Mangudya slams door on banks

December 23, 2020

…Banks have no capacity to run auctions

…Lenders freeze interbank system

News Editor

The central bank governor, John Mangudya, has criticised the proposal to take away the foreign currency auction system from the apex bank to local banks saying the local lenders have no capacity given their failure to trade among themselves.

Mangudya described the proposal as a ‘disaster’ given that the lenders have frozen the interbank system illustrating their lack of capacity to trade among themselves.

Despite the growing calls to take the auction system away from the Reserve Bank of Zimbabwe (RBZ) to banks, Mangudya cautioned against the move stating that it will be fraught with risks.

“The auction system is here to stay. It has stabilised the economy and the central bank will continue operating it,” Mangudya said.

The auction system was reintroduced in June and has helped to stabilise the exchange rate with the dollar trading at 1:81.7866 this week.

Fiscal and monetary authorities say the auction system has stabilised the exchange rate thereby taming runaway prices.

Mangudya, who spoke at the Zimbabwe National Chamber of Commerce business meeting held in the capital, also disclosed that local banks are “outrageously” failing to trade among themselves after freezing the interbank market, precipitating local lenders’ failure to settle transactions, undermining confidence in the banking system.

The scathing attack by the Central Bank boss will cause considerable alarm in the banking sector as the crisis is likely to cascade into economic meltdown which has deepened.

The monetary boss indicated that local lenders’ failure to engage in overnight borrowing was an abnormal situation, which is threatening the banking industry.

An interbank market, naturally allows banks that are flush with cash to increase their interest incomes with which to pay their depositors, operating expenses, and profit to their shareholders.

And the ones who are short on cash need to borrow until enough loan payments come in to cover the situation. 

“Banks don’t trade among themselves as should be done resulting in them failing to settle transactions.

This is a big challenge and it has given us a big headache,” Mangudya said.

In trying to get a better understanding of the banks’ issues, Mangudya said he met the president of the Bankers Association of Zimbabwe (BAZ), Ralph Watungwa, who is also the chief executive of the Standard Chartered Bank of Zimbabwe.

“I was in a meeting with the president of the BAZ [Ralph Watungwa] this other day saying why are you cheapening your profession as the sector is now best known for failing to settle transactions.

Interbank market is very critical, which banks should take advantage of instead of operating in silos.”

Efforts to get a comment from Watungwa were futile.

The interbank market was re-introduced in February last year with the hope of bringing stability into the economy.

It kicked off at a rate of 2.5 to the United States dollar, officially abandoning a strict control 1:1 exchange rate between the country’s quasi- currency and the United States dollars.

The central bank had administrative controls on the operation of the interbank market.

Analysts say the auction system should allow the exchange rate to be determined freely by market forces.However, shortages of the greenback resulted in high premiums for the US dollars on the parallel market, resulting in the country experiencing bouts of hyperinflation.

Zimbabwe introduced its own currency last June, ending a decade of dollarisation, but the currency struggled to hold its own as the inflation continued to rise unabated.

Consequently, the interbank system failed resulting in the central bank launching the foreign currency auction system in June this year.

Banks were left to trade on their own on the interbank market.

But, Mangudya said the interbank market was as good as dead as there was no activity with banks operating in silos.

Consequently, banks are failing to settle depositors’ transactions, an unfortunate situation which will take away the much-needed confidence in the banking system.

Last month, Mangudya accused banks of attempting to “contaminate banking with politics” amid rising cases of unsettled transactions. 

“You do not need to settle offshore. It is settled domestically but given value as a back office transaction. Settlement is not a negotiating tactic where a customer of a bank is told that there is no money. That is not banking,” Mangudya told a post-budget meeting.

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