This year in June, Zimbabwe’s central bank urged the banking sector to pay interest on savings and fixed accounts deposits starting July. Under this directive, banks started offering 5% and 10% interest on Zimbabwe dollar savings and fixed term deposits accounts, and 1% and 2.5%, respectively on US dollar accounts.
The main aim of the regulation was to lure more depositors but the public has already lost trust in the banking sector.
“The interest of 1% is not competitive as it is by far less than the inflation rate and the tax burden. To add, there is no certainty that one will get even the principal only without the interest after the savings mature. You are best at policy inconsistences. People won’t be motivated,” commented economist Sam Mutenga on the RBZ twitter handle.
Feedback from the public after the interest on deposit directive has proven that Zimbabweans lost trust in the banking sector. The banking experiences in Zimbabwe are so unattractive, with long queues, dreadful lending and deposit rates. DeFi platforms provides better services if it’s in terms of banking. The Zimbabwean government must consider the adoption of DeFi banking systems as they can replace the traditional ways of banking by catering for public sector concerns.
Decentralised Finance (DeFi) platforms allows businesses to carry out their own financial transactions using block chain technology cutting off the traditional untrusted financial intermediaries like the physical banking sector. Block chain technologies has inspired the development of these financial application which can be used to do all the banking transactions online.
DeFi is a noteworthy sector of financial technology (fintech) activity and there have been debates on what will happen to the African financial system and businesses if DeFi is fully adopted. If the Zimbabwean government would consider adopting laws that support DeFi it can be a better move for economic recovery than only relying on the traditional financial systems with intermediaries.
High lending rates and low deposit rates is a contributing factor to the economic crisis in Zimbabwe. The “Zimbabwe is open for business” mantra in the new dispensation is somehow being affected by the high lending rates as small businesses cannot easily access loans.
Business loans have always been the means of securing funding for SMEs but some start-ups find it impossible in Zimbabwe and end up closing down.
In DeFi, users can access loans at lower rates better than going through exchanges via traditional loans. Easy access to loans means that there is improved efficiency of factors of production such as land, labour and capital. The theory part of it has it that if businesses or start-up companies can improve the efficiency of all the factors of production, they can create more goods of higher quality at a lower price thereby stimulating economic growth as measured by GDP.
Instead of putting the apex bank at the centre of all transactions, the Zimbabwean bank should consider adopting DeFi platforms. This will bear the nation more fruits for the Zimbabwe is open for business mantra” as more business can get capital expenditure with just a click.
In terms of DeFi regulation, Zimbabwean policy makers can craft new frameworks with the help of the public through comments and consultations. These new frameworks can be combined with the existing regulation which can be a way of mitigating financial risks associated with DeFi.
To consider can be the Zimbabwe Block Chain Technology and Digital Asset Business Bill by advocate Prosper Mwedzi which vows for the licensing of local companies that enable buying and selling of digital assets in Zimbabwe.
Another option which can be considerable in Zimbabwe is the use smart contracts while executing DeFi transactions. Smart contracts are contracts recorded in form of computer codes thereby removing the needy of third parties and issues to do with financial trust. Using smart contracts in loans, two parties can make an agreement and once the conditions of the agreement are met the transaction is automatically executed.
However, it is important to consider that smart contracts do not prevent fraud, illegality in the formation process. The technology itself cannot solve human-driven abusive practices in the contract formation phase hence the issues to do with financial consumer protection must be looked at before adoption.
If regulators have access to block chains on which smart contracts are hosted, such technology could facilitate financial consumer protection oversight in retail finance. Nevertheless, policymakers and practitioners will need to carefully consider how the deployment of smart contracts in retail finance accommodates a variety of financial consumer protection imperatives, particularly allowing customer mobility, providing for dispute resolution, preventing unfair and deceptive acts or practices, and disclosure.
Additionally, smart contracts must be governed by laws and if a smart contract violated the law, it would not be binding or enforceable. Thus, courts will still need to address these matters and evaluate defenses to formation.
Zimbabweans have had a number of trust breaking experiences with the banking system with loss of savings and account raiding. Through using DeFi platforms, trust in banking can be redefined as data is made available to the users.
According to the World Economic Forum, DeFi activity spans many domains of financial regulation, including securities, derivatives, exchanges, investment management, bank supervision, financial crime, consumer finance, insurance, risk management and macro prudential oversight. This ensures safety to users.
Also, the software developers and token holders may be easily identifiable, but not those occupying roles that are the traditional regulatory touchpoints. And even when operators can be identified, they may lack the ability to modify DeFi services or stop transactions because of the decentralized nature of the protocols.
DeFi is an opportunity which can’t be missed by developing economies like Zimbabwe. The government, through the treasury department should make use of the shining opportunity in its bid to improve the economy.
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