Trust issues haunt Zim’s financial services sector

Lack of trust in financial institutions that include banks, pension funds and insurance companies remains a major threat to the growth and expansion of Zimbabwe’s financial services sector, experts have warned, arguing the sector would remain constrained in the absence of deliberate efforts to address the challenge.

Despite efforts by some financial sector authorities and intermediaries, the loss of value experienced since 2018 is discouraging effective and efficient deposit mobilisation, while the insurance penetration rate has remained low at around 5 percent.

“The main cause of loss of trust over the years is the loss of value experienced by depositors and savers due to inflation and changes in policies. With a stable environment characterised by low inflation and policy consistency, banks can offer proper savings products that earn interest to incentivize depositors,” Bankers Association of Zimbabwe president Lawrence Nyazema told Business Weekly this week.

According to Nyazema, in most countries, long-term savings come from pension funds, but in Zimbabwe, most of them have been negatively affected by high levels of inflation in the past and currency switches.

“Obtaining a stable environment provides an opportunity for us to slowly rebuild national savings. At a personal level, the majority of us cannot afford to save as we require monthly earnings to meet living expenses. You cannot expect one to save if they have not paid rent, school fees and bought food for their family,” he said.

In the insurance and pensions sectors, the pre-2009 loss of value issue remains outstanding even after recommendations by the retired High Court Judge, Justice George Smith-led commission of inquiry.

Pensioners and policyholders lost their savings when the country switched from the Zimbabwe dollar to the multi-currency system in 2009.

A commission of inquiry led by Justice Smith, which was set up by the Government in 2015 to investigate the possible losses during the 18 years to 2014, established that there was indeed a “huge loss of value to insurance policyholders and pensioners” and recommended, among other things, compensation.

However, according to the latest Insurance and Pensions Commission (IPEC) pensions report, a total of 372 funds were earmarked for dissolution, with 15 of them concluded in the quarter to March 31, 2024.

The proposals for dissolutions by the funds were made while compensation was still a hot issue, a clear testimony of unwillingness by the funds to pay clients for the loss suffered.

Meanwhile, the commission has put the dissolution of pension funds on hold pending the conclusion of the pre-2009 compensation to ensure fairness among members.

Compensation is one of the initiatives by the Government aimed at restoring confidence within the pensions and financial services sectors. “The industry has remained resilient, safe and sound despite challenges relating to the operating environment, particularly inflation and exchange rate distortions.

“More needs to be done on product reforms and the introduction of new products that meet customer expectations as a way of reviving the long-term savings industry.

“The commission remains committed to working with industry players and the Government to ensure an inclusive, stable, sustainable, and growing industry,” reads the IPEC report.

According to Nyazema, banks have been raising medium-term lines of credit from external financiers and they have been doing so for 3-5 years.

“More financial instruments like bonds need to be introduced to raise more long-term funds in addition to the introduction of more savings products,” he said.

Enock Rukarwa, an investment analyst, said that in an inflationary environment, there was no incentive to keep money in the bank account post-pay day as this carried value depreciation risk.

“Market risk around inflation and the interest rate has been the major soaring elements discouraging effective and efficient deposit mobilisation for commercial banks in Zimbabwe,” he said.

He noted that attractive long-term deposits demand high yields, especially on fixed-term deposits.

Currently, commercial banks are picking deposits at rates around 5 percent–12 percent per year, yet some non-financial institutions are offering rates northwards of 5 percent per month.

Rukarwa said this disequilibrium had been broadening financial disintermediation in the economy.

“More short-term deposits are a function of deep economic issues around income levels, economic informalisation, and historical circumstances on deposit security,” he said.

Experts contend that one of the major reasons for the lack of trust in the formal banking sector was Zimbabwe’s history of an unstable domestic currency.

However, since the introduction of the new currency, Zimbabwe Gold (ZiG), introduced in April and backed by gold, other precious minerals and forex reserves , the currency has been stable.

Eddie Cross, a renowned analyst, believes the only solution is to rebuild confidence in the country’s financial institutions and currency.

Overall, the ZiG’s relative stability has significantly reduced fluctuations in local currency prices compared to the pre-ZiG period.

Analysts believe that if sustained, this relative stability will gradually drive the accumulation of savings, stimulate private-sector investment, fuel consumer aggregate demand and subdue extreme poverty.

Banks are believed to be sitting on nearly US$3 billion in deposits, but only half of this amount is being loaned out due to their short-term nature and other currency policy issues, especially concerns over the end of the multicurrency system in 2030.

According to the Reserve Bank of Zimbabwe (RBZ) Financial Inclusion Strategy 2, 2022–2026, financial literacy in Zimbabwe is generally considered to be low, which has militated against increased usage of financial services.

Financial literacy is generally considered a combination of financial awareness, knowledge, skills, attitudes and behaviours that are critical in making sound financial decisions and contributing to the general well-being of consumers of financial services.

“Despite the high academic literacy level, which is at 92 percent, financial literacy in Zimbabwe is generally considered to be low and this has militated against increased usage of financial services by the marginalised and underserved groups.

“Given low financial literacy levels during the implementation of NFIS I, the National Financial Inclusion Strategy II (2022-2026) seeks to empower Zimbabweans and facilitate the financial capability of the underserved through high-quality financial knowledge and skills, which in turn are expected to influence consumer attitudes and behaviours towards financial matters as well as facilitate informed financial decisions,” the RBZ noted in its NFS11 strategy document.

In this regard, the bank, in collaboration with other financial inclusion stakeholders, embarked on awareness campaigns and financial literacy programmes throughout the country with the view to improving financial literacy levels and contributing towards the economic empowerment of the marginalised and underserved.-ebusnessweekly