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The price of dormancy

On the 17th of January 2020, the Monetary Policy Committee (MPC) nicodemously met at the Reserve Bank of Zimbabwe (RBZ) and made several deliberations. According to a circular that was published by the RBZ, the MPC noted a need for banks to hold sufficient capital to ensure continued stability and soundness of the financial services sector. As a result, the minimum capital requirements for banks has been reviewed upwards. This is a new headache for bank CEOs and shareholders given that most banks in Zimbabwe are still trying to recover from the scourge of value-destruction that has emanated from the hyperinflationary environment. Large indigenous commercial and foreign banks will be required to have minimum capital of USD30m in ZWL equivalent. Other commercial banks, merchant banks and building societies, will need the equivalent of USD20m in order to stay in business.

New banking business models now require banks to diversify income streams away from the traditional interest income by generating commissions and transactional revenues elsewhere. We feel most banks in Zimbabwe “left money on the table” and will now have to pay for their dormancy, particularly in areas relating to payment solutions. Mobile Money, for example has proved to be a “transformational” service that has brought financial services to the unbanked and has spread throughout the emerging economies at an unprecedented rate. In general, mobile money services include; (i) person-to-person transfer of funds, such as domestic and international remittances, (ii) person-to-business payments for the purchase of goods and services and (iii) mobile banking through which customers can access their bank accounts, pay bills, deposit and withdraw funds.

The Postal and Telecommunications Regulatory Authority of Zimbabwe (POTRAZ) recently published its Q3 2019 report showing a 2.2% increase in total active mobile money subscriptions to 7.2 million. The market share numbers clearly demonstrate how Cassava’s Ecocash platform remains the dominant player in the space. In addition, Ecocash processed 99.7% of the total value of transactions, up from 99.6% recorded in Q2 2019 as shown below;

Source: POTRAZ

Mobile Money in Zimbabwe has clearly become an important channel for effecting Person to Person (P2P) and Person to Business (P2B) transactions. Further, the growth in the value of transactions can be attributed to a number of factors such as the general increase in the cost of goods and services and the growth in the number of users. Cassava (Ecocash) has largely pursued a dominator strategy that implies controlling the whole ecosystem by eliminating all other species in their closest niche. This dominator strategy also makes it difficult for other actors to plug-in directly into the system. In other words, Ecocash determines the activities of the other species in the ecosystem. Furthermore, as a hub landlord, it controls the activities of the agents, banks, merchants and retailers in order to maximize value. Dominators are the only source of innovations in their ecosystem and give little or no room for the other species to innovate.

In order to demonstrate Ecocash’ dominance, Piggy applied the Herfindahl Index (also known as Herfindahl–Hirschman Index, HHI, or HHI-score). It is a measure of the size of firms in relation to the industry and an indicator of the amount of competition among them. It is the sum of the squares of the market shares of the firms within the industry where the market shares are expressed as fractions. The result is proportional to the average market share, weighted by market share. As such, it can range from 0 to 1.0. Increases in the Herfindahl index generally indicate a decrease in competition and an increase of market power, whereas decreases indicate the opposite.  Using market shares for mobile money subscriptions, the calculated Herfindahl Index for the mobile money industry in Zimbabwe is 0.87379 (0.93²+0.007²+0.059²), which shows that competition remains low.

Piggy notes that mobile money is built on a business ecosystem that depends on the interconnectedness of the consumers, mobile network operators, banks, agents, merchants as well as regulators. Generally, Mobile Network Operators (MNOs) have the advantage of bringing in a huge existing distribution channel that is normally far reaching than the branch institutions. Ecocash, for example was built on the Econet Wireless subscriber base. That said, there is nothing that stops an existing commercial bank in Zimbabwe from partnering with NetOne’s OneMoney or TeleCel’s Telecash. Such partnerships would not only stir competition but can achieve synergies in management and research and development (R&D). Synergy is the concept that the combined value and performance of two companies will be greater than the sum of the separate individual parts.

Advantages of Synergy

Overall, the fact that Ecocash remains the dominant player in the mobile money space means that investors will continue to have a strong appetite for Cassava shares on the Zimbabwe Stock Exchange (ZSE). The tech company has been active in rolling out new and relevant products that have been welcomed in different sectors that include Agriculture, Transport, Logistics and Health Services. Piggy likes Cassava’s asset-light strategy that taps into informal sectors.

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