An analysis of the problems facing the banking sector in Zimbabwe (Marvelous Ngundu, HBF, MSU, 2012) Introduction Zimbabwes

banking sector since dollarization remains highly vulnerable with weakening capitalisation rising from economic problems such as, tightening financial and liquidity situations, transitory nature of deposits, absence of the lender of last resort (RBZ), shallow stock market (ZSE), limited off-shore lines of credit, lack of active inter-bank markets and more but just to mention a few. On the other dimensions, banks are failing due to lack of proper management (poor board and senior management oversight, poor credit and risk management), inability to follow bank regulations (gross violation of prudential lending limits, abuse of depositors funds, loan concentration, irregular pledges of bank shares, concentrated shareholding and abuse of group structures), inability to cater with technology advancement and last but not least, some banks are facing problems arising from political instability of the country. Financial Problems Generally, commercial banks are always in search for finance to remain well capitalized in the face of write-downs on loan portfolios and increases in loss reserve accounts in anticipation of future write-down. However, since the economy restored in 2009, banking institutions in Zimbabwe are still struggling to meet their capital needs and minimum capital requirements as set by RBZ due to tightening chronic liquidity challenges and limited fresh capital. In light of this, banks in Zimbabwe are not operating in full capacity and this problem is prone to locally owned banks. Liquidity Problems Liquidity remains a challenge due to the transitory nature of deposits, scarcity of foreign currency, the absence of an active inter-bank market and lender of the last resort facility at the central bank. The unavailability of these events as sources of finance for banks makes it difficult for them to grow and expand their operations. Foreign currency is very scarce in the economy because of poor export performance and lack of international capital flows. Even solvent banks may not survive a run on deposits as they are also struggling to mobilise "less liquid assets to meet liquidity needs". Absence of the lender of last resort

The adoption of multiple currency use in 2009 marked the end use of Zimbabwean dollar. So currently Zimbabwe has no currency on its own. As a result, the Central bank can no longer perform all its roles especially being a lender of last resort. This gives banks a hard time to find sources of finance. RBZ's problems also meant that banks would not be able to obtain a refund of their statutory reserves for which they are entitled in case of a possible decline in their deposits because these reserves are not backed by international reserves. In normal environment, if liquidity tightens banks approach the RBZ for accommodation, then RBZ reserves the right to grant assistance on its own terms. Transitory nature of deposits The deposits to banks are very transitory and volatile in nature and hence low profits out of them. This is mainly caused by a very high marginal propensity to consumer of various economic agents who are earning low salaries and hence unable to save, this causes people not having money staying in their bank accounts except minimum balances. This has left banks having no money to invest and earn a profit. Major deposits are done by companies as salaries and wages of their employees who will then withdraw almost all of their salaries. The majority of workers are earning far less than the Poverty Datum Line especially those in the Public Service, making it difficult for them to save. Limited local and off-shore credit lines Like any other companies, banks are willing to borrow, be it locally or internationally so that they expand business, but the lines of credit are not available. The few that are there are of short term nature and hence very costly. The supply then cannot meet the demand. Small banks are the most affected as they cannot meet the requirements for getting credit even in the foreign market. In essence, foreign investors are reluctant to invest in the country because of the political instability. Lack of active inter-bank markets Currently there is no active interbank market, implying that those banks with no collateral to the required conditions find it difficult to borrow so that they cover liquidity gaps. Lack of finances remains a big challenge to the banking sector, as they are not able to expand their business in line with current economic conditions and public demand for their services to be appreciable and internationally competitive. Conclusion

Banks are at the engine room or nerve centre of economic growth and hence there is a compelling need to regulate and support them.