Home » Business » Why Interbank Won’t Work [opinion]

Not that there was a dearth in issues to talk about but the December financial reporting season had kept the writer busy. There wasn’t a flurry of results in the truest sense of the word but there were days where clearly the Public Relations departments of certain listed companies did not do their homework.

PR or the marketing department should know that briefings are not held to suit themselves but rather to suit the market.

My two cents is that it only takes a phone call to FinX, Zfn or any of the stockbroking companies to find out what’s happening on a particular day. Because these are the institutions that know, keep a diary of events and that attend the briefings anyway!

A commentary on FinX summed it all up, dubbing last Thursday as super Thursday: The last Thursday of March – as any analyst knows – is the busiest day of the year. So you can generally expect most executives will entirely disregard this and aim to have their briefing at exactly the same time as everyone else – 2:30pm.

This year was a little different. Padenga decided to bus 35 analysts to a rally in Kariba, and as of Tuesday, NMB was the only show in town – unlike the normal routine where they always try to have theirs at the same time as everyone else. Astra then decided it was going to have its maiden results briefing at only time possible of 2:30pm on Thursday, but kindly obliged to move it to 12 noon. Pearl and FML then announced briefings at 10am and 11am, respectively.

The only PR who has been able to do this diligently is Eltah from the Rainbow Tourism Group. She at least makes sure she finds out if there is any briefing on that particular day and then finds out if her time is convenient. The rest?

Not bothered maybe! But that’s not going to be the main topic for this week. The main story is on attempts to resuscitate the interbank market following the official launch of the $100 million Afreximbank facility last month. Most of the market sees this as doomed to fail.

An interesting letter was sent by one of the top analysts in the market after the Finance Minister Patrick Chinamasa at the launch of the facility urged ‘insolvent’ banks to stay away. The analyst said: “An exercise in tomfoolery . . . how many supposed bad banks have loans (assets) that are cash generative? And why would Barclays credit (London) ever contemplate releasing their depositors CASH for “maybe” cash generative assets . . . The Honorable Minister lambastes detractors for not bringing solutions . . . a few suggestions:

Let the results of poor capital allocation play themselves out . . . don’t defer the inevitable (I.e. Let the bad banks fail, let the depositors take a hit . . . this will therefore allow for capital that does remain invest in projects that will be successful . . . Darwin coined it Natural Selection . . . it boggles the mind why politicians and aisors to the politicians seem the think capital would act in any different way . . . even with the comfort of Afreximbank . . .poor capital allocation is just that, poor!

President Obama unconsciously confirmed Heinlein’s sardonic view of human nature in a campaign speech in Iowa: ‘We had reversed the recession, avoided depression, got the economy moving again, but over the last six months we’ve had a run of bad luck.’ All progress comes from the creative minority. Even government-financed research and development, outside the results-oriented military, is mostly wasted. Only the contributions of mind, will, and morality are enduring. The most important question for the future of America is how we treat our entrepreneurs. If our government continues to smear, harass, overtax, and oppressively regulate them, we will be dismayed by how swiftly the engines of American prosperity deteriorate. We will be amazed at how quickly American wealth flees to other countries… .

I agree there are no quick fixes . . . but stupid ideas similarly so will not get our economy moving…

That’s the sentiment elsewhere in the market and the Zimnat Asset Management team had a similar report in Thursday’s Herald Business. Basically the problem with the Zimbabwe money market at the moment is what we can call structural illiquidity. The former Reserve Bank of Zimbabwe Governor Gideon Gono once said it was caused by silos of liquidity. Eighty percent of the country’s deposits are held by virtually five or six banks

The liquidity in the banking sector is not mobile between banks. Gono once introduced measures to try and even out liquidity in the market when he directed banks to localize some of the money held in nostro accounts.

However even with a surplus liquidity position of a couple of hundred million dollars on its RTGS account, an international bank like SCB would not lend overnight or one week money to a another local bank.

Firstly there is a huge mistrust and big element of moral hazard in the banking sector where borrowers are generally viewed as not being honest about their true financial position.

So if one bank is temporarily short of cash and needs to borrow from another bank, it’s very difficult for the lending bank to prove that the borrowers position is only temporary and their money will be returned. There is a general fear that once a bank is struggling and needs to borrow, the problem maybe permanent

Secondly there’s is no acceptable collateral in the market. In a way the fact that Government has not been borrowing through TBs has caused a major problem in the banking sector. There are no investment grade trading securities that banks can surrender to each other when they are short of money. So typically a bank that needs to borrow would not have acceptable collateral.

Thirdly perhaps more importantly, the absence of a lender of last resort makes lending between and amongst banks difficult.

Banks need that comfort that if another bank borrows from them and their position does not improve within a given space of time the borrowed bank can always resort to the last resort window to borrow to repay its interbank loans. This facility is not present so generally banks are presently unable or unwilling to become last resort lenders to their peers in the market.

A g well capitalised Reserve bank is what is needed to restore confidence in the market.

There will be overall need in the market for a Special Purpose vehicle that will make a price adjustment between the unsound banks and the sound banks to make it worthwhile for the sound banks to lend to the unsound banks! Just my two cents! . . .to be continued.

Source : The Herald