RESERVE Bank of Zimbabwe (RBZ) governor John Mangudya says the central bank hopes to resume its role of lender of last resort in June this year after clearing the banking system of distressed organisations.
The central bank’s core functions should be to provide liquidity to financial institutions, or the market as a whole, in reaction to adverse shocks which cause abnormal increases in demand for liquidity which cannot be met from alterlocal sources.
This function helps the central bank to create stability by preventing financial panics and bank runs spreading from one bank to the next due to a lack of liquidity.
However, the RBZ lost its lender of last resort status in 2009 when the country assumed a multi-currency system, centred in the use of the United States dollar as it was not adequately capitalised.
Responding to questions at a Zimbabwe National Chamber of Commerce bond coin awareness workshop in Bulawayo last week, Mangudya said the RBZ aimed to resume the function in June after cleaning the banking system.
“What we don’t want is for distressed banks to take advantage of the lender of last resort which is called moral hazard,” Mangudya said.
Many financial institutions are reportedly experiencing liquidity chokes amid a crippling liquidity crunch that has seen more than five banks close down in the multi-currency era while more are reportedly gasping to survive.
“So we are in a cleansing process first and we will also ensure the interbank system, which is coming supported by the Afrexim bank where the foreign bank is assuming the risk for Zimbabwe, will serve as a learning curve for our lender of last resort process,” he said.
The interbank system will be supported by a $100 million Africa Export and Import Bank (Afreximbank) facility, providing security required for banks to lend to each other.
Both interbank and lender of last resort facilities ended at the inception of the multi-currency system.
Mangudya warned distressed financial institutions to improve their operations before June or face closure.
“We are dealing with those distressed banks and we are currently engaging stakeholders so that they can improve their operations. If they fail to do that we will close them but we don’t want that to happen. Banks should not take depositors’ funds for granted.
“They must respect them. By June we don’t want to see any distressed bank in Zimbabwe because we want to restore confidence in the banking sector,” Mangudya said.
Most banks have been struggling to meet capitalisation requirements and are experiencing service delivery challenges.
The current minimum capital requirement is pegged at $25 million and is expected to be increased to $100 million by 2020.
Allied Bank, owned by Transport minister Obert Mpofu’s family business, surrendered its operating licence last month and is now on course for liquidation.
The bank turned away customers in December 2014 informing them there was no cash.
Another bank that has been facing solvency problems, AfrAsia (formerly Kingdom), resorted to limiting withdrawal amounts to ensure clients accessed available cash.
Both institutions stopped interbank transfers.
The International Monetary Fund last year advised the central bank to close troubled banks or at least ring-fence them to address the deteriorating asset quality and restore confidence in the country’s financial sector.
In July last year, Finance minister Patrick Chinamasa said up to five Zimbabwean banks were “ill” but were not contagious due to their small size.
The RBZ has already indicated that it will liquidate Allied and Interfin banks this year after they failed to recover from the liquidity turmoil they were facing.
Banks in the Southern African country are struggling due to inadequate capital and growing non-performing loans, which has prompted the central bank to consider establishing a body to take over bad loans.