- End corruption
- Learn from China — social banking does not work
- Fix the underlying issues (bankable assets and projects)
Policy Banks are banking financial institutions that are created in order to drive a certain governmental policy. They are usually created by a developmental state in order to drive growth within a specific area. Growth is driven by credit expansion. Some sectors of the economy and sections of the population are left out when banking is solely conducted by private commercial banks. They are starved of credit, thus the need for government intervention. You can view it as somewhat a case of market failure or as an outright command banking where a central government commandeers resources and activities.
The most popular Policy Banks are the three Chinese giants; Agricultural Development Bank (AgBank), China Development Bank (CDB), and Export-Import Bank of China (Chexim). These banks are humungous. The development bank has been a phenomenal success, driving the urbanization of China. China builds entire cities from scratch. Public infrastructure growth in China has been “simply phenomenal”. On the trade front, China has risen to become the center of global trade. Imports of raw materials and technology from across the world flow into China. Exports of everything flow out of China. The two policy banks supporting the two economic policies of infrastructure development and international trade have been very successful.
The development bank has been funding the Belt-and-Road Initiative, which is expanding road networks from China outwards into South East Asia and Europe. In 2008, the development bank transformed into a proper corporation.
Policy Banks are owned by the government, usually via a Ministry or government department. A policy bank is essentially the government trying to be a banker. Whilst this has been very successful in China, it has failed dismally in Zimbabwe. What could be the reasons for failure in Zimbabwe? Plenty.
We have a wide range of policy banks in Zimbabwe, for all sorts of reasons. Actually, some of the policy banks are very young. We are still in the process of creating new policy banks.
List of Zimbabwe’s Policy Banks:
- Peoples Own Savings Bank (POSB)
- Agricultural Development Bank (Agribank)
- Infrastructural Development Bank of Zimbabwe (IDBZ)
- Zimbabwe Women Microfinance Bank (ZWMB)
The POSB was created to provide banking services to those who were not banked. The average person was not being banked by the commercial banks. The name is very communist. Even though it operates as a commercial entity, the Government of Zimbabwe still owns 100%, thus it is a pure policy bank, though currently operating with a very generalized policy mandate.
The Agricultural Development Bank of Zimbabwe (Agribank) is wholly owned by the government of Zimbabwe (50% owned by the Ministry of Finance, and 50% owned by the Ministry of Agriculture). It was founded in 1925 as the Land and Agriculture Bank and subsequently became the Agricultural Finance Corporation which then became the Agricultural Bank of Zimbabwe which is now simply AgriBank. Its purpose was and is probably still to finance agriculture.
The Infrastructure Development Bank of Zimbabwe (IDBZ) was formerly the Zimbabwe Development Bank. Similar to the development bank of China, it was set up to foster the development of infrastructure. It is 100% owned by the Government of Zimbabwe. It was established by an act of parliament, the Infrastructure Development Bank of Zimbabwe Act of 2005.
The Zimbabwe Women Microfinance Bank is yet another quasi-banking institution. It is 100% owned by the Zimbabwe Ministry of Women’s Affairs, Gender, and Community Development. It was formed to foster the financial inclusion of women.
Next up is the youth. EmpowerBank is 100% owned by the National Indigenisation and Economic Empowerment Fund (NIEEF). It was formed with the purpose of providing social and financial solutions to the financially excluded population with a greater focus on the youth.
The government’s involvement in banking does not stop there. The government of Zimbabwe has a significant shareholding in the Commercial Bank of Zimbabwe (CBZ) even though CBZ is not a policy bank. The government, through its shareholding, greatly influences CBZ operations.
The Treasury Account is with CBZ. Most of the government business is conducted via CBZ. By virtue of being the largest client, it has significant influence over CBZ. In fact, the government uses CBZ as if it were a policy bank, with the policy being to lend to politicians and the central government.
The government has so much influence over NSSA, the public pension fund, which owns shares in ZB Bank, exposing ZB Bank to government policy actions.
All this involvement at the policy level in banking, over and above central banking, has not yielded a positive result set. We are not there yet with agriculture. The country is starving. We have not developed our infrastructure. Millions are still financially excluded. Women, the youth, and every other group that we can form a policy bank for have not witnessed any positive impact from the policy banks. In short, our policy banks have failed. In response, we have tried to create even more policy banks.
Where POSB failed in financial inclusion, we responded by creating the women bank and youth bank. Next up will be a rural bank and the disabled bank. Where Agribank failed in financing agriculture we responded by introducing the Command Agriculture program funded indirectly from the fiscus via a privately-owned entity.
What should we do to fix this?
The first thing to do is to fight corruption. The policy banks have not been capacitated to undertake their mandates because of corruption. Corruption at the state level has incapacitated the state. At the next level, the operations level, there is corruption. Lending decisions are not optimal. The Lending Policies of our policy banks are weaponized. They are used as instruments to reward those who are loyal to the ruling party and punish those who defect or those who don't toe the line. Loans are dished out to people who will never repay.
Learn from China — social banking does not work
China’s Policy Banks operate on a full-blown capitalistic mode. Their banks are charging the highest interest rate (almost predatory) in projects they finance outside China. Within China, projects are thoroughly analyzed before lending decisions are made.
Although the policy objectives are stated as if it's socialism at scale. The actual operations are conducted in just the same way as any commercial bank would do. It wasn't always like that. They tried social banking and it didn't work. Throughout the 2000s they transformed their policy banks into the best capitalistic banks, thus fueling unparalleled growth over the past two decades.
Banking is a capitalistic undertaking. It cannot be done socially and remain viable. You do not have to turn bankers into social workers to achieve your policy objectives. If you do so, the bank fails due to heavy loan losses. When the policy bank fails, it's doubling up on the losses, because the targeted segments that were meant to benefit in the future do not get to benefit. It's a lose-lose scenario.
Fix the underlying issues (bankable assets and projects)
There are several reasons why private commercial banks can fail to deliver the desired result sets on society, leading to the need for policy banks. The main reasons, however, are the absence of bankable assets, bankable projects, proper documentation, and collateral.
Instead of establishing a bank to lend to the undesirables, the government ought to directly address the issue by making the undesirable desirable. The problem has to be attacked at its root.
In the case of Zimbabwe, most of the targeted sections of society are not bankable because of serious underlying issues. A vivid example is the issue of bankable assets. Rural farmers, farmers under the land resettlement programs, as well as some urban dwellers do not have title deeds to the land they occupy. As such, the land (usually the only asset they have) is not bankable. For farmers, some of the livestock they have is not registered and live-tracked, thus excluding the asset from the bankable universe.
These issues are easy to fix and have to be fixed by the government. It is hard to bank people that do not have bankable assets.
Another example is that of bankable projects. When a social viewpoint is adopted by bankers, unprofitable projects can pass the criteria, which is a bad thing because it leads to loan losses. Commercial banks do not fund unprofitable projects. The government has to step in to ensure that projects that are undertaken are viable. You can fund bridges to nowhere, that are used by two cars per day. That is a social project but not profitable. For example, farmers have to be encouraged to farm profitable crops rather than just being dished loans because it is the socially right thing to do. A strong profit motive is needed.
Instead of undertaking banking itself, in a manner that loosens the documentation required before extending a loan, the government has to simply educate the people in loan applications. Don't lower the standard to accommodate your people, rather raise your people to the required standard.
The baseline is that the state has to enhance the creditworthiness of projects and making them financially viable. It is a state-supported, but market-based banking.
So, what shall we do now? The best way forward now is to consolidate all the small policy banks and quasi-policy banks into one big bank. You cannot continue creating a bank for every policy objective you can think of.
The current ones we have must be consolidated. All of them to be under one banner. POSB, Agribank, IDBZ, EmpowerBank, Women’s Bank, and any other I could have missed should form one bank with special departments focusing on agriculture financing, infrastructural development financing, etc.
The idea is to save on operating costs. One Board of Directors, one Head Office, one banking software license. One MD, one treasury department, one balance sheet to manage. One branch per location (if a brick-and-mortar branch is needed) as opposed to having a POSB Hwedza branch right next to an Agribank branch, and behind them an EmpowerBank Branch which is next to a Women’s Bank, all of them owned by the same shareholder.
The idea is also to establish a capable bank. One large, well-capitalized bank can do more than 5 poorly capitalized banks. One big bank can absorb more risk. It can fund complex, large projects that fundamentally transform the country.
Lastly, the government itself is bad at doing business. Banking is a serious business. China executing this well is an exception, not the rule. Our government is simply not competent enough to operate any business, thus it's best for it to get out of the way. Privatize the consolidated entity and focus on creating the right incentives for the private sector to conduct efficient banking that also includes sectors of the economy and sections of the population that are usually excluded.