Harare,– Experts warn that a lack of trust in financial institutions such as banks, pension funds, and insurance companies poses a significant threat to the growth and expansion of Zimbabwe’s financial services sector.
This distrust, fueled by inflation and policy inconsistencies, continues to constrain the sector despite various efforts to rebuild confidence.
Erosion of Trust and Its Impact
Since 2018, the financial sector has struggled to mobilize deposits effectively due to the loss of value experienced by depositors and savers. The insurance penetration rate remains low, hovering around 5 percent. Lawrence Nyazema, president of the Bankers Association of Zimbabwe, highlighted that inflation and policy changes are the primary causes of this distrust. He emphasized that a stable environment with low inflation and consistent policies is crucial for banks to offer attractive savings products that earn interest.
“In many countries, long-term savings come from pension funds, but in Zimbabwe, these have been heavily impacted by past inflation and currency changes,” Nyazema noted. He stressed the need for a stable environment to rebuild national savings gradually.
Challenges in the Insurance and Pensions Sectors
The insurance and pensions sectors still grapple with the pre-2009 loss of value issue. Pensioners and policyholders lost their savings when Zimbabwe switched from the Zimbabwe dollar to the multi-currency system in 2009. Despite a commission of inquiry led by retired High Court Judge Justice George Smith recommending compensation, the issue remains unresolved.
The Insurance and Pensions Commission (IPEC) reported that 372 pension funds were earmarked for dissolution, with 15 concluded by the end of March 2024. The dissolution proposals came amid ongoing discussions about compensation, highlighting the funds’ reluctance to pay clients for their losses.
Efforts to Restore Confidence
IPEC has temporarily halted the dissolution of pension funds pending the resolution of pre-2009 compensation to ensure fairness among members. The government aims to restore confidence within the pensions and financial services sectors through compensation initiatives. Despite challenges, the industry remains resilient, though more product reforms and new offerings are needed to revive long-term savings.
Nyazema pointed out that banks have been securing medium-term credit lines from external financiers for 3-5 years. He called for the introduction of more financial instruments like bonds to raise long-term funds and more savings products.
Market Risks and Financial Disintermediation
Investment analyst Enock Rukarwa explained that inflation and interest rate risks discourage effective deposit mobilization. He noted that commercial banks offer deposit rates of 5-12 percent per year, while some non-financial institutions offer much higher monthly rates, widening financial disintermediation.
Rukarwa highlighted that short-term deposits result from economic issues like low-income levels, economic informalization, and historical deposit security concerns. He argued that Zimbabwe’s history of an unstable domestic currency has eroded trust in the formal banking sector.
Stability and Financial Literacy
Since the introduction of the Zimbabwe Gold (ZiG) currency in April, backed by gold, other precious minerals, and forex reserves, the currency has remained stable. Renowned analyst Eddie Cross believes rebuilding confidence in financial institutions and the currency is crucial. Sustained stability is expected to drive savings accumulation, stimulate private-sector investment, and reduce poverty.
Banks reportedly hold nearly US$3 billion in deposits, but only half is loaned out due to their short-term nature and concerns about the end of the multicurrency system in 2030.
Enhancing Financial Literacy
According to the Reserve Bank of Zimbabwe (RBZ) Financial Inclusion Strategy 2 (2022–2026), financial literacy remains low, hindering increased usage of financial services. The RBZ has embarked on awareness campaigns and financial literacy programs to empower Zimbabweans and improve financial decision-making, particularly among marginalized and underserved groups.
“Despite a high academic literacy level of 92 percent, financial literacy is generally low in Zimbabwe. The National Financial Inclusion Strategy II seeks to empower Zimbabweans through high-quality financial knowledge and skills,” the RBZ noted.
Zimbabwe’s financial services sector faces significant challenges due to a lack of trust, economic instability, and low financial literacy. Addressing these issues through stable policies, compensation initiatives, and enhanced financial education is crucial for the sector’s growth and expansion.
Source: Business Weekly
