Banks must lend, not hoard cash

This week, Reserve Bank of Zimbabwe (RBZ) Governor Dr. John Mushayavanhu revealed that banks are closing daily with surplus balances exceeding ZWG1bn.

This statement debunks the prevailing notion of a liquidity crisis.

However, the real issue is not the availability of liquidity in the banking system but its distribution and utilisation.

The governor’s revelation underscores a critical paradox, while banks are awash with liquidity, businesses are starved of credit.

This mismatch is not a trivial concern—it represents a fundamental dysfunction in the financial intermediation process.

If banks hold onto excess liquidity instead of channeling it into productive lending, the broader economy suffers, stifling business expansion, investment, and job creation.

A well-functioning financial system relies on the effective recycling of funds.

In an ideal setting, surplus banks should be trading with those experiencing shortfalls, ensuring that liquidity is optimally allocated. Yet, as highlighted by the Bankers Association of Zimbabwe (BAZ), there is a lack of interbank trading.

This absence of liquidity circulation suggests risk aversion among banks, regulatory constraints, or a misalignment of incentives.

One major factor contributing to this scenario is banks’ preference for risk-free investments, such as government securities, rather than lending to businesses.

This trend is understandable, given Zimbabwe’s volatile economic landscape, but it is unsustainable in the long term. A banking sector that hoards liquidity instead of supporting productive enterprises fails in its primary mandate—facilitating economic growth.

Equally problematic is the high cost of borrowing.

With a Bank Policy Rate at 35% and lending rates soaring between 40% and 47%, businesses find it prohibitive to take on debt. If the cost of borrowing remains excessively high, liquidity surpluses in the banking sector become meaningless, as they do not translate into accessible credit for businesses. The Reserve Bank must address this structural imbalance by working with financial institutions to create an environment where lending is both feasible and attractive.

Interbank lending must be encouraged and, where necessary, facilitated through targeted policy measures.

A more active interbank market would enable banks to balance liquidity positions more efficiently, reducing unnecessary hoarding and easing access to credit.

The RBZ, through its regulatory oversight, should incentivize banks to lend to one another and extend credit to businesses by reviewing collateral requirements, adjusting risk-weighting measures, and providing necessary guarantees.

Additionally, the central bank should explore mechanisms that ensure liquidity flows into productive sectors. This could be achieved through targeted lending programs, risk-sharing schemes, and the expansion of facilities such as the Targeted Finance Facility.

A recalibration of the monetary policy framework that prioritizes both stability and credit availability is essential.

The banking sector cannot afford to operate in isolation from the real economy. Financial institutions exist to serve the productive needs of the nation, not merely to accumulate reserves or invest in risk-free instruments. Without a functional credit system, businesses will continue to struggle, economic growth will remain subdued, and job creation will stagnate.

It is imperative for banks to break the cycle of liquidity hoarding. They must trade with each other and extend credit to businesses to stimulate economic activity. The central bank, in turn, must ensure that its policies encourage this shift.

Failure to address these inefficiencies will only perpetuate the paradox of a liquid banking sector in an illiquid economy.