The Sunday News
Dr Bongani Ngwenya
Preamble:
THE economy is experiencing shortages in money supply which has led to a reduction in money circulation — resulting in a liquidity problem, credit or consumer spending, causing deflation or negative inflation. This has resulted in prices falling, not because of falling inflation, but the supply of goods that has become higher than the demand for those goods due to low consumer disposable income. In any economy bank deposits, not cash, should account for the vast majority of the money supply. Bank deposits are critical to facilitate money creation through the deposit expansion multiplier. This is the case even though cash deposits, and cash reserves, are the foundation of the banking system.
Figures on money supply reveal that it had risen to $4,75 billion by end of 2015, due to improving confidence in the banking sector. On the other hand, annual growth in total banking sector credit to the domestic economy slightly increased to 20 percent in October 2015, from 19,7 percent in September 2015, with the month-on-month basis, banking sector credit rising to $5,3 billion by end of 2015 from $5,19 billion in October 2015. It is worth mentioning that the banks lending portfolio continues to be skewed towards consumptive lending, and bank deposits continue to be skewed towards demand deposits — a phenomenon that is not healthy for money creation and liquidity improvement.
Banking and financial inclusion challenges
Despite, growing confidence that has resulted in increasing bank deposits and banking credit to the domestic economy, a significant proportion of the Zimbabwean population is still financially excluded, that is, does not use financial products to manage their financial lives. Studies have revealed that the majority of the financially included proportion of the population, that is, the banked population is mainly for transactional products and services such as for the purpose of receiving salaries and other deposit monies from the employer and from other people. The other reasons why people have bank accounts is to facilitate easy access to consumer loans and for safety reasons. The propensity to save is generally low because of averagely low disposable incomes.
The majority of adults in Zimbabwe do not save because of lack of availability of surplus or residual income after appropriating employment income to living expenses, children’s education or school fees and emergencies. Usually the portion of income allocated for emergencies is kept as savings at home. There is almost a consensus that issues of affordability, i.e. inability to be able to maintain minimum balances and exorbitant bank service charges curtail or act as barriers to having a bank account in Zimbabwe. On the other hand, bank deposit and savings interest rates that banks offer are significantly low and unattractive.
As of April 2016 the average bank deposit interest rate is six percent, while that of savings is 0.3 percent. Comparatively, borrowing or credit/lending interest rates are pegged at 16 percent for all loans, home loans 16 percent, and personal loans 22 percent as of April 2016. This scenario is creating an imbalanced phenomenon. While it is natural to maintain credit interest rates above deposit and savings interest rates in order to curb inflationary tendencies in the economy, in the current situation of a deflation, there is a need for monetary expansion strategies that will help to trigger aggregate demand that is missing in our economy.
Suggested strategies for attracting bank deposits
Literature suggests several strategies that banks should employ to attract more bank deposits in order to boost the creation of money through the process of deposit expansion multiplier. The strategies range from client relationship management strategies, distribution strategies and bank deposit promotion strategies. Bank deposits have a multiplier effect on creation of money and money supply in the economy. Banks are encouraged to adopt new ways to grow their core deposit base to be able to successfully compete in today’s challenging Zimbabwean business climate, i.e. from a strategic management perspective every banking institution should have a comprehensive deposit growth strategic plan in place, and senior management must ensure the strategy is focused and measurable.
There is a need to work smarter in order to attract new customers through proactive deposit growth strategies. The financial sector by its nature is highly risky, hence the cautious approach (risk aversion attitude) by the management. It is very true that this cautious approach has contributed to the profitability performance of the commercial banks in the same economic conditions that the other industries have persistently posted losses.
However, although banks often take that cautious approach and regard the importance of core deposit growth, they generally do not take the steps necessary to address deposit gathering in a strategic and consistent manner.
Experience shows that many banks still stick to the traditional approaches to management of their deposit growth efforts. Otherwise, a strong deposit philosophy will help banks to generate core deposits more efficiently while improving their profitability as well. Literature suggests that there is evidence that banks without discernible competitive strategies tend to perform poorly, as do banks that employ traditional and outdated banking strategies without embracing efficient new banking product innovation methods.
Bank deposit promotion strategies are singled out as the most critical for boosting bank deposits and financial inclusion in an economy like ours, that is still reeling from loss of confidence as a result of the hyper inflationary era, notwithstanding the fact that there has been a significant improvement on the confidence particularly on the financial sector of the economy of Zimbabwe. Our banks are not doing enough to promote bank deposits. Due to the inherent intangibility of the nature of banking products and services, bank customers rely more on subjective impressions rather than concrete evidence.
The tendency is that every time banks come up with a new product, they make their target customer segments aware of the product only through marketing promotion. However, promotion could be done in various forms such as press advertisements, sales campaigns, word of mouth, personal interaction and direct mailing. Turning one into a customer may be enough if the product is unique or in great demand, but this may not always be the case. Banks must try to understand the real needs and aspirations of the society and provide such products or services which will satisfy their assets. The marketing strategies should be designed to suit not only the present markets but also the potential future markets.
Now that our banks have been posting profits dating from 2014 for most of the banks, maybe it could be strategic to revise upwards bank deposit and savings interest rates and lower the required minimum balances in order to encourage and motivate the financially excluded and potential market to come on board. This may go a long way towards further improving the bank deposit situation and financial inclusion.
In conclusion, bank money creation is being curtailed by low bank deposits. The current profit making or positive performance of the banking sector in our economy should not encourage complacence within the management of the banks, money creation can make these banks to make even much more profits in the long run.
Dr Bongani Ngwenya is a Bulawayo-based economist and senior lecturer at Solusi University’s Post Graduate School of Business. He can be contacted on [email protected]/ [email protected]
