eBusiness Weekly
Taking Stock Kudzanai Sharara
Following the release of the 2019 Monetary Policy Statement (MPS) by Reserve Bank of Zimbabwe governor Dr John Mangudya, much of the focus, thus far, has been placed on currency reforms that saw the liberalisation of foreign exchange trading.
But developments and statistics availed by the Reserve Bank of Zimbabwe show there is something fundamentally wrong with the country’s banking sector in terms of its role to oil the wheels of the economy — banks are simply not lending.
A slowdown in credit is a red flag as it is the backbone of consumer spending and business investment. Also, without the much-needed credit creation by the banking sector, the economy cannot be stimulated into the recovery mode it badly needs.
According to statistics that were part of the 2019 Monetary Policy Statement (MPS), loan issuance declined for the period between December 2017 and December 2018. Although the nominal loans and advances increased to $4,22 billion as at December 2018 from $3,8 billion as at December 2017, the loan to deposit ratio declined to 40,71 percent from 44,81 percent against a benchmark of 70 percent. This is a reflection of low lending levels in the economy.
This comes as bank deposits grew at a much faster rate than loans and advances. From the MPS numbers, deposits grew by 21,69 percent while loans and advances were only up by just 11 percent.
With calls that Zimbabwe is open for business, one would have expected such an environment to enable businesses to open up shop and seek increased capital funding for expansion projects, but what the numbers are showing is that the business climate, at least as measured by the unwillingness to take on debt, remains cautious.
Why are banks not lending
Banks not lending money to businesses means businesses have less access to capital. This has a very tangible impact on economic activity, since it means that businesses receive constricted supply of a crucial product, namely, money.
Depending on who is asked, the slowdown in lending is either an expected response to some preceding indicators or another reason to be worried about the economy.
One explanation, for businesses at least, was that they were awaiting the outcome of the 2018 national elections, that were eventually won by President Mnangagwa, and then of policies like fiscal and monetary reforms, before deciding to borrow for big investments.
There are several factors that also come into play here. One of them is the colour of money that is being offered by banks. Most businesses get their raw material, plant and equipment from outside the country, and if they are to borrow, they would want foreign currency to import.
On the other hand, for the banks to be able to service the offshore lines of credit, they would want assurance that the borrowers would be able to pay back the loans in US dollars. Probably this is where most local businesses are found wanting, they are not foreign currency earners and would find it difficult to service foreign currency denominated loans.
One other aspect that might be having a negative impact on the level of borrowings is that most business require long-term patient capital for example to rehabilitate infrastructure in power, water, agriculture, transport, tourism and other key sectors of the economy. But, the current structure of banking deposits does not allow such intervention hence the need for appropriately tenured credit lines.
Unfortunately, the bulk of the funds in banks are demand deposits which accounted for 64,94 percent of total deposits as at 31 December 2018. This mismatch then makes it difficult for loans and advances to grow at a similar rate as deposits.
There’s also no denying that businesses have become riskier to finance; they’re a bigger bet to lend to. Most companies could be heavily indebted and unable to take up more debt. Some are already struggling to keep up with repayments.
Credit risk in the banking sector portfolio increased during the period under review as reflected by the ratio of non-performing loans (NPLs) to total loans of 8,25 percent as at 30 December 2018, from 7,08 percent as at 31 December 2017.
The increase in NPLs is, however, largely attributed to forward looking credit risk management tools adopted by banks in line with the IFRS 9 accounting standards, resulting in improvement of the banks’ risks controls and provisions coverage.
Increased credit risk also meant banks could easily forgo lending in favour of “safer” fixed income assets such as Treasury Bills where they seemed to have piled the bulk of their funds. There are already arguments that given the RBZ and Government’s appetite to borrow through TBs and recently the savings bond, banks have an incentive to not lend, simply to collect interest from low risk instruments. As at November 2018, banks were holding approximately $3 billion in government paper.
Banks are still making profits
However, the decline in lending didn’t stop banks from otherwise having a strong quarter. All banking institutions, with the exception of one, reported profits for the year ended 31 December 2018, with a 61,06 percent increase in aggregate profits from $241,94 million in 2017 to $389,85 million in 2018.
Interestingly, the bulk of earnings were not from core activities (interest from lending), but from fees and commissions as a result of the forced switch to electronic transactions.
This was also reflected in other metrics with Return on Assets increasing to 4,57 percent from 2,61 percent while Return on Equity, a key matric in the banking sector was up to 20,59 percent from 15,48 percent.
Apart from increased transaction volumes, banks seemed to be managing their costs, with the cost to income ratio coming down to 70,01 percent from 75,36 percent.
