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