Zimbabwe's mid tern monetary policy: taking the path of least resistance

The time for blaming everyone else for the problems that we have created ourselves must now be over.

I have contemplated on the recently announced midterm monetary policy statement. Although it is a very nice sounding document, I beg to differ on the stated problem situation that might have led its proponents, to increase statutory capital reserve requirements for banks as an antidote to the systemic flaws in the regulation of our financial services sector. I note with curiosity, that there also has been some resistance on this move from some quarters, albeit for different reasons than mine.

I think that, the problems we face in this sector have been reframed and externalized by the authors of the statement, leaving them clean as a whistle, acting as the sober judge with an impeccable history, who must now prescribe a hangover concoction to a bunch of drunken bankers. The time has surely come to take a different approach?

For a moment, I imagined that I was the Reserve Bank Governor, and this is what I would have said:

"Our financial services sector, has had to react to the crisis management over a prolonged period of time which we have been part of, I sincerely regret that. It must be difficult for our banking fraternity, who can never be confident of stability and consistency in policy. Unfortunately, we have had to chop and change our strategies as we reacted to political and economic developments in the recent past. It must also be difficult for depositors, who I am sure, still feel traumatised by the misjudgements that we committed in period prior to the dollarization of the economy. Those were surely some moments of madness that significantly created a lack of confidence in the sector.

We all face challenges, most of which have been manufactured ourselves, and some of which, have been as a result of exogenous factors. The Zimbabwean economy has faced significant uncertainty and attacks of all sorts from local and international pressures. However, we cannot continue to blame others for our problems as if we ourselves have done nothing in contributing to the circumstances that we now face.

In any country, where the rule of law is perceived as selective, where political patronage and the increasing greed to accumulate material wealth are fashionable, the financial services sector is normally the first to be exposed to unimaginable risk. Zimbabwe is in such a situation. The drive to indigenize our banks, although necessary, has come with the unintended consequences of creating discord and uncertainties about the future. This has reduced our bankability as a country, while drying up international credit lines resulting in an illiquid market.

Our political disagreements and divisions have further exacerbated this problem, by creating a political risk for the country, and duly arresting the flow of foreign investments into the country. As a result, our economy is operating significantly below capacity in all sectors. This is hardly desirable.

It is critical that, at this juncture, we shed our victim mentality and begin to address the root causes of our problems and not tinker at addressing symptoms as we have done in the past. In the past, we have blamed sanctions as the root cause; we have blamed everyone else but ourselves. This reasoning has not only disempowered us significantly, but has resulted in our failure to note unless we make ourselves attractive as an investment destination, nothing will change.

The root cause of the state of the financial services sector is the inappropriate structure of regulation, coupled with political patronage and general deterioration in business ethics and morals in the country. This has happened to us slowly over time, as our priorities as a nation shifted from us pursuing the common good, to us pursuing  narrow and politically expedient policies that have disadvantaged the country as a whole. We at the Reserve Bank cannot claim immunity from that.

As your governor, I have seen it prudent that we resize and reduce the number of commercial banks that the country has. The number of our banks, given the size of the market is not comparable to acceptable international norms. As the Reserve Bank, we made some mistakes in the past, in granting new banking licences for the wrong reasons and at times, to the wrong individuals, without anticipating the negative consequences which we now face. We implemented impulsive policies that have contributed to the deterioration of this sector and for that, I stand responsible.

In order to further improve the quality of our banks, I propose that the number of commercial banks be reduced significantly. This would mean that our banks need to go through a consolidation phase and I encourage the banking fraternity to come up with possible solutions to this dilemma. I alone do not have all the solutions. However, time is not on our side and we need to act on this issue together as a matter of urgency. I propose that one year will be adequate to address this contentious issue.

It is evident to all, that increasing statutory capital requirements in the past has not contributed to the quality of our banks, nor has it protected them from failure. Instead, it has unfairly penalised a number of banks, further creating instability and distrust in the banking sector. Our integrity as custodians of monetary policy continues to be questioned, and that is understandable, given how we have acted in the past.

In response to that, I have seen it prudent that we establish a depositor's insurance fund that is managed outside the Reserve Bank by independent professional insurers. As far back as 2003, we proposed to establish a depositor insurance board which remains dormant 10 years later. We feel that this structure should not be a state body, but shall be made up of a consortium of insurers thus guaranteeing objectivity and professionalism in how it operates. The banks must themselves provide resources for this fund, so that it becomes a commercial initiative, and not another statutory body funded by the scarce resources of taxpayers.

This will ensure that, the risk of the loss of funds from banks is insured, based on the risk that the insurers perceive. This removes us from unnecessary interference, and the need to continually seek control of what is a dynamic market. This approach should also ensure that depositors are protected through managed market mechanisms, not through the continuous increase in statutory capital reserves. It removes our hand in continually prescribing how banks must run their business, while promoting a competitive and compliant banking sector.

On the issue of the monitoring of the activities of the banks, I must confess that as the Reserve Bank, we too have suffered a significant brain drain as has been the case for most companies in this country. Because of that, at times we have failed to effectively monitor activities in the sector to identify early warning signs; this has disadvantaged both investors and depositors. I therefore, propose the establishment of an independent and professionally managed Financial Services Regulator, whose mandate is to establish, monitor and regularly report on prudent financial management practice within the financial services sector. The regulator will be comprised of independent professionals with no bias towards or vested interests in protecting those who may operate outside the country's regulations or laws.

This does not exonerate us from being a responsible arbitrator in the financial services sector, but strengthens our intellectual capital and competence in managing the sector going forward. It also removes the politics in banking, a long overdue development. In addition, it provides us a reliable early warning system so that we may intervene in good time and thus avoid possible systemic collapse of this sector in the future. With the advantage of hind sight, we should have done this much earlier.

With regards to bad loans, the fundamental disadvantage we face is the lack of a central depository of credit information on borrowers. Its existence can only improve lending practice, while ensuring that information on borrowers is readily available to all credit providers so that they may make informed decisions on risk. The Minister of Finance concurs, and we will therefore expedite its formation as it is the interests of all concerned. Again this initiative must be independent from the Reserve Bank.

With regard to regulating the asset management industry, I now see no need for them to have minimum capital requirements. After all, those who place funds with them must shoulder the risk they are taking, which should be commensurate with the returns they may expect. Asset managers are not deposit takers and should therefore, not be managed like banks as we have done in the past. We were wrong in making that move in the past. The only requirement that asset managers must adhere to, is to be registered with the Financial Services Regulator. The regulator will ensure that qualified personnel occupy this space and they operate within the law. In addition, portfolio insurance will be required by law, thus minimising the risk of loss of assets managed.
How asset managers manage their funds, where they invest them and what fees they may charge, is a function of their competence, their own investment philosophies and their client's appetite for risk. These cannot be prescribed by us as we have done in the past. This practice is also in line with international practice.

Micro lenders are in the business of lending money, and may be free to attract investors as they wish, on conditions and terms agreed between them. Again it is my considered view that, they are not deposit takers and must therefore not fall under the Banking Act. As the Reserve Bank, we have created too much unnecessary work for ourselves and this has negatively impacted on the fulfilment of our duties. Our appetite for prescriptive control of the sector has resulted in diminishing returns in terms of our effectiveness.
Micro lenders need not have any statutory capital requirements, but must be registered with the Financial Services Regulator. We need not prescribe to them what they should charge, but can only give them guidelines. I am also convinced that, it is the responsibility bodies such as the Consumer Council of Zimbabwe, to educate and inform participants in this industry with regards to their rights and responsibilities.  This should also apply to bank charges. It is also our responsibility to promote competition in this sector and so, we must let borrowers decide what they are prepared to pay and on what terms. The Reserve Bank has no place in that relationship.

It is my opinion that, these measures will not only promote stability in the sector, but establish the most appropriate regulatory structures in line with international standards and practice. This will mean that we cease to use statutory capital reserves as a whip because; this has tended to work temporarily but is not a sustainable systemic solution.

Zimbabwe faces a bright future and therefore, I encourage that we go into a phase of mutual respect and responsibility where, we focus on solutions to deal with our problems as opposed to shifting the burden and using a carrot and stick approach. This has clearly does not work.

In conclusion, let me say that the time for blaming everyone else for the problems that we have played a large part in creating is now over."

With that, I would complete my speech.

I leave you with what I think is a fitting a quote from Winston Churchill,: "Men occasionally stumble over the truth but most of them pick themselves up and hurry off as if nothing had happened".

May the truth herein, forceth its way into judicious minds.

Vince Musewe is an independent economist  currently in Harare and you may contact him on vtmusewe@gmail .com