IN his monetary policy statement last week, Reserve Bank of Zimbabwe (RBZ) Governor, Gideon Gono, emphasised that the financial services sector has remained in good health despite the underlining risks spawned by the harsh economic environment, which had looked set to improve in February 2009 when the country adopted a multi-currency system while at the same time birthing the inclusive government.
The banking sector, along with the rest of the country's economy, had warmly embraced the stability that had been brought about by the consummation of the unity government and the introduction of stable currencies to replace the defunct Zimbabwe dollar. However, the multi-currency regime has had its own challenges that have not been helped by the constant and needless inter-party fighting rattling the tripartite arrangement forged by President Robert Mugabe, Prime Minister Morgan Tsvangirai and Deputy Prime Minister Arthur Mutambara.
These challenges have kept banking sector executives on their toes, with shareholders, now and again, being asked to reinforce their banks' balance sheets. With indications pointing to polls this year to terminate the moribund coalition, bankers have an unenviable task ahead of them.
While the industry must be applauded for working extremely hard to restore confidence, which had vanished at the height of the economic recession, there is one disturbing factor threatening to undo the hard work. Once again, the industry has been hit by unhelpful gossip, with rumour mongers alleging instability among the indigenous banks, in particular.
The tragedy of it all is that the banks themselves are substantially oiling the rumour mill because of petty jealousies.
These rumours fly in the face of assurances by the RBZ and Ministry of Finance (MoF) officials that the banking public need not to worry since the banking system is "in a safe and sound condition".
The apex bank went further to explain that the weak and troubled banks in the sector "are few, small and of low systemic importance".
"Collectively, as at December 31, 2011, these institutions had a combined market share below five percent in terms of total assets, deposits and loans," said Gono.
In fact, these outliers are essentially banks that are currently burning the midnight oil to recapitalise operations in order to meet the RBZ's minimum capital requirements. Most of these small banks are at various stages of either roping in strong partners or merging.
But instead of taking a cue from the RBZ and the MoF - the experts as far as financial matters are concerned - the market has gone into a frenzy of gossip, which is unhelpful.
Zimbabweans need to be extremely cautious about what they say, be it in private or in public, particularly when hearsay is not backed by facts.
The banking system is an extremely sensitive sector which could easily get upset at the slightest whiff of rumour.
It is not long ago that the sector experienced a catastrophe when more than 10 institutions twisted in the wind, partly because of the contagion triggered by the collapse of ENG Capital in 2003.
With such a terrible experience still fresh in our minds, the onus therefore, lies on every Zimbabwean to safeguard stability in the banking sector, and not make this an exclusive responsibility of the RBZ and the MoF.
Reckless statements or rumours could easily bring the entire banking sector down by sparking an unwarranted run on deposits whose impact would go beyond the banks.
In view of the financial intricacies in the banking sector and its inter-twining links with the rest of the country's economy, these unhelpful rumours could easily reverse the few gains that had been achieved since dollarisation.
The direct costs of financial instability, as pointed out by Gono in his presentation to the Confederation of Zimbabwe Industries last month, include the loss of depositors' funds when banks fail, the fiscal costs incurred by government in rebuilding the financial system and the loss of jobs in the financial sector and productive sectors of the economies. Indirect costs of financial instability include the disruption of financial intermediation and settlement systems, misalignment of asset prices, which in turn, profoundly affects consumption and investment decisions and the misallocation of resources across sectors.
All these culminate in reduction and disruption of economic activity.
A financial system that is efficient and healthy is a vital component of the necessary and fast economic development. If a financial system is efficient, it simply increases funds for intermediation, better prices for financial products and quality services for the consumer.
This is the ideal Zimbabweans must aim for.
As it is, bankers have their plates full. While they have done well by improving the level of deposits to about US$3,3 billion as at November 30, 2011, from about US$2,3 billion during the comparative period in 2010, representing an increase of US$958 million or 41,7 percent, challenges still remain.
The sector is currently battling concerns around the stormy indigenisation debate that has ruffled the feathers of foreign-owned banks, namely, Standard Chartered, Barclays, Stanbic and MBCA, among others. The sector has also received its fair share of criticism for being too ultra conservative when it comes to agricultural lending, with the banks arguing that the government must first make land a bankable asset.
In the midst of all this hullabaloo, the interbank market has also been subdued because of the side effects spawned by dollarisation, with the fight for deposits degenerating into a dog's breakfast. To make matters worse, the industry has no fallback position in the event of a systemic liquidity crisis due to the absence of a lender-of-last-resort.
The RBZ has gone for years tip-toeing without the requisite tools to make it effective. As witnessed in Zimbabwe, financial stability cannot be sustained with an undercapitalised central bank as well as the absence of the lender-of-last-resort function. The dire consequences include the undermining of financial stability and economic growth.
There is need for the central bank to be recapitalised to enable it to fulfil its lender-of-last-resort function. There is also need to provide a reliable financial sector safety net, to reassure depositors of the safety of their hard-earned monies in the financial system. Current efforts to review the Deposit Protection Board are encouraging and should be carried out with a view to instilling confidence in the financial system.
Despite these constraints, the RBZ must be commended for walking a tight rope in promoting financial sector stability to ensure the safety and soundness of the banking system; treading a fine line between addressing the domestic economic challenges and exogenous shocks from the adverse effects of an impending global downturn.
But to assist the banks and the RBZ, the banking public must also conduct themselves responsibly and avoid starting banking fires that can destroy the industry with cathartic effects on the rest of the country's economy.
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