The financial meltdown in Zimbabwe and the impending crisis

By Shame Mugova

The banking system in Zimbabwe has been crippled by the worsening liquidity crises and cash shortages. Depositors are bearing the full rage of the crisis as they are not able to get cash on demand. A financial intermediary never holds sufficient balances to guarantee full withdrawals, a condition that exposes it to potential runs.

Financial intermediation activity; a role carried out by banks carries a significant social risk because there is potential for systemic disruptions. Therefore, the financial situation in Zimbabwe should be taken seriously.  Investments of banks are naturally opaque, it is difficult to distinguish the problems specific to one bank from problems affecting the industry. The resultis that financial distress at one entity could lead to runs on others as well.

“Since the end of 2015, the country has seen its cash crisis escalate to the point today whereby Banks cannot pay out clients more than a small proportion of what is in their accounts. In a “normal” economy this would automatically result in the Bank declaring insolvency and closing its doors. Here, the Banks just carry on as if it’s business as normal. Extraordinary, but Zimbabwe is always doing that and it makes understanding what exactly is going on very complex and difficult to grasp.”

Eddie Cross a member of parliament lamented on March 12, 2017. Banks have existed since ancient times, taking deposits from households and making loans to economic agents requiring capital.In Zimbabwe, it now seems banks are only providing cash to depositors and whatever is withdrawn never comes back to the banking system again.

Financial intermediation is the use of a financial institution such as a bank to allocate funds between borrowers and lenders. The use of a financial intermediary allows pooling of risk and information costs, and an efficient means of payment. Theoretical and empirical studies find that a well-developed financial system is beneficial to the economy. Bank loans are the predominant source of external funding in Zimbabwe and with low deposits it means banks are not able to mobilise funds to increase lending activities.

The financial sector has multiple and important functions to an economy. The primary purpose of the banking system is to transfer funds from savers to borrowers, that is both households and corporates. In Zimbabwe contrary to the normal function of a banking system people are only withdrawing and not depositing. The financial system in Zimbabwe can no longer pool funds, and lend to borrowers. A financial system provides a way to transfer economic resources through time and across geographic regions and industries.

Persistent cash shortages in Zimbabwe mean the financial system is not able to provide means of payments and ease the exchange of goods and services. A banking system in a normal economy must provide a way to manage uncertainty and control risk. The banking system in Zimbabwe on the contrary is the source of uncertainty as depositors are not sure whether they will be able to withdraw their money. There is a high risk for depositors if they deposit their savings in a bank because they will be not be able to get their cash on demand.

Banks are the fulcrum of financial sector development in developing and emerging economies. Banks are one of the very important elements of financial development, without which developing economies such as Zimbabwe cannot progress without.

Small countries completely rely on their banking sector rather than financial markets which are still under-developed. The banking sector plays an important role in undertaking intermediation functions in the economy, such as receiving money from the public in the form of deposits and using such funds, in whole or in part, to grant loans and other credit facilities.