Banking sector a ticking time bomb

These are the words of former British prime minister Ms Margaret Thatcher, who was known famously as the Iron Lady.
Banking in Zimbabwe resembles the above. Our financial sector is characterised by a middle ground affair where the bankers are doomed if they do not loan out and at the same time they are also doomed if they are conservative with the numbers.

A fragile banking climate currently obtaining in Zimbabwe can possibly precipitate a bank failure if not well managed.
With 26 banking institutions, 16 asset management companies, 132 micro-finance institutions and a single ineffective central bank, the heat wave remains hanging as banking remains a melting pot.
The current veneer of stability being pronounced in the banking sector can be shortlived if proper policies are not implemented.

The near absence of any reference to the Basel Accord in the way business is discharged along Samora Machel Avenue smacks of a tricky future which calls for more than banking supervision and surveillance.
The unhealthy balance sheets for most banks coupled with sub-optimal asset liability management strategies continue weighing down on banks’ potential to recover, the repricing gap-cum-a high concentration of deposits in 60 days tenor is fundamentally impacting on the liquidity regime at macro-economic scale.

It is certainly a source of relief to realise that Finance Minister Tendai Biti hinted on the urgent need to come up with a credit bureau.
The introduction of a US$100 million fund, jointly funded by some international financial institutions and a regional financier to support banking sector liquidity, is a welcome move.
The haziness in the composition of the technical team working on the operational modalities for the fund is, however, a source of worry.

What makes Western economies great is the transparency in constituting such economic sub-sectors where no departmental head will hand pick the players without the knowledge of the public.
The quality of loans in the balance sheets of most banking institutions has to be closely tracked.
The dominance of non-interest income when loan deposit ratios are averaging 78 percent raises the risk profile for most financiers.
In 2009, the non-interest income was 92 percent of total income and 76 percent to date.

The paradox of Zimbabwean banking sector is that it is the struggling banks which are safer than those at breakeven.
Large banks such as Barclays and Standard Chartered continue with their cautious approach in business with their parent companies intervening in times of stress.
Banks such as TN, MBCA and Metropolitan remain closed operations with the real contribution of TN Bank to the whole group remaining a mirage.
The allegations of concentration risk with Econet touted as the monopolistic client continues to rattle the rating status for the bank.

The founding director of the bank, Tawanda Nyambirai, is convinced that the number of active accounts for the bank is a closed subject, which makes the job of analysts a very untenable one.
A bubble burst might take long but the conditions in the market have a potential to unlock a Pandora’s box of inefficiencies, which will see substantive diseconomies of scale in trying to recover the disbursed funds.

There is a significant threat of NSSA and the Youth Empowerment Fund crowding out any appetite for steep interest rates being levied by the different financial institutions notably banks and micro-finance houses.
This might force the banks to revise their rates downwards. At each point, the gap between assets and liabilities will give rise to risk, if assets are more and rate increases then interest income will increase and the reverse also holds.

Every financial institution strives to protect interest spread, liquidity and credit quality.
With poor and inadequate record of the borrowing clientele, more banks are more exposed to a credit bubble burst.
Information at our disposal indicates that there are some big clients who owe local financial institutions close to US$1 million at individual level and way beyond that for corporate clientele.

Such banks had been concealing such gaps and in the absence of a derivatives market, coupled with illiquid conditions, chances of the banks recovering such funds in the foreseeable future are almost nil.

There seems to be docility in terms of laws and rules governing the operations of micro-finance houses.
More than 96 percent of such concerns had been operating based on instincts ahead of fundamental banking regulations.

Their prime market had been the elusive informal sector but an interesting difference between them and traditional banks is surprisingly the fact that they had been more stricter in their management of loan books as compared to established indigenous banks.
The poor quality loan book has been tainting an otherwise bullish banking sector within the equities context.

Most bank managers are clueless on how to handle astronomically loan deposit ratios which are in conflict with the short-term nature of their deposits. It seems their expansionary drive to give out loans was in response to the central bank’s call to see banks supportive of economic empowerment policies.

Whether the same bankers had a full appreciation of the market fundamentals remains a mystery.
This is so in a climate where very few players can embrace various tools for interest rate risk management which include diversifying their portfolio, use of caps, floors and the repricing gap model to manage a funding gap. In simpler terms, a funding gap is just loans less average deposits.

The uncertainty of bad debts reflects a disturbing state of affairs with impairments as a percentage of advances being understated.
It is certainly difficult to have a positive view of the banks’ loan books. It will be regrettable for the sector to be sitting on sub prime loans, which will only be unearthed when the economy switches from dollarisation to a different domestic unit.

This could be the basis for the banking sector to restructure and streamline its activities.
The underlying cum inherent risks arise due to rampant insider trading, inadequate supervision by the central bank, liquidity crunch and poor asset quality.

They can definitely pose a bubble burst risk not more than 36 months into the future as all policy statements from both monetary and fiscal authorities are failing to correct the anomaly.
Thank you and God bless you.