Ills of pillow banking


The history of banking is closely related to the history of money as a store of value and medium of exchange. In the ancient forms of banking, wealth was usually deposited in temples and treasuries.

By Jelousy Chishamba

Banking, in the modern sense of the world, can be traced to its renaissance where the mandate of banks was (and is) to be the custodians of deposits from surplus units and a conduit for funding deficit units of the economy.

It follows that the development of banking and growth of modern economies is inseparable. This economic growth equation is effectively satisfied when the bankable citizens save and/or or transact through the banking system. In Zimbabwe, whereas the bad apples and fly-by-night institutions have painted a wrong picture about the relevance of banks, the culture and importance of saving in banks cannot be underestimated.

The adoption of the multicurrency system with the dominance of the United States dollar (USD) has changed the face of banking. The favourable tale is that the country has a stable currency which satisfies all the qualities and attributes of what is universally considered as money.

Going by its qualities, money, particularly the USD, is considered a store of value. Most importantly, what matters is where the economic agents choose to store this value that is either in banks or in their homes. The daily long queues of cash withdrawals in the country is testament to not only productive labour time and efficiency lost but citizens opening bank accounts at their homes – money withdrawn and not deposited back in banks.

From an analytical perspective, while the adoption of the USD has helped to exercise restraint on willy-nilly money printing, it has also resulted in mini or passive bank runs on a daily basis. A run on one bank has the potential to impact the health of other banks.

This causes significant harm to the economy because of the pivotal position of banks in the economy. The banking system is gradually weakened by selfish desires where citizens have bank accounts in their homes, shunning regulated banks.

In as much as every citizen and/or corporate will endeavour to err on the side of caution due to previous policy errors and experiences, a holistic macro-economic view of the current cash withdrawal spree may be enveloped by the old adage penny wise, pound foolish. There is much concentration on the minor and precautionary withdrawals at the expense of the economy which is sustained by savings and the flow of money through banks.

Often, when central banks realise that the notes and coins within the financial sector are “disappearing” into the black market or not being deposited back in banks, demonetisation is the last resort. Demonetisation is when a currency is stripped of its status as legal tender and it is normally replaced with another currency.

The objective of this is to encourage trade, reduce dependence on cash and combat corruption. India, one of the fastest emerging markets, was hard-hit by the scourge of cash economy risks where some money was not circulating through the banks. In November 2016, India was left with no option but to demonetise some high-value notes and increase advocacy for remonetisation of the digital economy. For Zimbabwe, unlike other countries, the use of the multicurrency system makes it more onerous for the monetary authorities to address this economic sin of banking under the pillow. More so, once a country has dollarised, disorderly de-dollarisation is economically painful if it is not supported by the right discipline and fundamentals.

In the context of Zimbabwe, pillow banking is an indigenous term referring to the practice of keeping deposits mostly in the form of cash outside the banking system, informally referred to as under the mattress or pillow. In this instance, citizens view themselves as better custodians, insurers and or underwriters of their own deposits.

Pillow banking is a double-edged sword as it threatens to alter the modern economic order of the flow of money and its obvious effects are to weaken the economy. This phenomenon is also exacerbated by the proliferation of the informal sector operating on cash basis, cultivating this mantra of a cash economy mindset.

In the 2017 Monetary Policy, the RBZ estimated about US$600 million circulating outside the banking system whereas some forecasts have put the figure around US$1 billion which is outside formal channels. By simulation of the average withdrawals and the working population, the balance of cash circulating outside banks can be in excess of the aforesaid estimates. Whereas some may cite declining confidence in banks’ roles, when transactions are skewed towards cash most of them are undeniably meant to evade taxes with what is globally termed as the black economy.

Cash outside the banks also deprives access to the deficit units who intend to use it for productive purposes. For example, where the foreign currency is supposed to fund the productive sector, it remains deposited under the pillow and cannot be used to fund deficit units. This results in the vicious cycle of poverty where the productive sectors are left with no option but to downsize operations which results in continued unemployment and increase self-inflicted poverty. Globally, countries that achieve high rates of sustained and inclusive economic growth share common attributes and chief among them is the ability to keep money within banks.

Without the banking system, the modern economy cannot func­tion properly. This is worsened in Zimbabwe’s case which is characterised by sluggish inflows of foreign savings — the savings gap is wide. With no easy way to get the funds from savers into productive investment, the economy faces bigger problems.

By mobilising the savings of millions of savers in an economy and channelling of same to the deficit spending units, the capital needed for economic growth and development is enhanced. Savings create capital formation, reduce the burden of foreign debt and lead to fuller utilisation of available resources, thus leading to improved national output. In view of the foregoing, there is need to rein in this culture or belief that all transactions can be done by cash and adopt a savings culture.

The capacity of a nation to ensure that most of its transactions go through the banking system is strongly related to its ability to achieve elevated, sustained and inclusive economic growth and social development. Developing countries have always been constrained by inadequate savings and investment. There is persuasive evidence that a high domestic savings rate among economic agents supports investment spending which is the lifeblood of economic growth and development. This calls for the provision of greater incentives to save via specific financial instruments.

There is a need for the country to embrace financial inclusion and wean off the cash economy mindset. The world is moving towards digitisation and there is global cooperation against tax havens, tax evasion and stamping out the shadow economy, parallel economy and move towards a more formal economy.

As policy advice, there is a need to place high importance on improving the digital infrastructure of the country with better reach to rural and semi-urban areas as the country moves towards the cashless economy. This needs to be supported by regulation which penalises economic agents pushing to weaken the potency of this cashless system through price distortions.

Zimbabwe is arguably underbanked given that the current focus on financial inclusion has been more on urban areas whereas around 67% of the Zimbabwe population live in the farms and rural areas with no access to banking services.
The current increase in Point of Sale (POS) machines is quite commendable and needs to be complemented by banking the unbanked and increasing the distribution of access points in rural areas. While banks are downsizing brick and mortar structures, there is a need to broaden access to financial services through leveraging on the current mobile phone penetration.

The birth of Zimbabwe’s Financial Inclusion Strategy 2016 – 2020 is a noble idea. The strategic goals of the inclusion strategy are to increase the overall level of access to affordable and appropriate formal financial services within the country from 69% in 2014 to at least 90% and raise the proportion of banked adults from 30% in 2014 to at least 60% all by 2020. These are optimistic targets which must begin with attracting cash circulating outside the banking system into the mainstream sector.

The vision for a digital currency must be strengthened in the central bank’s financial inclusion strategy to address accessibility and affordability to banking services. Banking has evolved over time and it is the prime time for economic agents to support the economy by transacting through banks and closing automated teller machines (ATMs) in their homes for the greater benefit of the economy.

Chishamba is a Zimbabwean banker based in Harare. He has experience in treasury and corporate banking and writes in his personal capacity.

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