TIM RAINHARD
More than ever before, it is becoming important for Zimbabwe to strengthen its legislation and regulations to guard against situations whereby shadow banks could plunge the country’s economy into the abyss.
In the past few years, Zimbabwe has witnessed a huge increase in financial activities that fall outside the orbit of regulators, and these seem to be riding on the surge in informal sector activities as the country’s
economy tanks.
At the centre of these shadow banks are mobile money platforms, instant payment systems operating outside of the traditional banks, nonbank broker-dealers, certain real estate investment trusts and some hedge funds, among others.
By definition, shadow banks perform the same functions as traditional banks but are subject to little, if any, prudential regulations and yet their failings have the potential to cause ripples across the entire financial ecosystem.
Where unregulated shadow institutions have been allowed to proliferate, they have been used to circumvent the strictly regulated mainstream banking system and therefore avoid rules designed to prevent financial crises.
The shadow banking system has been implicated as having significantly contributed to the global financial crisis of 2007–2012.
History can testify to the fact that the most devastating runs, including the 2007 financial crisis were not on bank deposits — as happened during the Great Depression — but on shadow banks such as Lehman Brothers (a broker-dealer) and money-market funds.
In India, shadow banking refers to all sorts of lending that takes place outside the regular financial system. In 2018, India’s Infrastructure
Leasing & Financial Services Limited (IL&FS) sent shockwaves across credit markets after it missed debt payments after its short-term financing
costs jumped.
Until then, investors had viewed the group’s debt as rock solid. The sudden default pushed up funding costs and made it harder for peers to access debt markets.
In the period up to IL&FS’s default, loans from the shadow-banking sector had expanded rapidly at a time when the conventional banks were
preoccupied with battling a US$190 billion bad-loan crisis.
In the race to grab market share, shadow financiers borrowed short-term funds and lent it out for longer periods, setting up a classic mismatch.
The binge was funded by bond sales, credit from Indian mutual funds and bank loans.
We are almost getting to a meeting of minds based on the realisation that the rapid growth of shadow banks in emerging markets, including South Africa, if left without proper checks and balances is capable of creating financial bubbles thereby leading to another crisis just as it was experienced in 2007.
Zimbabwe is already experiencing its fair share of problems arising from the lack of regulatory oversight on shadow banks amid the manipulation of the country’s vulnerable domestic currency and the externalisation of foreign currency.
It is apparent that the less regulated shadow banks are serving as a means of bypassing the regulated traditional banking system thereby avoiding rules designed to prevent financial crises.
The Reserve Bank of Zimbabwe (RBZ)’s Financial Intelligence Unit has lately
bared its fangs after observing that there are a lot of shenanigans happening within these shadow banks that are scouring the alternative market for foreign currency, which is then used to buy trinkets and
other non-essentials, amid suspicions that some of the money is being stashed away in safe havens in the Channel Islands.
It has also been observed that the information technology systems used by these shadow banks lack the integrity and that there is little or no
adherence to the Know Your Customer principle, which means that there is no tracking at all to check the source of the transactions passing their systems, which is an international standard.
It is thus important that these be within the visibility of regulatory authorities to curb against illicit activities, including money laundering.
This is probably why the Ministry of Finance is pushing to have these placed under the ambit of the RBZ so that it can have teeth and muscle to
ensure they don’t stray into activities that may bring the sector down on its knees.
A concerted policy effort must therefore be undertaken to strengthen the regulation and oversight of non-bank financial intermediation, with
the aim of promoting more resilient forms of marketbased finance.
Dr Tim Rainhard is an economist with extensive knowledge on Africa’s financial systems. He can be contacted at timrainhard97@ yahoo.com
