ZIMBABWE – THE banking public is still being subjected to punitive charges and interest rates, long after fiscal and monetary authorities promised action against the extortionate practices.
There is general consensus among stakeholders that high bank charges and interest rates have been detrimental to both deposit mobilisation and a fragile economic recovery process.
While banks appear to be doing well in terms of profitability, this is being achieved through usurious charges and interest rates on loans and services to vulnerable clients.
Finance Minister Tendai Biti last week promised, for the umpteenth time, to deal with the “unsavoury banking” practices. Unfortunately this has all been words and no action.
Even Reserve Bank Governor Gideon Gono has on several occasions raised hope the situation would be addressed in no time, as he lamented a situation where even the least income earners were being fleeced.
But so far, there has been no action.
“As a result of the undercapitalisation a lot of unsavoury and unacceptable banking practices have been taking place to fund the undercapitalisation,” Minister Biti said last week, during his state of the economy summary for July-August 2012.
“In other words, because you are undercapitalised, you then engage in creative means and methods of capitalising yourself. One of those things has been high interest rates. So you (banks) then levy unnecessary dues on your loan portfolio because you are trying to recapitalise your banks,” he said.
He also slammed the banks for high bank charges, which he said, “unacceptably” constituted 40 percent of banks’ income.
“You do not (have) to start a bank with no money and hope to make money through the bank. It does not happen that way, which is why it makes sense to insist on good capital requirements, because you do not want a poor person to open a bank and run your money because he will steal (the) money.”
While banking institutions levy as much as US$3 per transaction and US$5 for account maintenance per month, then offer no interest on savings and current accounts. Furthermore, the majority of banks charge up to 30 percent interest on loans and as much as 50 percent penalty on defaulters.
“We are engaged in discussions with the banking sector and I am pleased to report that it is a matter high on our agenda between the Governor and the Minister of Finance,” said Dr Gono in May this year, as he addressed a Parliamentary Portfolio Committee on Small to Medium Enterprises.
“If we have to create regulations or mediate between the savers and banks — if that is the way to go — we will have to do so, lest the legislators come up with a law which says you (banking institutions) have to charge so much,” said Gono.
“And in our Monday meetings, it is going to occupy the top position on our agenda. I am going to tell the banking sector that you make a choice – either agree voluntarily on reasonable amounts and also that you do not charge any costs on any account where there has been no transaction.
“We have a culture in the banking sector that we want to make money beyond what is reasonable – that is why I called this extortionist approach. I am not calling banks extortionists, I am denouncing extortionist practices,” he said.
Gono has presented his monetary policy statement and the major highlight was the increase in the banks’ minimum capital thresholds.
The central bank chief said while banks argued the charges and interest rates they levied justified their cost structures and macro-economic fundamentals, there was need for compromise because banks invested depositors’ money to generate income.
Analysts say Gono and Minister Biti “should act now” as opposed to “continue threatening action against the banks”.
Traditionally and in terms of standard practice, people deposit their money in banks for safe keeping and to get a return. But high bank charges and fees are discouraging savings.
This explains why more than US$3 billion is lying outside the formal banking sector as there is no motivation to bank the money.
As a result, most individuals only use the banks to receive their salaries, simply because their employers have directed them to have bank accounts for convenience in running the payroll.
But many economic players and individuals are shunning the banks, with some even preferring to keep their money in stock (as safe havens) than in the bank, where there are no returns.
If these institutions will not oblige, to quote Minister Biti, “only a mad person will continue to do the same things over and over again” by using moral suasion and not legislating.
Savings are a critical ingredient for development as they provide an important stimulus for investment to spur economic development. Although banks seem to be benefiting from the irrational banking practices, this may not be sustainable in the long run, as it does not help build confidence in the use of banking channels.
Under normal circumstances significant income for the banks should come from charging of reasonable rates of interest.
It becomes the responsibility of the RBZ and the Ministry of Finance to address this malignant cancer and the banking sector itself, as a critical element for financial intermediation.