature.

Individuals and corporates pay up to US$40 dollars in monthly banks charges, far above the regional average of US$24,50 cents.

Individuals are being charged between US$2,50 to US$10 for a single withdrawal while companies pay up to US$10. The charges are higher if the amount being withdrawn is more.

Companies pay up to US$11 to be issued with a draft/RMO.

Telegraphic transfers cost between US$15 and US$25 for both corporates and individuals depending on the amount involved. The same amount is charged for deposits received by telegraphic transfer.

Some banks are charging clients between US$2,50 and US$5 dollars for maintaining their accounts. Corporates are charged between US$5 and US$15 dollars per month.

FCA inter-account transfers cost between US$1 and US$5, depending on the bank, for both individuals and corporates.

Service charges for salary processing cost between US$1,50 to US$5 per entry for manual salary claims. Unclaimed salaries cost between US$4 and US$7.

Companies are charged between US$7 and US$10 per payroll for late salary submissions.

Facility negotiation fees for companies cost five percent of the value of the overdraft or loan. Between US$4 and US$8 is charged for stop orders.

Accounts closed within six months are attracting a fee of between US$18 and US$25, while reactivation of dormant accounts cost between US$20 and US$25.

Service for bond guarantees, securities and indemnities and bills range between five percent and 10 percent of the amount involved.

Economist, David Mupamhadzi, said bank charges in Zimbabwe were punitive and discouraged people from using formal channels for savings, a situation that was undesirable especially given the liquidity problems in the economy.

"High interest rates imply a high cost of capital to companies. This affects the viability of industries and their competitiveness given that industries will end up passing the high cost of doing business to the market through the price," he said.

Mupamhadzi said there was need to rebuild customer confidence within the domestic banking system so that banks could mobilise more savings.

"Currently interest rates are high because the money market is illiquid, thus domestic savings mobilisation is critical to improve the liquidity situation and hence interest rates," he said.

He said banks should put incentives for customers to save by offering attractive interest rates on deposits and move away from punitive bank charges.

"A number of customers are discouraged from using the domestic financial sector due to the current punitive bank charges," he said.

On June 4, the RBZ governor Gideon Gono gave banks two weeks to review service charges and interest rates which he said were very high. However, banks maintained their punitive lending regime.

Most banks in the region do not depend on bank charges as the main source of income. In South Africa, for example, high bank charges are levied on people who withdraw huge amounts of cash as a way of discouraging large withdrawals.

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