HARARE (Zimbabwe Investor) - It is no secret that banks have been continually urged by financial authorities to lend to productive sectors of the economy. Yet, despite threats of specified action, the banking sector has remained adamant in not lending out.

Presently the banking sector is committing 50% of its deposits as credit to the productive sector, a figure which authorities want to be raised to 80%.

A plethora of challenges are currently besieging financial institutions.

Policy Inconsistencies

The Ministries of Finance and Economic Planning headed by Hon. Tendai Biti and Hon. Elton Mangoma respectively intend to scrap off minimum capital requirements for banking institutions and rather elevate capital adequacy ratios as the key variable for rating financial muscle.

Meanwhile, the Reserve Bank of Zimbabwe (RBZ) late last year carried out a stress test on the financial sector and realized that most banks had failed to raise the minimum capital requirements before the tabled deadline.

Commercial and Merchant Banks are required to have minimum capital of US$12.5 million and building societies US$10 million. “We want to create room for small banks that lend small loans to small business so that the small business can also access credit,” said Hon. Elton Mangoma. “…emphasis should be on capital adequacy rather than on minimum capital requirements,” he continued.

This position by fiscal authorities has created a standoff between fiscal and monetary policies which has the potential to seriously hamper financial sector growth.

Advocates for the present monetary policy, such as the Bankers Association of Zimbabwe presided over by John Mangudya are in favour of maintaining minimum capital requirements as a means of protecting depositor’s funds.

The outcome of this potentially debilitative standoff remains to be seen.

The banking sector proposes the temporary scrapping of statutory reserve requirements so as to improve the loan-to-deposit levels to above 50%. Bank deposits reportedly rose from U.S$475.5 million in April 2009, U.S$1.01 billion in October 2009 and as at December stood at U.S$1.2 billion.

The financial sector’s argument is that statutory reserves are no longer serving their traditional purpose given the new economic circumstances currently pervading. In the first instance statutory reserves are meant to ensure that banks remain liquid so as to retain depositor’s confidence in the financial sector.

Presently liquidity levels are low and the RBZ can no longer financially assist banks should they face liquidity problems, for the obvious reason that the RBZ cannot print United States dollars.

Kingdom Bank in its 2010 budget analysis contends that statutory reserves have become taxes.

 A source at the RBZ explained that the likelihood of statutory reserves being scrapped is all but none as these reserves are meant to protect depositor’s funds.

“Money is indeed entering the financial sector through deposits but none of it remains deposited for at least 30 days,” said the source. “Even if banks were to lend out money for a 7 day window period, this is bound to create serious problems as depositors may demand their money at any time, so these statutory reserve requirements should remain in place for quite some time.”

Statutory reserves also serve to control the money supply in the economy via banks through multiple credit creation processes in a bid to control inflation. Presently the three year macro-economic policy and budget framework launched in December last year shows that the annual rate of inflation will climb to 5.1% this year and move up to 7.7% in 2011 before going down to 7.8% in 2012.

Quite clearly, the banking sector faces a conundrum in this regard.

The Medium Term Plan (MTP) proposed by Government targets increasing the ratio of national savings and investment to GDP from under 10% at present to 14.3% in 2010.

Without fiscal and monetary policy complementarities, the MTP will, on the balance of probabilities miss this target altogether.