Financial deepening is critical for a country, if it needs to register economic growth. Today's offering will discuss financial deepening in the Zimbabwean context.
It will provide examples of the state of financial deepening within the country, whilst offering recommendations on how greater financial depth can be realised.
Financial deepening refers to the development and widespread accessibility of financial products and services within an economy. Examples of such products and services are mobile money, bank accounts, bank loans, insurance, pension funds, stock exchanges, venture capital, private equity, bonds and Treasury Bills.
As such, mobile money platforms, banks, insurance companies, pension funds, stock markets, venture capital and private equity firms, private sector firms, the government and its central bank, are critical institutions, as far as a country's financial deepening is concerned.
Local developments
Zimbabwe's financial sector is shallow. High transaction costs are typical. Processes such as opening new client accounts, applying for loans and making physical cash withdrawals, are generally long and inefficient.
For example, even when making an enquiry on one's account balance, customers are charged a fee. In other countries, customers are able to open new accounts entirely online, eliminating the need for physical paperwork and in-person visits to a financial facility.
Moreover, in those efficient nations, costs are kept within modest ranges and the sanctity of time is honoured. Zimbabwean firms are also much smaller and some sub-sectors such as venture capital and private equity have an insignificant presence in the market.
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There is limited interaction with foreign capital, which further entrenches the small size of the local financial sector. A significant portion of the country's population is alienated from the formal financial sector. Considerable numbers have access to mobile money platforms such as Ecocash but unfortunately, that is as far as it gets, for most.
The majority of the population remains without a bank account. Rural dwellers and informal sector workers make up the majority of such, and because of the demographics and economy, the villagers and informal workers represent the largest proportion of the country's population.
The aforementioned, are rarely financially productive. If they become economically active, they typically keep their earnings in cash. That means their earnings are largely not kept within the formal financial sector, for onward lending to local enterprises and households, who may need to expand their operations or to purchase durable consumer goods.
Informal savings channels known as "mukando" "round" or "stokvels" are more prominent, further rendering the local financial sector of limited significance.
The Reserve Bank of Zimbabwe (RBZ) is generally perceived with distrust, causing the local currency to be undervalued, compared to foreign currencies.
Credibility issues also mean that even the affluent formal and informal sector companies who are financially capable are not making full use of the local financial services sector.
Wealthy economic participants are renowned for keeping their savings at their homes, offices or even in foreign countries, where they feel their funds are safer. These leakages mean whenever economic participants earn local currency, they are mostly inclined to either spend it on immediate needs, or on savings in the form of US dollars and other valuable assets.
Ultimately, the local financial system has little leeway for savings, onward lending to borrowers and the provision of diverse financial products. The aforementioned implies that the local economy is condemned to extremely slow GDP growth.
Multiple changes in the valuation of depositors’ funds have also entrenched instability as a familiar part of the domestic financial sector. When a significant portion of local funds are kept outside of the deeper financial sector, that also reduces the effectiveness and precision of the central bank.
Under such circumstances, the central bank will have great challenges whenever it attempts to control inflation, set interest rates, or influence economic activity, by altering the level of money supply within the economy.
This is because the effectiveness of the central bank in controlling the aforementioned is enhanced and more ascertained in an economy which assigns the majority of its funds within the deeper financial sector.
Zimbabwe's regulatory environment is strict. For example, even though local banks are small by regional and international standards, they are likely to find it hard if they try to merge with their local peers, in an attempt to create larger and more effective financial institutions.
In January 2025, a proposed merger between CBZ Holdings Limited failed to materialise, due to regulatory prohibitions which were invoked by the Competition and Tariff Commission.
Several business and household clients also report of onerous administrative processes for account opening, and fund withdrawals.
The overregulation limits efficiency, curtailing the number of customers that can be acquired as first time clients, or served in a particular period of time. It also raises costs for both the clients and the local financial sector.
The limited size of the domestic financial sector implies that the economy has unmet financing needs. Formal and informal economic participants cannot access as much loans as they deem necessary to expand their operations, hire more workers and drive vibrant economic growth.
Recommendations
There are a number of policy choices and reforms, which Zimbabwe can implement in order to promote financial deepening within the country. If successful, the improved depth of the financial sector can be expected to drive vibrant economic growth.
Firstly, the central bank should continue working on the value of the local currency in forex markets, and in relation to domestic inflationary pressures. It will be critical for the bank to renew the public's trust in the local currency and the financial services sector. If that can be achieved, then more locals will be drawn to using the domestic financial sector for their savings and investments.
An increase in deposits would drive the growth of both the financial services sector and the economy.
Authorities should seriously consider establishing alternative securities exchanges, which can link savers and investors to SMEs and emerging businesses.
Examples of such include setting up an alternative stock market at the Zimbabwe Stock Exchange, which helps emerging businesses to raise capital, under less stringent regulations.
An increase in the range and type of financial products offered by the sector should also be brought into consideration. For banks, a bank account which needs no paper work for opening, charges negligible and predictable fees, and facilitates automatic integration with a mobile money platform should be a good start.
Such products can attract the traditionally unbanked sections of the population, thereby increasing funds available for lending to entrepreneurs and consumers who depend on credit.
Considering the small size of local financial institutions, consolidation should be permitted by policymakers, including the Competition and Tariff Commission.
Consolidation will enable local firms to provide their services to a much wider client base, at much reduced costs. Innovation can also improve after consolidation. The result is that locals will have access to affordable, accessible and modern financial services. In South Africa, for example, the banking sector is characterised by high market concentration. As of 2016, 91% of banking sector assets were under the "Big five" banks, namely; Standard Bank, Capitec, ABSA, FirstRand and Nedbank.
Innovative policies will, however, be crucial to pre-empt any tendencies towards abusing the market which the consolidated firms may be tempted to do.
General economic stability will be essential in order to have an assured citizenry.
When there is stability in the financial sector and the economy, locals will be drawn to increase their savings.
Economic growth will also drive demand for more, new, and sophisticated banking products.
In this case, the point is that economic growth itself can encourage greater financial deepening.
The government, firms and households will utilise the financial sector, at a greater pace and scale, when the economy is growing.
This is because during economic upswings, infrastructure spending, expansion of productive capacities to meet growing demand and low interest rates which encourage vibrant borrowing, are typical.
- Tutani is a political economy analyst. — [email protected].
