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Banks: The Engine that drives the economy

Sanderson Abel

Banks have come a long way from the temples of the ancient world, when they played a pivotal role in keeping empires and countries afloat. Although history has altered the finer points of the business model, the bank's purpose, for a long time, has remained that of protecting depositor’s money and lending those in need of funds for projects.

The study of economics has shown that the health of the economy is closely related to the soundness of its banking system since the sector has been called upon even at short notice to help countries in times of wars, crises, and food shortages to provide requisite resources.

The Banking sector will always be the nerve center of the economy as it supports the diverse array of economic activities across the various sectors of the economy. It is for this reason that banks should always be protected from collapse by all the citizens of a. The ability of the banks to mobilize resources and channel them to important sector of the economy requires that the legislature puts in place legislation which is water tight to protect the depositor’s funds and enable banks to recoup loans from borrowers even those reluctant to pay 

The question that has been raised by the majority of Zimbabwean stakeholders is that, are banks doing enough to spur economic growth? Historical figures show that the financial services sector has always played an important role in the economy even during the period when the economy was declining, as indicated hereunder.

The contribution of the financial services sector to GDP is tabulated below:

Period Average Contribution to GDP (Percentage)
1980-1989 4.9
1990-1999 8.2
2000-2008 6.6
2009-2011 4.1

Source: Zimstats

Some of the roles the banking system has been playing in economic development include;

  • Providing efficient national payment systems and platforms including mobile based systems.
  • Mobilization of resources both internally and externally for lending to the various sectors of the economy.
  • Spreading and transferring of risks some of which should have be borne by the Government, especially in funding sectors such as agriculture
  • Efficient allocation of scarce financial resources in an optimal manner
  • Advisor to the Government  on monetary and financial issues
  • Funding some programmes which traditionally are supposed to be donor financed.
  • Championing the concept of Financial Inclusion as proposed by Government and RBZ. 
  • Attracting foreign funding given the local financing constraints.
  • Development and popularizing various financing instruments on behalf of the government (Agro-bills, AMA bills, ZESA bills, GMB bills, Grain Bills, etc.)
  • Supporting the marginalized groups ( e.g. Women and  Youth Projects)

Currently there are 21 operating banking institutions including the Post Office Savings Bank (POSB). Total banking sector assets as at 31 December 2013, were $6.7 billion with commercial banks accounting for 82.69%; POSB (1.35%); Building Societies (13.65%) and Merchant Banks (2.31%)

As at 31 December 2013, total banking sector deposits amounted to $4.73 billion while loans & advances were $3.70 billion. The loans to deposit ratio increased from 37.33% in June 2009 to 78.29% as at 31 December 2013. This implies that of every one dollar banks receive as deposits, there are lending at least 78 cents. International best practice shows that prudent lending should be around 60percent.

The table below shows the Distribution of Loans and Advances as at 31 Dec 2013. It is important to note that loans and advances are flow variables and not stock variables meaning that they are not static but continuously changes.

Sector Percentage
Agriculture 15.12
Individuals 23.80
Services 18.42
Manufacturing 15.03
Mining 4.97
Communication 7.80
Construction 3.69
Financial firms 2.54
Transport 1.79
Distribution 6.84
Total 100

The table shows that the banking sector is supporting almost all sectors of the economy though not at the same proportion. It is important to understand that the distribution also includes the MSMEs who fit into the criteria of the relevant banks.

The banking sector’s average non-performing loans to total loans ratio (NPLs/TLs ratio) stood at 15.92% as at 31 December 2013. This implies that that of all loans and advances that are being given out by the banks on average, 16 percent of the recipients are in default. This is unhealthy development as it means various sectors are starved of resources to the level of 16 percent of loanable funds

It is for this reason that, the banking sector through the umbrella body, BAZ has since embarked on the financial literacy and financial inclusion programmes which are meant to raise awareness of the need to mobilize funds through savings, so as to increase amount of   funds available to lend to productive sectors which create employment and grow the cake for future generations

It is a fact that the banking industry has to date failed to educate the public on the various products it offers. It also accepts that at times some bank charges, whilst justifiable has been on the exorbitant side. In its quest to educate the public on financial literacy, it will always be cognizant of the concerns of the public as raised at various fora and aims to address these shortcomings. The banking sector needs to build the confidence of its stakeholder, uphold highest ethical standards in playing their fiduciary role in protecting and growing depositor’s funds. It will always be appealing to the regulators, Legislators and stakeholders to encourage borrowers to repay funds lent to them. In the long run, banks hope by restoring confidence to its clients, the public will release those funds under their mattresses so that they can grow them and in addition, also grow the economy. 

Sanderson Abel is an Economist. He writes in his capacity as Senior Economist for the Bankers Association of Zimbabwe. For your valuable feedback and comments related to this article, he can be contacted on abel@baz.org.zw or on numbers 04-744686 and 0772463008