Question: Examine the evolution of the Zimbabwean financial system since

independence in 1980 up to date.

The Zimbabwean financial system is relatively sophisticated, consisting of the Reserve Bank
of Zimbabwe, Discount houses, Commercial Banks, Finance Houses, Merchant Banks,
Building Societies and Post Office Savings Bank. The development of the Zimbabwean
financial system can be analysed within different separate periods which the financial system
went through and this is examined as follows.

By definition a financial system refers to the set of markets and other institutions used for
financial contracting and the exchange of assets and risk. It involves the money market,
capital market, foreign exchange market, the derivative market, financial intermediaries,
financial service firms such as advisory firms and the regulatory bodies that govern all of
these institution.

Period 1980 to 1991

In 1980, this is the period where Zimbabwe as a nation got its independence from the British
Colonial and before that everything was governed by the British people. Therefore in 1980
after Zimbabwe got its independence, the financial system inherited a regulated environment
and it has for years. This was in the sense that Merchant Banks were restricted on export
finance while Commercial Banks were restricted to the service of taking deposits and
advancing loans.

Furthermore, there was specialisation within each class of financial institution with Barclays
Bank mainly financed the agriculture sector while First Merchant Bank was concentrating on
financing the mining sector. Building Societies concentrating on mortgages and Discount
Houses on commercial, lastly the Reserve Bank of Zimbabwe concentrated on intermediation
within the financial system. In addition, the government had put some boundaries that
separated institution and gave them almost guarantee of core business segments. There were
restrictions to entry into the financial market, which created a situation that enabled banks to
form some cartels. This meant that institutions would combine with an aim to limit the scope
of competitive forces within the market and they usually enter into agreements pertaining to
interest rates.

Moreover, the banks did not go out to the market to solicit clients as they perceive that there
was no need for them to be innovative since they were cushioned from competition and rarely
ventured into risk management. It was argued that during that period, in general the financial
system was lacking in the shaping business ambitions, attitude and aptitude. Financial
institutions were not development formatting and customer orientation, the bank managers
were more important than the clients. In addition, banks took a relaxed approach they
persuaded a demand following approach whereby they only provide services when those
services are needed. More concentration was on towns at the expense of rural areas and this
discouraged a large segment of potential savers from depositing their money into these
financial institutions.

The Zimbabwean financial system was highly repressed and this limited the growth of the
financial sector. This meant that controls on interest rates, foreign exchange holdings,
impediments in terms of savings mobilisation and excessive bank regulation. Generally the
level of financial repression is measured by the ration of financial assets to gross domestic
product. The lower the ration, the higher the level of repression in the financial system and
this was the case in the Zimbabwean financial system during this period. Myint 1971 states
that financial repression leads to financial dualism. This means that there would be
coexistence of heterogeneous interest rates in the organised and unorganised markets.

Period 1991 to 2000

Before the year 1991, the Zimbabwean financial sector was a highly oligopolistic industry,
with a few large expatriate banks notably Standard Charted and Barclays Bank dominated the
market with 40% combined. However in 1991 there was introduction of financial reforms and
this resulted to financial sector liberalization. In addition, the deregulation of the financial
sector led to the mushrooming of several banks, with 17 Commercial Banks from 5, six
Merchant Banks, and 6 Building Societies emerged.

Furthermore, the Reserve Bank of Zimbabwe mobilised special funds through the issue of
certificate of deposit for on-lending to development institution such as Zimbabwe
Development Bank, SEDCO, and the Credit Guarantee Company for small to medium- scale
enterprises for approved projects. The Reserve Bank of Zimbabwe used moral suasion to
cajole bank to increase lending to new small and medium sized exporters, newly established
and mostly black owned enterprises. Targets were set for Commercial banks and those of
them that achieved the target qualified for access to special fund, those which failed were to
be penalized.

Period 2000 to 2009

During this period in 2000 Zimbabwe faced inflation of 56% and it was gradually rising to
over 1000% by 2006, shooting to an astronomical 231 million percent by July 2008.
Zimbabwe’s inflation began to shoot up dramatically in early 2007, thus this is when hyper-
inflation set in with a month on month rate of inflation (MOM). However this period of
inflation caused a huge problem in the financial system. The Reserve Bank of Zimbabwe was
forced to revalue the Zimbabwean dollar three times in the space of less than three years
because of the rampant hyper-inflation in the country. In August 2006, in an operation called
Sunrise 1 the Reserve Bank of Zimbabwe removed three zeroes from Zimbabwe’s currency
and promised to introduce a new currency in the near future. August 2008 exactly two years
after the first revaluation, the RBZ slashed a further 10 zeroes from the currency calling this
Sunrise 2. Rampaging hyper-inflation forced the government to erase another 12 zeroes in
early February 2009, this was Sunrise 3. However, the hyper-inflation was just unsustainable
and the Zimbabwean dollar was officially shelved in March 2009.

UNDP 2008 states that during the period of 2008, the banking sector had 15 Commercial
Banks of which three had some degree of state ownership and others were wholly private
owned. There were also six Merchant Banks, three Discount Houses and four Building
Societies. Four of the private commercial banks, South African owned Stanbic Bank, the
Merchant Bank of Central Africa and British-owned Standard Charted Bank and Barclays
Bank were multi-national banks commanding 55% of the commercial banks market share.
The three banks that had the degree of state ownership, the Commercial Bank of Zimbabwe,
ZB bank and the Zimbabwe Allied Banking Group (ZABG) were gaining market share
through preferential treatment from the state, indicating unfair playing field.

More so, the banking sector was generally doing well during the peak of the Zimbabwean
crisis because of the speculative activities that most banks were engaged in, in a bid to
cushion themselves from the hyper-inflation. However as a result, most banks were trading in
the best performing stocks on the Zimbabwe Stock Exchange (ZSE) which happened to be
doing very well during the period of the crisis as individuals and companies chose to trade on
the bourse’s best performing shares as oppose to saving money which was being eroded
rapidly by the hyper-inflation.

In 2009 dollarization was introduced into the Zimbabwean financial system. During this
period it was argued that most banks struggled during the early stages of dollarization
because of the capitalization requirements that were imposed by Zimbabwe’s Central Bank to
be strictly capitalized in hard currency. In addition, most banks were also not getting many
deposits from clients because of low income that people were receiving in hard currency that
could not permit them to bank some of their earnings. According to (ZIBAWU, April 2009)
several banks such as Zim bank, CABS and Stanbic were forced to close some of their
branches in reaction to slumps in business.

Furthermore, this situation faced by banks brought about instability in the financial system
and there was a need to restore stability. The finance minister Tendai Biti held a critical
meeting with the African Import and Export Bank (AFREXIM) and the PTA Bank officials
so as to undertake some negotiations. Afrexim gave Zimbabwe a US$250 million facility
while the PTA Bank extended US$185 million in addition, added to the $400 million secured
from SADC and COMESA, Britain, German and the Scandinavia countries. Zimbabwe was
able to mobilise close to US$1 billion- the equivalent of its 2009 budget in three months. In
addition, another agreement was made by Zimbabwe with the donors so as to establish the
Multi-Donor Trust Fund to marshal resources under the Humanitarian Aid-Plus initiative, the
fund was agreed to be managed by the World Bank, African Development Bank and United
Nations Development Programme (UNDP).

Therefore, this period of dollarization proved to be a double-edged sword that was able to
wip-off hyperinflation in on time and lead to the gradual re-integration of sectors such as
public sector teaching, whilst on the other hand dollarization of the economy brought
difficulties as liquidity levels were generally low.