Armed robberies force people to deposit money in banks

An increase in armed robberies had forced many people to deposit money in banks for the sake of security otherwise most Zimbabweans were still sceptical about putting their money in banks.

This was said by George Guvamatanga, the managing director of Barclays Bank, one of the country’s biggest banks to explain the increase in deposits from February to June 2009.

Though dollarization had played a big part, seeing deposits in banks increase from $200 million to $706 million, some $500 million was still circulating outside the banking system because people did not trust the banks.

Central bank governor Gideon Gono was not making things any easier by his repeated statements that the Zimbabwe dollar was on its way back.

Full cable:

Viewing cable 09HARARE712, ZIMBABWE BANK DEPOSITS GROW BUT LENDING IS TIGHT

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VZCZCXRO8717

OO RUEHBZ RUEHDU RUEHJO RUEHMR RUEHRN

DE RUEHSB #0712/01 2471043

ZNR UUUUU ZZH

O 041043Z SEP 09

FM AMEMBASSY HARARE

TO RUEHC/SECSTATE WASHDC IMMEDIATE 4875

INFO RUCNSAD/SOUTHERN AF DEVELOPMENT COMMUNITY COLLECTIVE

RUEHAR/AMEMBASSY ACCRA 3010

RUEHDS/AMEMBASSY ADDIS ABABA 3125

RUEHRL/AMEMBASSY BERLIN 1554

RUEHBY/AMEMBASSY CANBERRA 2388

RUEHDK/AMEMBASSY DAKAR 2755

RUEHKM/AMEMBASSY KAMPALA 3173

RUEHNR/AMEMBASSY NAIROBI 5618

RUEHGV/USMISSION GENEVA 2301

RUEAIIA/CIA WASHDC

RUEATRS/DEPT OF TREASURY WASHDC

RHEFDIA/DIA WASHDC

RHMFISS/EUCOM POLAD VAIHINGEN GE

RUZEJAA/JAC MOLESWORTH RAF MOLESWORTH UK

RHEHAAA/NSC WASHDC

UNCLAS SECTION 01 OF 02 HARARE 000712

SENSITIVE

SIPDIS

AF/S FOR B.WALCH

ADDIS ABABA FOR USAU

ADDIS ABABA FOR ACSS

STATE PASS TO USAID FOR J.HARMON AND L.DOBBINS

NSC FOR SENIOR AFRICA DIRECTOR MICHELLE GAVIN

E.O. 12958: N/A

TAGS: ECON EFIN ZI

SUBJECT: ZIMBABWE BANK DEPOSITS GROW BUT LENDING IS TIGHT

¶1. (SBU) SUMMARY: Zimbabwe’s banking sector is slowly recovering

from the effects of hyperinflation.   Public confidence in the

sector had sunk to low levels, with people keeping money in pillows

rather than depositing it in banks. As confidence improves, the

banks are growing again, but they still find it difficult to lend.

Following the collapse of the Zimbabwe dollar, the Reserve Bank of

Zimbabwe (RBZ) cannot act as lender of last resort, and there is no

longer an active interbank market. In order for the banking system

to become liquid again in Zimbabwe’s newly dollarized economy, there

will need to be more investment inflows and greater confidence among

depositors. Both will be more likely once sustained economic and

political reforms allow Zimbabwe to re-engage with the international

financial institutions. END SUMMARY.

———————————–

Banks Struggle under Hyperinflation

———————————–

¶2. (SBU) Zimbabwe’s commercial banks almost collapsed during the

hyperinflation of 2008. Most were technically insolvent, with U.S.

dollar liabilities eventually overwhelming assets denominated in the

evaporating Zimbabwe dollar. At an August 3 meeting of leading

bankers at the Embassy, the Deputy President of the Bankers’

Association of Zimbabwe (BAZ), John Mushayavanhu, said the public

had lost confidence in the banking system after the RBZ raided

foreign currency accounts and imposed very low daily cash withdrawal

limits in the face of hyperinflation. When they could not get their

funds out of the banks, people started keeping money “under

pillows,” he said.

—————————

Dollarization to the Rescue

—————————

¶3. (SBU) Informal dollarization of the economy began years ago and

was virtually complete by the end of 2008. But the RBZ was slow to

allow transactions in foreign currency. The President of the BAZ,

John Mangudya, said dollarization harmed the banks at first because

RBZ rules required that fees be charged in Zimbabwe dollars even

though banks’ costs were predominantly denominated in foreign

exchange. As hyperinflation raged, this generated further losses at

most financial institutions. According to Mushayavanhu, only when

the RBZ changed the rules in February did the banks start to

recover.

¶4. (SBU) According to Mushayavanhu, once the RBZ acknowledged

dollarization, total deposits in the banking system began to grow

again, rising from about USD 200 million in February 2009 to USD 706

million at the end of June 2009. One reason for this was growing

public confidence in the banks. Depositors remain much more

cautious than before the hyperinflation, however. Mushayavanhu

believes that as much as USD 500 million is still circulating

outside the banking sector. Another reason deposits are growing,

according to Barclays Managing Director George Guvamatanga, is that

an increase in armed robberies had forced a number of people to

Qan increase in armed robberies had forced a number of people to

deposit money in banks for the sake of security.

¶5. (SBU) RBZ Governor Gideon Gono’s recent call for re-introduction

of the Zimbabwe dollar has made the public more cautious about

depositing money in banks. Fresh memories of the hyperinflation

Gono unleashed with a flood of banknotes create justifiable worries

that U.S. dollar deposits in the banks would be forcibly converted

and lose value. Even though a reintroduction of the Zimbabwe dollar

is a practical impossibility in the near future, Gono likes to

“think outside the box.”

—————

Lending Stalled

—————

HARARE 00000712 002 OF 002

¶6. (SBU) In its 2009 mid-year monetary policy statement of July 30,

the RBZ expressed concern over the banks’ low average

loan-to-deposit ratio of 37.3 percent as of the end of June, about

30 percentage points lower than before the hyperinflation.

Mushayavanhu said banks cannot make large loans over long periods

because they must keep significant cash balances to meet the

withdrawal requests of depositors, who now tend to turn their funds

over more quickly than before. Furthermore, bankers say, without an

active interbank market, individual banks must keep more cash on

hand because they cannot count on being able to borrow from other

banks. With no lender of last resort in the market and the general

scarcity in Zimbabwe of dollar-denominated commercial paper to use

as security, the banks have largely ceased lending to each other.

¶7. (U) Citing these liquidity constraints, other banking sources

confirm that most banks lend on a very short term basis — 60 days

for companies and 30 days for individuals. The consensus view among

our banking contacts is that liquidity, not credit risk, is the main

obstacle to bank lending in Zimbabwe right now.

¶8. (SBU) In Mangudya’s view, lending will improve only when Zimbabwe

sees substantial foreign inflows that ease liquidity constraints.

While remittances used to help, Mangudya said, little is coming in

from Zimbabweans abroad because of the global economic crisis. He

did not foresee increased lines of credit until the country

normalized relations with the international financial institutions.

——-

COMMENT

——-

¶9. (SBU) Zimbabwe’s economic prospects will improve when the banks

can get back to lending. That will require liquidity from

investment inflows, external lines of credit, and greater confidence

among depositors. We expect all of these factors to improve at

least marginally in the short run as Zimbabwe’s economy crawls back

from the depths. But permanent recovery and steady growth in the

banking sector will be hard to achieve until the GOZ can re-engage

with international financial institutions after clearing arrears and

implementing overdue reforms.

#PETTERSON

(49 VIEWS)

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