Dynamic Research Journals (DRJ)

Journal of Economics and Finance (DRJ-JEF)

Volume 1 ~ Issue 2 (November, 2016) pp: 19-22
www.dynamicresearchjournals.org

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Snapping Cash: Unholy Bank and Transaction Charges
Wellington Garikai Bonga

Received 20 November, 2016; Accepted 25 November, 2016; Published 07 December 2016 The
author(s) 2016. Published with open access at www.dynamicresearchjournals.org

Abstract:- Banks and financial institutions are increasingly coming under pressure from shareholders to deliver an
acceptable return on investment. A new textbook for the banking sector in Zimbabwe is currently due. Banks are no
longer offering welcome services as theoretically known. Investment in banks through deposits only benefits the bank
owners, and they have nothing to offer except taking investors monies through high bank charges and transacting
charges, with little or no interest. The regulating Authority, has if properly intervenes anyway, has failed to create
and supervise a banking environment embraced by many. This paper is a policy prescription which calls for better
control measures to be put in place to restore a viable banking sector with manageable costs. Punitive bank charges,
if left uncontrolled, could further diminish confidence in the turbulent financial services sector, which is critical in
allocating resources in an economy. The study recommends banks and financial institutions to resort to other solutions
to curb their challenges rather than reaping the already struggling depositors. Corporate governance is highly
expected from banks. Capping bank charges and transaction charges at a bearable magnitude for a lengthy period is
expected to restore depositor confidence and hence help easing liquidity challenges currently bedevilling the economy.
Key Words: Banking Sector, Bank Charges, Transaction Charges, Bank Deposits, Interest Rate
JEL Codes: E41, E42, E43, E58, G01, G21, G23, G34
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I. INTRODUCTION
Banks and financial institutions live on interest income and non-interest income among other sources. As
indicated by Oteng and Luthur (2014), banks are in business to make profit. The major source of income for banks
and financial institutions in a stable environment should be interest income, as their main function is to act as an
intermediator between lenders and borrowers of funds. Non-interest income refers to banks revenue mainly from
service and penalty charges and to a much lesser extent, asset sales and property leasing.
Currently for the Zimbabwean banking sector non-interest income is relatively significant, and this has been
attained through straining depositors of funds in form of high bank charges and transaction charges. Such an
environment has caused a public outcry, as no growth of funds is realized despite low levels of inflation prevailing in
the economy.
Zimbabwe is currently facing liquidity challenges emanating from a shrinking economy. The challenge has made
the banking sector and financial institutions to capitalize on the situation, robbing innocent investors of their hard
earned funds. The market system has responded to the liquidity challenges in the economy. In an effort to stabiles and
correct the challenges, there has been an increase in the need for electronic transactions among other measures.
Apart from market intervention, the regulating authority has been seen imposing short term measures to curb
liquidity challenges. However, the measures have been observed to lead to long term impact on the economy
(increasing fiat money in the economy, in form of bond notes and coins).
Zimbabwe, just like other nations has its citizens demanding hard currency for their day-to-day transacting. This
has imposed a maximum on the amount that can be electronically dealt with. such need for money has since been
unprotected.
Evidence from recent research indicates that the majority of banks at global level are increasingly coming under
pressure from shareholders to deliver an acceptable return on investment (Nyoka, 2015). Zimbabwean financial sector
institutions have resorted to another source of income, bank charges in a bid to improve on shareholder return on
investment.
Citizens have been faced with high withdrawal charges on top of high monthly bank charges. Also with various
limits on the amount to be withdrawn daily and weekly from ones account. The withdrawal charges are therefore
taking a significant portion, and this is worth to be investigated as investors savings are eroded.

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. Snapping Cash: Unholy Bank and Transaction Charges

Local financial institutions have increased service charges, taking advantage of the prevailing cash shortages.
Depositors now rely on multiple electronic transactions such as point-of-sale and Automated Teller Machines (ATMs)
transactions to withdraw their hard-earned cash locked in banks. International payment charges have also increased
the high cost of settling international card transactions.
It is very worrisome to the economy as a whole, when those banks are still posting low profit levels and losses,
yet they are taking money from depositors out of nothing simply by imposing high transacting charges. The future of
banks remains uncertain if they are not manipulating documents for tax purposes (a fact that should be investigated).
Non-performing loans have been on the rise since the adoption of multicurrency in 2009. This has been
necessitated by the economic challenges and poor credit culture among other issues. Rising NPLs basically implies
that investors funds held by the banks are being eroded away, and with inadequate insurance, the future is never clear.
Unless otherwise, investors chances of losing their money is increasing by each day.
This short paper seeks to highlight the cruel behavior of banks and financial institutions towards investors funds.
The paper insists on a win-win situation, where the banks benefits while the investor benefits as well. The current
situation refers to banks and financial institutions reaping profits at the expense of individual investors.

II. Bank Charges Prevailing in Zimbabwe Financial Sector

Currently, the economy is grappling with an unprecedented shortage of notes, which has forced banks to limit
daily cash withdrawals. Depositors have of late, been forced to make increased visits to the banks to withdraw
their funds (multiple withdrawals per period), due to the cap imposed on withdrawals. Depositors currently rely
on multiple electronic transactions such as point-of-sale and Automated Teller Machines (ATMs) transactions to
withdraw their hard-earned cash locked in banks. Each withdrawal is however tied to a fee, hence huge significant
costs for depositors. Also, banks have been charging very exorbitant interest rates on loans.
Before the cash crisis, most banks were charging withdrawal fees of about US$3 for withdrawals made in the
banking halls and US$2,50 for withdrawals done on Automated Teller Machines (ATMs) for cash of up to US$1
000. As of 2016, depositors have been parting with US$20 for a withdrawal of US$1 000 made over several days
because of the cash limits, implying a hike of between US$17 and US$17,50 or nearly 570 percent. However,
important to note is that some banks, especially foreign banks, are charging slightly less, but on average, all have
increased their withdrawal charges by huge margins.
The case is the same for international payment charges. They have gone up because of the high costs of
settling international card transactions. Cash withdrawal fee for international debit cards has gone up from 3% to
5% per each transaction, with a minimum charge of US$3,50 per transaction for those using Mastercards.
The debate around the efficacy of the financial institutions in Zimbabwe has been going on since the
introduction of the multicurrency system in 2009 (Sanderson, 2015).

III. Functions of Banks

The main function of the banks is to act as an intermediator between deficit units and surplus units of funds
among other functions in the economy. The functions can be defined as primary and/or secondary. A clear picture of
bank functions is shown in Figure 1 below;
Figure 1: Functions of Banks

Source: http://kalyan-city.blogspot.com/2011/04/functions-of-banks-important-banking.html

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Figure 1 above, clearly shows the functions of banks and financial institutions. The roles include accepting
deposits and granting advances to those who need funds. Banks also perform agency functions, these includes
salary processing, stop order facilities for payments. The institutions also assist in underwriting of shares and
social welfare programs. From Figure 1 above, it can be clearly seen that the institutions play crucial roles in the
economy, and they can never be ignored or excluded from their operations.
This short paper is much concerned about the primary functions of the institutions. They accept deposits and
they have to offer interest while charging holding and transaction fees, and also offering loans to deficit units.
The institutions are currently characterized by high transaction charges, high bank charges and high interest rate
as compared to deposit rate (high interest rate spreads).

IV. How Banks and Financial Institutions Make Money

On average 97% of the money circulating in the economy is made by banks and financial institutions, whilst
the remaining 3% is created by government. The banks apply a concept commonly known as multiple deposit
creation, in making money (The process whereby banks make loans equal to the amount of their excess reserves
and create new checkbook money). Through their lending activities, banks increase or decrease the checking
deposit component of the money supply; checking deposits make up the largest portion of money supply (Beale,
1996). Whenever a bank makes a loan, it simultaneously creates a matching deposit in the borrowers bank
account, thereby creating new money.
However, important to note is that the amount of money created in the economy ultimately depends on the
monetary policy of the central bank (McLeay, Radia and Thomas, 2014). In normal times, this is carried out by
setting interest rates and the central bank can also affect the amount of money directly through purchasing assets
or quantitative easing. Worth to note is that bank credit creation does not channel existing money to new uses,
but it newly creates money that did not exist beforehand and channels it to some use (Werner, 2005).
Most of a bank's revenue comes from the interest they receive on the money they lend. Banks basically make
money by lending money at rates higher than the cost of the money they lend. Interest is, however, also a major
cost for a bank, as savers receive interest on their savings. Banks earn more money by charging more interest on
loans than that they pay on savings. However, as this study recommends, there should be an optimum spread
between loan rate and deposit rate.
Interest income is used to cover the costs involved in keeping interest-rate risk under control, to cover losses
on loans that are not repaid or not repaid in full, and to pay the bank's overhead, such as wages. As noted earlier,
besides interest income, banks also make money from other transactions and services, such as providing financial
advice and products to large corporations.

V. Zimbabwe Financial Sector

Zimbabwes financial sector is relatively sophisticated, consisting of a Reserve Bank, discount houses,
commercial banks, merchant banks, finance houses, building societies, the Post Office Savings Bank, numerous
insurance companies and pension funds and a stock exchange. As a result of the liberalization of the financial
sector in 1991, the establishment of local banks has grown considerably (Zimbabwe: Survey of Financial
Institutions).
The country of Zimbabwe is currently having low financial literacy levels, in terms of the population banked
as compared to the total adult population. This implies a greater opportunity for growth of banks in terms of
deposit attraction especially for the rural population.
The banking sector over the years have seen the collapse of some institutions due to various reasons ranging
from poor corporate governance to macroeconomic factors.
Table 1: Zimbabwe Banking Sector Composition
2010 2011 2012 2013 2014 2015 2016
Commercial 17 17 17 16 15 14 13
Banks
Merchant Banks 4 4 4 2 1 1 1
Building Societies 4 4 4 3 3 3 4
Savings Banks 1 1 1 1 1 1 1

Table 1 shows the composition of the banking sector over the period 2010-2016. There is no significant
change over the areas. Some banks have been closing while other new ones emerge. Merchant banks have a

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significant decline from 4 to 1, this shows instability in the sector and the future for merchant operations are now
questionable.
There is greater need for addressing factors that are affecting banks. Banks should put forward adequate
documents to support their journey. Short term measures, such as transferring the burden to the depositors is
against corporate governance issues. This study suggest that banks and financial institutions should resort to better
solutions to solve problems rather than doing injustice to the depositors through high bank charges and transaction
charges. The regulator of the banking sector should do an appropriate informed research on the future of banks
and work on solutions in time.
The researcher recommends low high bank charges and transaction charges. This boost the trust with banks
and ensure increased deposits attraction and hence help ease liquidity challenges in the economy.

VI. Conclusion
Banks and financial institutions are key to an economy, they contribute to the development of the economy
as they facilitate the national payment system, advance loans to major economic players who then use the funds
for infrastructure development, for job creation and other economic activities that benefit the society at large.
The study analysed Zimbabwean banks and financial institutions behavior in relation to their bank and
transaction charges. Since dollarization era (2009) to date, depositors have been faced with high bank charges
and high transacting costs. This has led to investors reaping low to zero returns on their deposited funds. As noted
by Nyika (2015), concerning South Africa, Zimbabwean banks, due to their high bank charges and transaction
charges, have lost patronage to and led to the immergence of non-banking sector financial institutions such as
Eco-Cash, Net-cash and Tele-cash among other.
The study noted that, increase in non-interest income for banks have been mainly caused by loss in corporate
governance, when banks capitalize on economic crisis prevailing to rob depositors, poor investment usage of
funds, and poor monitoring and control from the central bank.
The study recommends that the Central bank should intervene in the financial sector and set caps on bank
charges and transaction charges in line with other regional counterparts. Furthermore, financial institutions should
develop a fair culture that benefits both the institutions and the depositors. The culture enables both players to
develop and grow, not one sector progressing at the expense of the other. Therefore, banks to review their bank
charges and transaction charges downwards. Banks therefore need to be efficiently fully engaged in financial
service provision in a manner that embraces customers and at the same time avoiding emergence of
disintermediation.
Policies on bank charges and transaction charges cap should run for a significant period that enables depositor
behavior to be molded to trust banks and keep their funds banked. The policies will help in easing liquidity
challenges in the economy.

References
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