The money market liquidity crunch that prevailed since December 2007 and reached fever pitch levels in the third week of January this year, thereby severely denting the profitability of banks has significantly improved, if not ended.

Kingdom Bank economist, Witness Chinyama indicates, having peaked at Z$88 trillion on 23 January 2008, the money market liquidity deficit had by 31 January improved to Z$16 trillion. On 5 February 2008, market liquidity deficit stood at only Z$23 billion and a forecast surplus of Z$8 trillion was given by the Central Bank on 6 February.

“This is a commendable improvement which clearly indicates the resilience of the banking sector in Zimbabwe.”

“Save for signs of relapse into indiscipline and imprudent behaviours by some banks, the Central Bank governor says the sector continues stable,” he said in a statement.

RBZ governor, Gideon Gono in January this year claimed major commercial banks and other financial houses were facing a critical liquidity crisis largely caused by unlawful speculative investments, which are now threatening to ruin the banking and financial institutions

All banks entailing Barclays, Stanbic, Standard Chartered, CFX Bank, Kingdom, NMB Bank, ZB Bank, MBCA, ZABG, FBC, CBZ, Agribank, ABC Corporation, Genesis, Premier, Interfin and Renaissance, CABS, Beverley, FBC BS and Intermarket were cited as being in trouble.

Chinyama says of interest and most of all reassuring about the 2007/8 bank crisis is that banks have managed to get out of the problems without much support from the Central Bank unlike during the 2003/4 crises whereby significant amounts of taxpayers' money in rescue package was poured into sector.

“Such private sector crisis management solutions are clearly preferable to public sector ones as they impose existing shareholders in a first loss position with no direct costs on the taxpayer,” he said.

The money market situation during the 2003/4 banking crises is similar to the current one. The Central Bank, like is the case now, was pursuing a low interest rate policy designed to support the productive sectors of the economy. Banks had run out of Treasury bills needed to secure their borrowings from the Central Bank because of a long period of tender rejections by the Bank as banks wanted higher interest rates that matched inflation. The secured overnight accommodation stood at 70 percent whilst the unsecured rate was 75 percent.

The Central Bank was not providing unsecured lending. This combination of limited Treasury bill holdings by the market and severe liquidity shortage resulted in banks being unable to access cheaper funds from the RBZ through the overnight accommodation window

As a result, banks resorted to borrowing from the open market where they were charged penal rates. It is this picking of expensive money from the inter bank market that plunged banks into viability and insolvency problems.

Due to the financial distress, the Reserve Bank, amid fears of a deeper financial crisis to the whole banking industry, intervened to correct the situation. This was done by availing cheaper liquidity to the distressed banks through a Troubled Bank Fund (TBF) for a limited period of time up to 31st March 2004 which was later extended to 30 September after it was seen that banks had failed to recover. After discovering that some banks had failed to recover and meet capital adequacy requirements, the Central Bank muted the Troubled Banks Resolution (TBR) Policy in a special purpose vehicle called the Zimbabwe Allied Banking Group (ZABG) was established to take over the debts and assets of the failed banks.

“In the current, if not the just ended banking crises, the Central Bank did not establish a fund to bail out troubled banks as already noted. In fact, it has increased the accommodation rates from between 975-1100 percent to between 1200-1650 percent for secured and unsecured lending, respectively.

“It did not open the repo window to buy back its Treasury bills so as to improve the liquidity situation unlike during the 2003/4 crises. Unlike during the 2003/4 crises when the public had higher confidence in some banks (especially the traditional ones) and the payments system, this time around all banks had to contend with massive net cash withdrawals emanating from cash shortages since November 2007,” said Chinyama.

In 2003/4 crises, the informal sector was not as large as is currently the case. The negative real interest rates have increased financial disintermediation and reduced banking habit with the consequent result of significant amounts of cash being kept outside banks. In the 2003/4 crises banks were not forced to buy Treasury bills as there was no penalty for not doing so hence the massive tender bid rejections by the Central Bank then. 

Chinyama adds this time around any surplus liquidity position found on a bank at the end of each trading day would be swept into the non-negotiable certificate of deposit (NNCD) at zero percent for 270 days.

In this regard the reduction in the NNCD tenor to 7 days on 31 January 2008 is very welcome and should reduce the financial loss to banks through such instruments. Maybe a major difference in the two crises periods is that unlike in the 2003/4 crises whereby the Statutory Reserve Ratio was increased by 20 percentage points from a maximum of 30 percent for commercial and merchant banks' demand and call deposits to 50 percent in January 2004 and further to 60 percent in August, in the current crises the Central Bank reduced the Ratio by 10 percentage points from a maximum of 50 percent to 40 percent for the same liability classes. This move by the Central Bank is very commendable as the increase in Statutory Reserve Ratios on 6 December 2007 is one of the factors that had caused the liquidity crunch.

“Now, having said all this and whilst it is true that banks are operating under very difficult conditions, they should desist from the said indiscipline and imprudent behaviours.” 

“The authorities know the mismatch between the banks' low lending rates to the Government through the Treasury bill of only 340 percent per year and extremely high borrowing rates from the Central Bank of at least 1200 percent per day. They know that this is not sustainable and an obvious cause for banking crises if banks do not invest their assets in high yielding investments,” he said.

The economist conclude banks should therefore engage the authorities on how best such issues can be resolved. Already the Central Bank has reduced the NNCD tenor and the Statutory Reserve Ratios. The RTGS issue is something that needs to be seriously worked on as it is another factor that worsened the crises through the resultant payments gridlocks.

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