Zim: Rescue plan falls through
The Reserve Bank plan to inject liquidity into the economy with a $100m interbank trade facility is dead in the water. So now what?
The Reserve Bank of Zimbabwe (RBZ) has failed to roll out a $100-million facility made available by Afreximbank more than a month ago to restore the interbank market – a move that would have greatly improved the liquidity situation in the banking sector.
An interbank market is a trading platform through which banks with surplus cash sell to those with shortfalls to cover their daily cash requirements.
The market collapsed during Zimbabwe’s hyperinflationary period when bigger banks avoided lending to smaller ones because of systemic risks – the possibility that problems at one bank could trigger severe instability or the collapse of the entire industry.
The situation worsened when Zimbabwe adopted the United States dollar and other international currencies. The central bank was unable to print the country’s own currency, which had been abandoned, so it lost its lender of last resort role under which, in the past, it was able to bail out banks experiencing daily shortfalls.
The Reserve Bank is unable to rescue the current situation. As it is, the government has had to take over RBZ debt amounting to $1.35-billion. The RBZ is also undercapitalised.
“The facility has not been rolled out. I think it can work only under circumstances where the central bank has an active role in the banking sector,” one banker said.
‘Much more complex’
The RBZ’s new governor, John Mangudya, who started work on May 1, was said to be busy and could not comment. But an official with the central bank said Afreximbank was “co-operating with banks to recalibrate the facility” to make it appropriate for the domestic banks.
“It’s proving to be much more complex that we had initially thought,” he said, refusing to be named because he is not authorised to speak to the press.
When the facility was announced, Finance Minister Patrick Chinamasa said it would boost liquidity, which appears to be worsening because of an acceleration of imports against a shrinking export base, caused largely by a poorly performing manufacturing sector that has failed to recapitalise because of a lack of cash.
Banking sector sources said the smaller indigenous banks, which were expected to become the largest beneficiaries of the Afreximbank fund, were failing to buy the necessary securities to use as collateral on the interbank market.
The Afreximbank regional representative, Gift Simwaka, was said to be away when the M&G contacted at his Harare office.
Chinamasa confirmed the facility was not yet operational but said it would be rolled out soon. He could not give details. He said at the time of the announcement that the economy was facing a liquidity challenge that had “manifested itself in the banking sector since [the] dollarisation of the economy”.
“The situation was compounded by the Reserve Bank’s inability to provide liquidity support to the banks in dire need of liquidity. Resultantly, our banking sector was now divided into two tiers, with one tier comprising large banks with surplus liquidity and another tier of smaller and illiquid banks,” said Chinamasa. “This caused a lot of inconveniences to the banking system as a whole and to economic agents at large.”
He added that the Afreximbank facility would ensure convergence and reintegration of the banking system through restoration of a healthy interbank market. The facility was supposed to become operational soon after its launch on March 22.
A number of locally owned banks have collapsed over the past few years, the most recent casualties being Renaissance Merchant Bank (which was later bailed out by the National Social Security Authority), Royal Bank, Trust Bank, Interfin Bank and Genesis Bank – all alleged to have crumbled owing to the liquidity problems as well as gross mismanagement.
There are 16 active commercial banks, three building societies, two merchant banks and one savings bank in the country.
Only about four of the commercial banking institutions are operating with cash surpluses. The majority are struggling, with at least two others banks having nearly collapsed in December after failing to secure cash for withdrawals by customers.
Although the RBZ has said the banking sector is “safe and sound”, such statements have failed to inspire confidence: the central bank’s assurances have, in the past, been followed immediately by bank failures.
One banking sector source said at least six banks could “willingly trade” among themselves because they had “impeccable balance sheets”.
“Banks now use their own intelligence and rely less on the central bank because it is undercapitalised to monitor the sector effectively,” said the source.
The proposed Afreximbank facility had been structured as a “collateral swap”: Afreximbank would issue its own-name securities to participating banks in exchange for collateral presented by the participating banks that was acceptable to Afreximbank.
The participating banks could pledge the Afreximbank securities for interbank borrowings. Banks seeking cash from those holding surpluses could borrow using Afreximbank-issued securities as collateral. The securities could be presented to Afreximbank and cashed at any time. But most banks are struggling to raise the collateral to secure the Afreximbank securities. “About only six or seven institutions have the collateral to secure the securities. The rest are unlikely to manage,” said the banking sector source.
Chinamasa said the idea behind the plan was to “create a one-tier banking market in Zimbabwe and to promote interbank dealings among all banks in the Zimbabwean economy”. That has so far not happened.