RESERVE BANK OF ZIMBABWE
“A SOUND FINANCIAL SECTOR – HEART BEAT OF GROWTH”
Remarks
by
Dr. C .L. Dhliwayo
Deputy Governor
Reserve Bank of Zimbabwe
On the occasion of the 2014 Annual Conference of
the Institute of Administration And Commerce
Held at Caribbea Bay Resort in Kariba
OCTOBER 2014
A.
Salutations
Good morning, ladies and gentlemen.
1.
Let me start by acknowledging the esteemed presence of:
 The Chief Executive Officer of IAC, Mr. F.J. Dube;
 Corporate Sector Representatives;
 Representatives of Non-Governmental Organizations (NGOs)
 IAC Members and Students here present;
 Distinguished Guests;
 Ladies and Gentlemen.
B.
2.
Introduction
I am delighted for the honour and privilege accorded to me to share with
you important perspectives on a very topical subject. The theme of my
speech today is “A sound financial sector – heartbeat of economic
growth”.
3.
Ladies and gentlemen, the financial sector and its role in the process of
economic growth and development has attracted notable attention
since the early 1990s. In particular, the crucial need for a stable banking
system was highlighted in the wake of the Asian financial crisis of the
late 1990s as well as the recent the global financial crisis (2007 - 2009)
and the Eurozone crisis of 2011.
4.
In my remarks today I would like to highlight the intricate links between
the financial system and the macroeconomy in Zimbabwe. In addition,
I will discuss the role of the banking sector and why it is different from
other sectors of the economy.
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5.
In Zimbabwe, the financial system has been significantly tested in
recent years by the effects of the hyperinflation environment, volatile
global commodity prices, and the resulting slowdown in domestic
economic activity since the adoption of multicurrency system in 2009.
6.
Nonetheless, the Zimbabwean financial system has remained relatively
resilient over this period.
C.
7.
Components of the Financial System in Zimbabwe
Our financial system comprises of the following components:
a) Financial intermediaries, such as banks, insurance companies and
other institutional investors.
b) Financial markets, such as money markets and stock exchanges.
c) Financial market infrastructures through which money and financial
assets flow between buyers and sellers. Examples include payment
systems such as RTGS, Zimswitch, Paypal, Ecocash, Telecash and
Onewallet.
8.
Ladies and gentlemen, as you would know, banks dominate the
financial system, accounting for around 80 percent of the total assets
of the financial system. The banking sector provide the lion’s share of
financial services and products to the economy, and therefore is of key
systemic importance.
9.
Banks play an important role in supporting economic growth.
10. Currently there are 19 operating banking institutions, comprising 15
commercial banks, one (1) merchant bank and three (3) building
societies as well as one (1) savings bank and 156 microfinance
institutions.
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11. My speech will predominantly focus on the banking sector which is
supervised by the Reserve Bank.
D.
Pillars of Financial Sector Soundness and Stability
12. Ladies and gentlemen, a stable financial system is defined as one in
which the financial system can withstand shocks without major
disruption in financial intermediation and leads to the effective allocation
of savings to productive investment.
13. As such, when a state of financial stability and soundness is attained,
the financial system is able to smoothly perform its financial
intermediary role and there is confidence in the operation of key
financial institutions and markets within the economy.
14. A sound financial sector is typified by:
a. An effective regulatory infrastructure;
b. Effective and well developed financial markets, and
c. Effective and sound banking institutions.
15. On the contrary, financial instability manifests itself through failure of
systemically significant banking institutions, intense asset price volatility
or the collapse of market liquidity and ultimately the disruption of the
national payments system. Such instabilities can potentially affect the
real sector through macroeconomic costs. Where the financial system
becomes fragile, the entire economy is at risk.
16. The soundness and stability of the financial system is important for the
following reasons:
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a.
It creates a trusting and enabling environment favourable to savers and
investors.
b.
It helps the transmission of monetary policy, thereby, assisting the
attainment of the price stability objective.
c.
It encourages efficient financial intermediation which eventually
promotes investment and growth.
d.
It encourages effective and efficient operation of markets and improves
distribution of resources in the economy.
E.
The role of banks in the Zimbabwean Economy
17. Ladies and gentlemen, financial intermediaries, such as banks, are an
effective conduit for channeling funds from surplus to deficit units
through the mobilization of resources and ensuring an efficient
transformation of funds into real productive capital.
18. As at 30 June 2014 total banking sector deposits were $4.96 billion, up
from $4.73 billion as at 31 December 2013.
19. The ability of financial intermediaries to pool surpluses and transform
them into long term credits is an indispensable role which facilitates
economic development. As such, banking institutions agglomerate
capital from many smaller savers, allocating capital to the most
important uses, and monitoring to ensure that it is being used well.
20. Total banking sector loans & advances were $3.81 billion, as at 30 June
2014.
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21. Loans granted by the banking sector to the various sectors of the
economy as at 30 June 2014 were distributed as follows:
22. The banking sector loan portfolio is dominated by the industrial sector,
household, transport and agriculture, constituting 26.07%, 21.21%,
16.95% and 15.68 of total credit, respectively. The remaining sectors
contributed less than 10% each.
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23. In addition, ladies and gentlemen, the intermediation of cross border
capital flows and provision of trade finance facilities also allows the
country’s productive sectors to spend beyond current income,
contributing significantly to fixed capital formation in the economy.
24. Within the context of the multiple currency system, which has remained
typified by adverse balance of payments developments, banks in
Zimbabwe have played a critical role in mobilizing surplus funds from
international money and capital markets.
25. These offshore credit lines secured by banks for on-lending to the key
productive sectors of the economy have provided the much needed
long-term funding for infrastructural development.
26. Importantly, the financial intermediary role of banks facilitates access
to project financing, in a manner that complements Government’s
infrastructure development programs.
27. In this regard, the facilitative role of banks in mobilizing savings from
both domestic and international investors has helped bridge this
financing gap.
28. In addition, ladies and gentlemen, any modern financial system
contributes to economic development and the improvement in
living standards by providing various services to the rest of the
economy. These include clearing and settlement systems to facilitate
trade, channeling financial resources between savers and borrowers,
and various products to deal with risk and uncertainty.
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29. Banks specialise in assessing the credit worthiness of borrowers
and providing an ongoing monitoring function to ensure borrowers
meet their obligations.
30. Banks offer a repository for savings, and then transform them into
long-term assets such as housing loans and lending to businesses. This
process is known as “maturity transformation” and is at the heart of
modern banking.
31. At the same time, the financial system transfers, pools, and reduces
risk, increases liquidity, and conveys information to market participants.
The ability of financial intermediaries to reduce risk from the system
through efficient risk diversification as well as techniques of risk
sharing and pooling is critical in asymmetric markets.
32. In addition, banks play a role in providing payment and settlement
services which are necessary for households, business and other
financial institutions to settle day-to-day transactions.
33. Ladies and gentlemen, the recurrence of financial crisis and their
negative spill-over effects has brought to the fore the importance of
financial sector soundness as a prerequisite for sustained economic
growth.
34. Economic growth prospects are closely tied to the availability of credit
and financial sector soundness in general.
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35. Importantly, well-functioning financial markets are an essential link in
the transmission of monetary policy to the economy and a critical
foundation for economic growth and stability.
36. Liquid markets can lead to more investments; improve the allocation of
capital, thereby enhancing prospects for long-term economic growth.
37. Countries with better-developed financial systems tend to grow faster
over long periods of time. A large body of literature suggests that this
effect is causal: financial development is not simply an outcome of
economic growth; it contributes to this growth.
38. In addition, financial development reduces poverty and inequality by
broadening access to finance to the poor and vulnerable groups,
facilitating risk management by reducing their vulnerability to shocks,
and increasing investment and productivity that result in higher income
generation.
39. Financial sector development can help with the growth of small and
medium sized enterprises (SMEs) by providing them with access to
finance. SMEs are typically labour intensive and create more jobs than
do large firms. They play a major role in economic development
particularly in emerging economies.
40. In fact, based on empirical evidence, financial stability is regarded as a
pre-requisite for economic prosperity through encouraging savings,
asset transformation, allocative efficiency, risk transfer and sharing,
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improved
corporate
governance
and
improved
overall
factor
productivity.
F.
Challenges to Overcome in the Promotion of Financial Sector
Soundness in Zimbabwe
41. Notwithstanding significant progress made in stabilizing the economy,
the efficacy of the financial system under the multiple currency system
has been adversely affected by the following challenges:
i) Persistent illiquidity, which has constrained the economic recovery
process;
ii) Capital erosion and associated financial sector risks;
iii) Loss of monetary policy autonomy resulting in the Central Bank’s
inability to adequately influence economic variables such as the
exchange rate and interest rates; and
iv) Limited lender of last resort function for the Reserve Bank.
v) Deterioration in asset quality. Non-performing loans have increased
in from 1.6% in 2009 to 18.5% in June 2014,
42. Despite these challenges, Zimbabwe’s financial sector has remained
largely safe and sound. In turn, the stability of the financial system and
the banking sector in particularly has provided a conducive environment
for sustained economic growth and development.
43. Over the period 2009 to 2012, the Zimbabwean economy grew at an
average of 10.5%. Economic activity has, however, slowed down to
4.5% in 2012 and is estimated to have decelerated further to 3.4% in
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2013 owing to limited access to offshore credit lines, subdued non-debt
creating capital inflows and the negative effects of cheap imports.
G.
Measures Instituted to Promote Financial Sector Soundness
44. Ladies and gentlemen, the Reserve Bank’s supervisory framework
continues to be underpinned by supervision methodologies, derived
from international best practice, which place emphasis on the accurate
determination of the risk profiles of banking institutions and adequacy
of risk management system.
45. Various supervisory techniques are employed to promote the safety
and soundness of the banking sector including off-site surveillance,
risk-based on-site examinations and stress-testing.
46. The Reserve Bank of Zimbabwe continues to apply an international
bank-rating systems, such as the CAMELS rating system in the
assessment of the condition of banking institutions.
47. The Reserve Bank, has also adopted the consolidated supervision
approach in order to control the risks associated with financial
conglomerates, which may be used as conduits for indulgence in
regulatory arbitrage including engaging in non-permissible activities.
48. Further, the Reserve Bank has signed bilateral and multilateral
Memoranda of Understanding (MoUs) with other central banks and
regulatory agencies governing coordination and the exchange of
information relating to banking groups with cross border operations.
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49. Reserve Bank also collaborates supervisory efforts with local
financial sector regulators namely Insurance and Pensions
Commission, Deposit Protection Corporation and the Securities
Commission of Zimbabwe. In this regard, an MoU was signed, to
enhance financial stability through effective co-operation among the
regulators of the financial sector.
50. A financial sector Multidisciplinary Committee on Financial Stability
was also established to promote development of a framework for
assessing financial system stability across the financial sector on an
ongoing basis.
51. Ladies and Gentlemen, in order to enhance the Reserve bank’s
preparedness and mitigate the adverse effects financial instability to the
economy, the Reserve Bank of Zimbabwe instituted measures in 2012
to tune its crisis management program to improve its legal, policy and
institutional arrangements.
52. The program was largely geared at increasing the country’s institutional
capacity to deal with financial crisis effectively and timely, and thus
reduce the fiscal, economic and social costs of the crisis.This in the
main entailed a number of related activities, such as:
a) Contingency Planning:
b) Crisis Simulation Exercises:
c) Early Warning and Prompt Corrective Action:
d) Problem and Failing Bank Resolution:
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53. In view of the current challenging macroeconomic environment and
spirit of Basel III that aims to implement a countercyclical capital regime,
the Reserve Bank has revised minimum capital requirements to
promote strategic groups with different capital thresholds.
54. Further, to ensure better alignment of banking institutions’ risk profile
and required risk capital including enhancement of risk management
practices, the Reserve Bank adopted the Basel II framework and is
now monitoring the stability of banking institution’s Basel II system to
ensure a smooth transition into the revised capital framework.
55. In order to further strengthen the regulatory environment, the Reserve
Bank has proposed amendments to the Banking Act providing for
the enhancement or risk management and corporate governance
practices in banks as well as problem bank resolution.
56. On the back of deterioration in asset quality, the Reserve Bank
established a National Special Purpose Vehicle (SPV) known as
Zimbabwe Asset Management Corporation (Pvt) Ltd (ZAMCO). The
Special Purpose Vehicle is designed to acquire NPLs from Banks in
order to clean up and strengthen banks’ balance sheets and provide
them with the liquidity to fund valuable projects for the economy to
rebound and to mitigate loss of confidence.
57. Further, against the background of heightened credit risk compounded
by high levels of information asymmetry and the lack of effective credit
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information sharing mechanism the Reserve Bank of Zimbabwe is in
the process of establishing a central credit registry system within its
structures.
H.
Conclusion
58. In conclusion ladies and gentlemen, the country’s banks and other
financial institutions provide a wide range of banking services, financial
products and act as a safe custody of funds for the public and private
sectors of the economy.
59. The dependence of key productive sectors on borrowed funds
strategically places the financial services sector as a key growth
enabler in the economy.
60. Numerous empirical studies support the existence of a positive
relationship between financial intermediation and growth.
61. Broadly, the safety and soundness of the financial services sector is
key in enabling it to effectively play its role as the fulcrum of monetary
policy implementation.
62. Through the capital accumulation and productivity channels, the
intermediary role played by a sound financial system creates great
scope for the meaningful unlocking of growth and employment
opportunities particularly in developing countries such as in Zimbabwe.
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63. Great prominence should therefore continue to be attached to the
development and oversight of financial markets as they remain
inextricably linked to the economic growth process.
I Thank You
Dr. C. L. Dhliwayo
Deputy Governor
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