HARARE, Zimbabwe (PANA)�Zimbabwe�s banks, which for years have been the investor�s first choice as they offered annual gains of up to 65 percent in interest, are now facing a massive capital flight to the equity market after cheaper funds made available by the Central Bank sharply brought down interest rates.

The Reserve Bank off-loaded $200 million (U.S.) on the money market three-weeks-ago for on-lending to the productive sectors at concessionary interest rates, as part of a new government initiative to rejuvenate the economy.

The move, widely welcomed by the country�s business community, has forced interest rates on bank loans to tumble from as high as 70 percent to around 15 percent, setting off a massive capital flight to the equity market which had remained in the doldrums for years as investors focused attention on the money market.

The Reserve Bank specifically required banks to lend funds drawn on its $200 million facility, targeted at agriculture, tourism, mining and manufacturing at no more than 15 percent, creating a glut of cheaper funds on the market.

The excess liquidity has forced banks to sharply reduce interest rates even on funds outside the central bank facility, giving the business sector a long-sought respite which analysts say may be the key to reviving Zimbabwe�s troubled economy, which declined by 4.2 percent last year.

But investors, who had been in a long romance with the money market, did not take long to extricate themselves from the courtship after the central bank�s move took the shine off the relationship.

And for understandable reasons, bank call rates had declined from about 40 percent to five percent per annum, while rates on 90-day negotiable certificates of deposits dropped from 55 percent to 14 percent.

"The past few days have seen short-term rates continuing to drop as high levels of liquidity persist in the money market, with daily surpluses of more than $100 million being recorded on some days," said Howard Sithole, a bank economist.

The main beneficiary of the money market�s woes has been its chief rival, the equity market�the Zimbabwe Stock Exchange (ZSE).

It has captured the bulk of the investors and funds withdrawing from the money market, jolting it into strong vibrancy after years of playing second fiddle to the money market dominated by commercial banks.

"There is a strong appetite for stocks, and this seems to be driven by institutional investors pulling out of the money market," said a ZSE official.

For the banks, the capital flight has thinned out margins and left them little room, if any, to maneuver to re-capture the lost business.

Most bankers concede that as long as the excess liquidity prevailed, they had little chance of re-snatching investors away from the equity market, which last enjoyed the good times way back in 1997 when it was voted one of the world�s best performing bourses by the International Finance Corporation.

Few are shedding tears for the banks, long accused of profiteering by charging huge margins of as high as 70 percent on loans.

"Mine are crocodile tears," said Shadreck Sando, a businessman forced into liquidation last year by a commercial bank after defaulting on a loan re-payment.

But some analysts suspect the government had flooded the market with cheap central bank funds, mainly to benefit itself from the resultant lower interest rates.

With a staggering domestic debt portfolio of over $4 billion, the government was coughing up millions of dollars weekly in interest, a factor widely blamed for the country�s high inflation of 56 percent.