The Role of the Financial Sector in Zimbabwe, Central Banking and its Social and Economic Impacts’

Written by admin on August 26th, 2011

that it is not worth to invest in shares, as the return is almost to nothing. Also individuals are not able to generate savings to invest in the stock market, as many are earning very low salaries, far below the Poverty Datum Line. Workers are withdrawing all of their salaries in their bank accounts, leaving nothing for the banks to do their own investments. Banks are surviving on the bank charges and minimum balances for investing, making it hard to generate money for lending to the needy investors. Currently the economy is comprised of deficit agents who need to be rescued in the financial drought and very few surplus agents.



A central bank is known as the apex of the banking structure. A central bank is distinguished from a normal commercial bank because it has a monopoly on creating the currency of that nation, which is loaned to the government in the form of legal tender. Central banks around the world have more or less the same roles they perform for the benefit of the economy, what differs is their efficiency and scale of operation. Most importantly is the level of central bank independency to political influence. Most of the rich countries today have independent central banks, that is, ones which operate under rules designed to prevent political interference. Examples include the European Central Bank  and the Federal Reserve System in the United States.


In a summary the general functions can be listed as follows;

1. Supervision of the entire banking system in the economy. (2) Should act as the government advisor on monetary policy. (3) Issue of banknotes and coins (printing money). (4) Acting as banker to other banks. (5) Acting as banker to government. (6) Raising money for the government. (7) Controlling the nation’s currency reserves. (8) Acting as “lender of last resort.” (9) Liaising with international bodies.


However it has to be noted that on each and every function, each country’s Central bank has its own level of efficiency depending on the resources, rules governing operations, flexibility and many other factors. The Central bank of Zimbabwe commonly known as the Reserve bank of Zimbabwe (RBZ) also performs some of the above functions and has its own efficiency levels and hence affecting the transition of the economy’s growth pattern.


 It is also worthy to explain the several functions of the Central Banks in terms of origin and development perspective. For every Central bank, there are basic functions that it has to undertake for the public’s benefit and also the economy in general. It is taken as the leader who should operate by example and should spearhead the path of which agents are to take. Hence the Central Bank has both Economic and Social influence.



Traditional functions refers to the obvious roles that the bank should be carrying. If the Central bank is not efficient in these roles, it can be quickly criticised by every economic agent. Inefficiency is quickly detected.


The functions can be given as follows;

1) Public confidentiality. (2) Uniformity in money issued. (3) Easiness in credit control (4) Control in value of money. (5) Economy (6) Elasticity (7) Stability (8) Easiness in monitoring and controlling


If the functions are well undertaken by the Central Bank, the economy is said to be stable and economic agents should be earning normal business profits, workers earning decent salaries, goods well priced and social status acceptable.


Developmental functions refers to those functions that are strategic in nature and helps the overall economy to be competitive to other nations. They are associated with various economic policies that guide the entire nation on good business practices that enhance efficiency. The functions involves publication of economic data that can be used by various economic agents for their own analysis and economic forecasts, so as to determine the best ways of operation that is profitable and sustainable.


The functions can be listed as follows;

1) Economic development (2) Development of banking system (3) Contribution to the development of financial institution (4) Publication of economic data. (5) Supporting of loan to the poor sector (Empowerment) (6) Establishing the commercial banks in joint ventures (7) Development finance


If the Central Bank is not correctly partaking the functions, political influence comes into play, because they determine the efficiency of the ruling party. Also the efficient levels of the Central bank towards the developmental functions may be affected by the level of independency it has from the political world.


The efficiency and smooth running of many economies depends on the activities and functions of their Central banks, and from this phenomenon will make it necessary to analyse each basic function carried out by the Reserve bank of Zimbabwe.


This function refers to the issue of printing paper money and is not as simple as it might seem. Only the central bank has the right to issue bank notes and coins in the economy and no one else. Printing of paper money and issuing of coins is highly depended on an economic formula of which if the formula is bypassed, it will change the path of economic development of the nation and hence causes inflationary effects. During the 2003-2009 period, the RBZ abuses its right of printing and issuing notes and coins and end up printing excess money and hence inflation increases exponential and the economy was unstable. It uses the wrong formula, of issuing the notes and coins. A correct economic formula matches the level of reserves to the amount of paper/ discretionary money in the economy. Due to the abuse of the role, the Zimbabwean dollar, lost its credibility in the economy, and turned into unwanted currency. Economic agents preferred stable currencies than the local currency, enforcement of laws was done to ensure continuous existence of the local currencies but could not work. Penalties were imposed, but still could not work as the RBZ continuously printed more money to finance government expenditure. ‘Good’ money replaced ‘bad’ money in the Zimbabwean economy. Until such a time when the local currency was completely rejected for any transaction, the authorities were forced to authorise the use of other currencies for business transactions (Multicurrency regime).


Most payment these days do not involve cash but cheques, standing order, direct debit, credit cards and so on, however cash is important as bank’s cash holdings are a constraint on creation of credit. As of now the RBZ is no longer able to perform the function of issuing notes and coins, because the Zimbabwe has no currency right now. The economy is using South African rands and the United States dollar for business transactions. The amount of forex in the economy depends on the strength of attraction from the services the economy is rending to other nations, donors and credit from international organisations.


For the economy to be well function, organisations should be working at full capacity and with no constraints. One major constraints organisations face is the financial constraints. Companies usually obtain loans from banks and financial institutions, ranging from short term loans to long term loans (mortgages). However there is a time when banks are not able to meet demand and hence the Central bank has to be the lender of last resort. The government treasury bill and bond markets are covered by the central bank. It can offer in many types, there are 30 day treasury bills, 90 day treasury bills and 180 days treasury bills. One good thing with the Central bank loans is that they are cheaper as compared to commercial bank loans.


The RBZ currently is not able to act as the lender of last resort, there is no production of funds around its activities and neither can it print as there is no currency. The RBZ has lost its credibility, with the economy, other nations and development banks. In fact, it is struggling to pay its own debts, it has accrued during crisis period. Therefore, the bank cannot extend its hands to others rather is waiting for such favours.


Because, the Zimbabwean nation currently has no local currency of its own, the RBZ cannot fully advise the government on the central issue on monetary policy. The role implies that the RBZ would control the level of money supply in the economy to allow smooth business operations, and avoid inflationary effects. However, for the monetary policy statement is still issued in the economy, only to explain the happenings in the economy as far as interest rates are concerned. The monetary policy is no longer the road map which economic agents rely on, and it has lost its traditional importance.


The Central bank should be at the top of all other banks and hence regulating and monitoring the activities of the sector. The RBZ was in charge during the period, it was monitoring the minimum capital requirement levels. During the period some banks which were not performing according to the required level and not in line with the set regulatory framework were forced to close and some merged, for example the Time Bank was closed, Intermarket Bank was swallowed by ZB Bank family.


During the crisis period the RBZ engages itself in various social programs, for example empowering citizens through the Mechanisation Programme. This was of great importance fro some individuals, although not all people were involved and the way it was done through excess printing of money. The program raises

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