The financial sector plays a crucial intermediation role by mobilising funds from depositors and redeploying to entities which require financial support for various reasons in particular for business purposes.
In harnessing/mobilising these resources, it is imperative that banks on lend these funds to best advantage so that they are repaid to depositors as and when requested.
At times some of these funds are not repaid timeously or are entirely lost as a result of poor lending. It is for this reason that the Deposit Protection Corporation was conceived in order to protect depositors from loss of funds.
As banking has become technologically driven, a number of issues and challenges have arisen which necessitates deposit insurers to adopt ways and means of mitigating these challenges.
The financial sector in Zimbabwe is made up of various players offering a wide spectrum of financial products and services. Of late the financial system in Zimbabwe have leveraged on the high mobile phone penetration rate by partnering mobile network operators (MNOs) to offer a range of efficient and safe digital financial services to different market segments, thereby broadening the consumer choices.
Chief among the beneficiaries has been the informal sector and the small to medium enterprises who because of their characteristics have difficulty in opening bank accounts. The economy has been experiencing increased use of mobile financial system. All banks have partnered Mobile Network Operators to offer MFS. As at end of August 2016 electronic money balances amounted to $105 million. Before MFS these funds largely represented cash in the economy outside the banking system.
Interoperability, the ability of the payment systems to interact at various levels, is important in promoting convenience and reduction of operational costs.
The deregulation of the financial sector and emergence of new financial instruments and services offered by financial institutions has blurred boundaries between different types of financial institutions such as banking, insurance and securities.
Evolution of deposits and mobile transactions in Zimbabwe
The total amount of deposits in the banking sector increased from $382 million in February 2009 to $1,4 billion in December 2009. The growth trajectory in deposits continued in the subsequent years to reach $4,32 billion and $ 6,4 billion by August 2014 and June 2017 respectively. There has been an increase in confidence in the banking sector by the public since 2009 which saw them increase their use of banks.
The increase in deposits was a result of increased salaries as well as increased production in industry since the adoption of multi-currency in 2009. The various incentives that banks have been offering, including the increased product offering, have also assisted people to use the banking sector. Most individuals in the formal sector were forced to open bank accounts so as to get loans, as banks went on a drive to offer salary based loans.
Banks also have been involved in negotiating offshore lines of credit which has significantly increased their resources. Despite the increase in deposits, the growth rate in the total deposits started to decline in 2013. The growth in deposit albeit more so as a result of RTGS settlements is a function of:
The unsustainable fiscal imbalances being financed by rising domestic borrowing.
The expansionary fiscal stance which curtailed net capital flows, and declining investor confidence have resulted in cash shortages. In response the government has introduced capital and current account controls and quasi-currency instruments in the dollarised economy.
Budgetary operations are crowding out the private sector, and the expenditure profile tilted towards employment costs and unsustainable agricultural support is inhibiting investments in other priority sectors, particularly infrastructure and social outlays.
Credit to the private sector remains subdued, and some domestic banks face increasing risks emanating from fiscal imbalances.
Commensurate with the developments obtaining on the deposit market, there has been an increase in the amount of transactions being done through the mobile money. There has been improved use of mobile transactions in the economy as a result of the cash shortages that engulfed the country since 2013. The increased uptake of mobile money rides on the increase mobile penetration rate in the country.
According to the Postal and Telecommunications Regulatory Authority of Zimbabwe (Potraz), the total number of active mobile telephone subscribers increased by 1,4 percent to 12 878 926 during the quarter ending December 31, 2016, from 12 696 303 recorded the previous quarter. The futility increased sign up is supported by statistics from the Finscope survey which revealed that 45 percent of adult population (3,25 million) was registered with mobile money platforms in 2014, which compares favourably with 2,08 million or 30 percent of adult population with bank accounts.
It is expected that the use of mobile money in the country will continue to increase as the cash shortages in the country persist. The efforts by mobile financial services providers to penetrate the traditional banking space is being aided by the central bank’s drive for increased financial inclusion as well as the need to come up with a permanent solution to the cash crunch. One observation that comes clearly from the statistics on mobile money transactions and total deposits is that there is a positive correlation between the two. The Growth in total deposits (M3) is moving in tandem with the growth in mobile money transactions. The increase in mobile money transactions reflects the fact that people are being increasingly confident in the platforms being offered by the MNOs. This is a result of a number of factors among which include:
Increased mobile penetration
Growth of the informal sector
Low access to traditional banks
Improved internet availability
Loss of trust in banks
Increased security on mobile internet platforms
Challenges of financial technology deposits
One of the important challenges pertains to how mobile money should be regulated. As fintech start-ups generally do not operate like a full-fledge bank or insurer, they tend not to be subject to the same regulations that govern more traditional players in the financial system. Not surprisingly, the existing regulatory framework is geared towards supervising more traditional financial services providers who can be more easily categorised as banks, insurers and asset managers.
How is a deposit defined? In light of the developments in fintech, the definition of deposit has become complicated due to rapid evolution of digital financial services bringing in the unserved and underserved customers in completely new ways also due to emerging retail payment systems.
Also ambiguous differentiation between transactions and deposits. A number of transactions recorded as deposits are payment and transfer transactions, which are in transit (no wonder majority of deposits are short term.
The appearance of electronic wallets, prepaid plastic or virtual cards, online transaction accounts, and other value-storing instruments is making it harder for authorities, providers, and consumers to identify clearly what products are, or should be, considered deposits — and which are “deposit-like” enough to consider insuring. There is also the challenge of how to insure such products. Literature show that there are three possible approaches:
i. The exclusion approach, whereby such products are explicitly excluded from deposit insurance coverage, although other measures to protect customers’ stored value are adopted;
ii. The direct approach, whereby such products are directly insured by a deposit insurer and their providers must be or must become members of the deposit insurance system; and
iii. The pass-through approach, whereby deposit insurance coverage “passes through” a custodial account at a depository institution that is a deposit insurance member and holds customer funds from deposit-like stored-value products, to the individual customer of the digital product provider (although this provider is not a deposit insurance member). There is no specific law on consumer protection given the limited coverage of mobile money accounts by the deposit protection scheme. Given the high preference for cash (cash is king), there is high velocity of circulation for mobile money which makes it difficult to measure at any point in time. This is being slowed down by the scarcity of cash in the economy at the moment. Cash challenges, makes put a premium on payment done with fintech platforms and a discount on cash payments. There is still challenges on the interoperability between alternative fin tech platform and bank platforms (although ZIMSWITCH has helped improve on interoperability). There remain confidence challenges in the banking sector. People have high preference of alternative fin tech products (MNO based) to bank based mostly because of their convenience.
The future of banking hinges on how the traditional banking and mobile banking are going to converge. This would require legislation that ensures that there is level playing field between MNOs and banks. This should be couple with mechanisms that ensures that the deposit protection is extended to the mobile money to ensure holistic safety and stability of the whole financial system.–herald.co.zw