Business, Careers & Technology
My viewpoint
The struggle to revive savings
F
Terence Zimwara inancial institutions have been releasing their financial results throughout the year and their performances seem to point to a healthy as well as profitable financial sector, contradicting the supposed effect of the ongoing liquidity challenges and not to mention the lower projected growth rates. The results are by and large satisfactory; the return on investment seems quite handsome in an environment where there is an absence of long term lending. Save for one or two banks, the majority of the institutions managed to declare profits and most importantly these were adequately capitalised as confirmed in the monetary policy of January 2012. However, there are less pleasing aspects to the performances and unless something is done as a matter of urgency, the seemingly good results will continue to inhibit faster recovery of the greater economy. The first problem one can decipher from the results is the very short term or transitory nature of the deposits. In the reports that are accompanying most of the results, financial institutions acknowledge the very short term nature of deposits and how this affects the traditional banking business. Depositors still have little confidence in the banking system as evidenced by their maintaining
demand deposits and call accounts or transitory deposits. Demand and call accounts constituted about 90 percent of all deposits last year essentially meaning the advances or loans that were made during the same period tended to be short term as well. Unfortunately industry is in dire need of medium to long term funding to enable companies to recapitalise as well as supplementing their cash flow needs. What compounds the situation further is the non availability of lines of credit with reasonable rates. This mismatch between the tenor of deposits and the needs of industry has resulted in what is now commonly referred to as the liquidity crisis. In normal circumstances, long term deposits earn financial institutions the greater portion of the interest income. However, this is not the case and in the absence of long term lending, banks have had to charge high interest rates to compensate for the loss of this source of revenue. Therein lies the problem, compensation that depositors receive for their funds has not been commensurate with what borrowers are charged. According to the last monetary policy, the rate of interest on deposits ranged between 0.175 and 8 percent against lending rates as high as 25 percent or more. Classical economic theory suggests that the interest rate on deposits has to be above the inflation figure to attract savings and the disparity between deposit February 2013
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