30 January 2014

Zimbabwe: Monetary Policy - New Rules for Banks

BANKS now have to justify and obtain approval from the Reserve Bank of Zimbabwe before effecting increases on charges and lending rates. Presenting the 2014 Monetary Policy Statement acting RBZ Governor Dr Charity Dhliwayo said this was meant to prevent collusion on pricing and help in evaluating bank charges and related cost structures.

Her maiden Monetary Policy Statement (MPS), presented in Harare yesterday, also set the stage for the return of some of the RBZ's roles, extended banks' capital compliance deadline and contained measures to enhance banking sector stability.

"Banking institutions will be required to justify increases in their charges or interest rates from October 31 2013 levels before approval is granted by RBZ.

"This will assist the regulator in monitoring collusion on pricing as well as evaluating the banks cost structures in relation to bank charges," she said.

The directive follows the expiry last October of a memorandum of understanding the RBZ signed with banks, after a public outcry over punitive rates.

Banks will be required to upgrade their core banking and delivery systems to promote efficiency and lower charges.

Dr Dhliwayo said this will assist in reducing the cost of delivery, translating to lower charges for the banking public. She said operating should be offset by cost savings from efficient and automated processes.

The acting Governor called on banks to be innovative in delivering products and services and to leverage on technology to improve efficiency.

"This will enable them to design products and tiered pricing structures, which suit the circumstances of low income groups. Empirical evidence indicates that banks' strong reliance on charges to cover operational expenses is a reflection of inefficiencies in service delivery," she said.

The Reserve Bank recently said the interest rate structure in Zimbabwe is distorted as evidenced by the wide disparity between deposit and lending rates.

These distortions have been sending mixed signals to the market, as reflected by inconsistencies in the pricing of loans and savings deposits.

RBZ said that the lending rates quoted by banks range between 6 percent and 35 percent per annum, with most banks quoting average lending rates of around 20 percent. However, deposit rates range from 0,15 percent for savings accounts to 20 percent for time deposits.

RBZ said the disparity underscores the need for a properly discern-able yield curve to guide the market.

At its monetary policy committee the RBZ proposed indicative yields of 6,6 percent for 91 day instruments, 7,2 percent for 180 day instruments and 8 percent for 365 day instruments. The central bank boss also said banks should seek interoperability and sharing of infrastructure (systems, networks, and applications) across institutions.

In an effort to encourage efficiency and cost reflective rates, the central bank will publish financial institutions conditions of service on a quarterly basis.

On their part, banks will be required to display the conditions of service in banking halls and to also publish the terms in newspapers periodically.

The requirements come as the RBZ angles to resume some of its key functions that had been rendered redundant due in the main to lack of resources.

Dr Dhliwayo said the bank, in line with the pronouncement by Finance Minister Patrick Chinamasa, will from March 31 resume its banker to Government role, lender of last resort function and facilitate reactivation of the interbank market to allow banks to support each other.

The minister is at advanced stages of securing US$150 million to US$200 million for the lender of last resort function and US$100 million to help revive the dormant interbank market despite other banks having surpluses. Dr Dhliwayo said while banks faced tight liquidity constraints, the few troubled banks posed little systemic risk as they constitute less than 10 percent of the sector's total assets, deposits and loans as at December 31.

She also reaffirmed earlier pronouncements by ex-RBZ governor Dr Gideon Gono that the minimum capital thresholds compliance deadline had been moved back to 2020 instead of the initial time of end of June this year.

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