Cash crisis and job cuts

Zim’s acute cash crisis continues as job cuts loom

Zimbabwe Independent – by Taurai Mangudhla

August 12, 2016 in Business

ZIMBABWE’S acute cash crisis characterised by banks limiting or failing to honour withdrawals has heightened fears of a fresh run on banks due to plummeting levels of confidence, business digest can report.

Banks are currently mulling massive job cuts to ensure viability.

This puts into sharp focus the stability of the financial services sector as well as banks’ financial performances, particularly post May 2016 when the cash crisis deepened after the central bank announced plans to introduce the controversial bond notes.

Banks with smaller balance sheets and deposits are seen being pushed out of business because of operational challenges stemming from dwindling turnovers, interest income and worsening other non-performing loans.

Sources in the banking industry said some banks are already suffering from dwindling deposits and failing to meet recurrent expenditure. Others are either failing or are taking unusually long to honour RTGS (Real Time Gross Settlement) payments with some going for more than two weeks without settling.

Although Bankers Association of Zimbabwe (BAZ) president Charity Jinya downplayed the potential impact of the cash crisis on the health of banks, particularly given Zimbabweans have traditionally depended on cash for most of their transactions, analysts warned of a devastating sectorial crisis.

Jinya said the acceptance of cash as deposits and its subsequent disbursement as cash withdrawals is an essential, but not a mission critical function of a banking institution.

She said the principal functions of a bank were to provide financial intermediation services between savers and borrowers and to facilitate trade, objectives the banker said should be achieved primarily through electronic payment platforms which provide for a more seamless and cost-effective financial intermediation process.

“In fact, the less cash handling a bank does, the less costly it is for the bank to provide services to its customers, particularly in our environment where cash has to be imported at a tremendous cost. It is for this reason that banks are encouraging the wider use of mobile, internet and card based payment platforms to move away from hard cash as a means of trade,” Jinya said.

Economist Prosper Chitambara, however, said bank liquidity was important to financial sector stability as banks are fragile if they do not have sufficient safety margins.

“The cash crisis will make it impossible for banks to survive a bank run,” said Chitambara.

A bank run occurs when depositors lose confidence in a bank and withdraw their funds simultaneously en masse due to concerns over the institution’s solvency.

“The only sure way to counter a bank run is to restore confidence. Banks can increase their liquidity by increasing their capital positions,” added Chitambara.

Economist John Robertson said interest income for banks was expected to drop significantly due to the institutions’ inability to grow lending as a result of the cash crisis.

“Banks can use RTGS to lend, but the problem is that they also need some deposits to fund lending. However, people who should be putting money into these banks won’t be able to withdraw it. So they are keeping it at home,” Roberstson said. “The general shrinkage in turnover across industry means consumer spending drops.”

Another concern, Robertson said, was a likely increase in non-performing loans.

“Companies rely so much on cash transactions and these have been shrinking which means businesses will be unable to repay their loans,” Robertson said. “Some banks are already having problems paying their wages.”