Insight into Zim's multiple currency liquidity crunch
Francis Chinjekure
IMAGINE those winding queues that used to form at most banking halls years ago, if that was a result of liquidity crunch then the current situation has to be addressed before we endure the same scenario. A liquidity crisis occurs when businesses
and individuals in the economy do not have the liquid assets (i.e. cash) necessary to meet their short-term obligations, such as repaying their loans, paying their bills and paying their employees.
A liquidity crisis is usually the symptom of underlying strategic and operational crises that must be tackled to avoid repeated cash crises.
The levers to address liquidity crises are not just operational and financial but also behavioural. The most basic way to address the crisis is to tackle the root of the crisis.
Normally, a liquidity crisis is only the last symptom of pre-existing root issues such as strategic or profitability crises (for example, misalignment of product portfolios and maybe the whole market, a company overstretching itself by entering too many markets and granting too many loans than cannot be sustained).
The current liquidity crunch which hit the economy was not by chance but was a manifestation of some of the problems associated with malfunctioning of the multi-currency system which should act as an insight to the problems expected in the economy if the adopted system is to stay.
Zimbabwe has been faced with a liquidity crisis since dollarisation when the Government ditched the local dollar in favour of the multiple-currency system mainly based on the US$ and ZAR.
The crisis has been attributed to internal problems of cash management within local banks (duration mismatch) and offshore accounts (nostro accounts) held by local banks in foreign countries.
Other problems include negative balance of payments, under the mattress banking system and the effect of foreign-owned firms, which are not banking with the local financial institutions.
Duration mismatch
Several local banks are said to have committed funds to illiquid assets as well as lending extensively to companies and individuals that are now failing to repay on time.
The deposit to loan ratios are so unsustainably high (loan to deposit ratio including offshore lines of credit for December 2011, as given by the monetary policy was said to exceed 87 percent).
Bank loans have been used to finance relatively illiquid assets, while the institutions themselves fund their loans with short-term liabilities.
Negative Balance of Payments
A Professor at the University of Zimbabwe’s Economics Department attributed the present economic problems, especially the liquidity crisis, to the poor state of balance of payments.
Balance of payments “basically refers to a statistical compilation formulated by a country of all economic transactions between residents of that nation and residents of all other nations during a stipulated period of time, usually a year”.
Zimbabwe has been experiencing negative balance of payments which could be the root of the crisis in a way.
 Under the Mattress Banking
Zimbabwe has a history of significant informal transactions outside the banking sector.
According to a recent AfDB report, the informal sector accounts for approximately 65 percent of all business transactions in the country.
The December 2011 records were suggesting that bank deposits were approximately US$3 billion.
About the same amount is also estimated to be under the mattress, largely because of an overload of policy statements which seem to suggest to the public that Zimbabwean banks are either on the brink of collapse or fundamentally unsafe.
A significant portion of the economic activities is outside the official monetary system in an increasingly informal transaction atmosphere.
Need for Micro Banking Licensing
This clearly shows the need to introduce micro banks, which are specially structured to access the informal sector cash and clientele.
Micro banks are specialised financial institutions, which have specific products and services that attract funds and cash from the informal sector.
Across Africa, most countries have established vibrant micro-banking sectors which have served to capture deposits and cash from the informal sector.
Kenya, Ghana, Uganda and Nigeria are some of the countries that have successfully introduced micro banks to cater for the informal sector.
The informal sector and the Small to Medium Scale Enterprise (SMEs) have proven to be the key employment creators yet there are no specific micro banks which support this key sector of the economy.
This failure to introduce micro banks has in turn fuelled the liquidity crunch since the traditional banks have failed to tap into the informal sector which circulates more than half of Zimbabwe’s cash resources.

• Francis Chinjekure is a student at Harare Institute of Technology studying for a B.Tech (Hons) in Financial Engineering. He is currently attached at GMRI Capital.

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