Financial Resource

The study seeks to provide a critique of the theoretical framework of economic governance as it relates to the financial sector in Zimbabwe and identify institutions in the financial sector and explain their roles. It also seeks to unpack the concepts related to the banking or the financial sector, with specific emphasis on the role of central banking from a policy and developmental perspective. Outline of the economic history of the development of the financial sector in Zimbabwe and the regulatory framework governing the financial sector will also be given. To capture the community’s view and experience of the financial sector within the period 2003 to 2009, recording of community voices has been done, with main emphasis on the views around the  inclusion or exclusion, popular notions of monetary policy and banking, and impact (perceived or real) of these on people’s social conditions. Finally the study seeks to equip the poor and grassroots communities and the working classes, to engage meaningfully in discussions on the role of monetary institutions as part of an ongoing engagement on economic and public policy advocacy.

There has been increased call for a greater attention to the development of financial systems in many countries all over the world. The financial sector is well known for its purpose of allocating savings, from surplus units to deficit units. One can have plenty of resources (cash or wealth), but is not prepared to use or consume in the current period but later in the future. And on the other hand an economic agent may need funds for a specific purpose currently but due to some reasons have no adequate funds. So financial institutions help in collecting funds and match the current needs of some investors and hence creating economic development by avoiding idle funds. Some researchers (Herring and Santomero (1991)), argue that the direct impact of financial institutions on the real economy is minor, while the indirect impact of financial markets and institutions on economic performance is extraordinarily important.

A financial system which is efficient and healthy is a vital and necessary component for faster economic development. If a financial system is efficient, then it should show profitability improvements, increased funds intermediation, better prices for financial products and quality services for consumers. If the financial system is under tight regulation, financial markets would not be able to function efficiently and the use of resources would not provide desired outcomes. It should also be noted that reforms in other sectors have less impact on the overall economic development if the financial sector is under control, Edirisuriya (2007).

As part of the economic growth strategy, many economies have aimed at improving their financial sector. Ghana structured its financial reforms in two phases, FINSAP 1 and FINSAP 2 (Financial Sector Adjustment Program) and the reform for Non- bank financial institutions credit, Gordon (2008). An assessment of the impact of this policy on savings, investment and the growth of income (GDP) in the Ghanaian economy was undertaken by Gordon (2008) and positive impact of the financial sector on the economy. Previously, Ghana operated a tightly regulated financial system and the impacts of these policies on economic development were found to be dismal. The country turned to the International Monetary Fund (IMF) for assistance to reshape the macroeconomic structure, and one of the policy packages was to reform the economy’s financial system. Financial liberalization thereafter affected positively the interest rate, savings, investment and GDP in Ghana. Sri Lanka also went ahead with its financial sector reforms about three decades ago, Piyadasa (2007). The reforms were also spearheaded by the IMF and World Bank, and they encouraged the opening up of financial markets for foreign and domestic competition and to encourage efficient functioning of financial market with less government interferences.  

Major economic factors to look at include; the inflation level, rate of economic growth, unemployment levels, balance of payments and the exchange rate (Business Studies Online). A well functioning financial sector is able to influence positively on the economic factors. High levels of inflation have a number of problems; people try to save money and so will spend less, high prices leading to people becoming worse off, costs will increase and exports will decrease hence exporting companies greatly affected leading to unemployment. The Zimbabwean nation has experienced such problems and do not wish to return to such time soon, savings have been eroded.

Capital goods production is one of the best ways an economy achieves a long lasting sustainable and stable economy. Financial services stimulate savings, investment and growth of GDP and for that matter economic growth by increasing the rate of capital accumulation and by improving the efficiency with which the economies use that capital, Gordon (2008). Well functioning banks spur on technological innovation by identifying and funding those entrepreneurs with the best chances of successfully implementing innovative products and production process.

The research seeks to explore the financial sector in Zimbabwe, its impact on the economy and how the Central bank policies affect the operations and efficiency levels in the economy. It dates back during the crisis period (2003-2009). The crisis originated from Central bank policies adopted during and before the crisis. The Reserve Bank of Zimbabwe (RBZ) adopted an uneconomic formula to control the level of money supply in the economy, and hence it failed to control the economy. The RBZ failed to control its independency status from the political family and hence supported uneconomic projects by printing excess money.

The relationship between the RBZ and other financial institutions during the crisis period can be explained y what the RBZ called ‘Financial Indiscipline’ in 2008. It is reported that during the last quarter of 2008 the financial sector had fallen back into territories of indiscipline and general malaise,resulting in the contamination of ethics in such institutions as the Zimbabwe Stock Exchange (ZSE) which invented the deadly phenomena of “burning money”. Indiscipline in banking and stock markets is precisely what has largely been responsible for the global economic crisis particularly in the USA, RBZ Monetary Policy (2009).

The RBZ Governor, was quoted in his Monetary Policy Statement, blaming the Financial sector and warning it against indiscipline in the market;

“As true as the sun rises and sets each day, the “miracle” of “burning” money could not be sustained by men and women born of flesh and pretending to have the supernatural powers of our Lord Jesus Christ. It was soon to back-fire and consume those who were stroking the fires in the first place.”

The Governor argues that it is the activities of the Financial sector that transforms to the Central bank to be blamed, hence he has warned it several times, and has put measures to control their activities. The Governor specified that new measures constitute a war against idleness as without some gainful activity, citing roadport and world-bank sextillionaires destined for the starvation market. Hence from this evidence the RBZ has both social and economic influence on individuals and companies, and it is the impact of its influence that we seek to analyse. It was pointed out that individual and collective actions of the past have not taken the economy anywhere, particularly in the areas of advancing collective socio-economic programmes, hence RBZ initiated change of behavior, even from the politicians and diplomats. The RBZ set up a 5-year framework to guide the financial sector activities so that no shift from core banking business to speculative transactions.

Zimbabwe’s financial sector is relatively sophisticated and consists of the Reserve Bank, discount houses, commercial banks, merchant banks, finance houses, building societies, the Post Office Savings Bank, numerous insurance companies and pension funds and a stock exchange. As at 25 January 2009 Zimbabwe has 15 commercial banks and 4 building societies under the supervision of the Reserve Bank of Zimbabwe.  

Commercial banks have been and are one of the most important contributors of private sector credit and therefore highly influential over most areas of economic activity. However, currently they are facing financial constraints, as the Reserve bank cannot perform its function as a lender of last resort due to the phasing out of the Zimbabwean local currency. Commercial banks have in fact changed their loan structure, they are now lending short term loans, just for their survival and to certain credible analysed economic agents. Short term loans are very costly as the interest is very high. They can’t be used for sustainable investment, as capital investment needs to be matched with long term loans. Hence, various organisations are financially constrained, with several Small and Medium Enterprises (SMEs) shifting their operations, and the shift is not proper for the growth of the economy as it creates gaps in the economy. The banking sector has since facing problems; they have retrenched their workforce, as they have shut some operations due to the crisis.

The performance of the financial sector currently can be explained by the return on investment registered through the Zimbabwe Stock Exchange (ZSE) market. Very few companies registered on the stock exchange are making huge returns. The volatility of the Mining Index and Industrial Index is very low, indicating

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