Banking sector continues to grow but . . .

and yet the sector remains highly vulnerable.
Following the adoption of the multiple currency system in February 2009, the sector jumpstarted financial intermediation with bank products significantly surpassing the pre-hyperinflationary levels.
The advent of the multiple-currency system and liberalisation of the sector breathed life into the economy resulting in stable macroeconomic conditions.
This facilitated confidence building and allowed scope for forward planning by banking institutions, which had become impossible during the hyperinflationary era.
The sector has largely boasted a clean bill of health except isolated cases of magnified vulnerability due to near fraudulent behaviour by some errant bank management.
However, the banking system remains highly vulnerable with weak capitalisation arising from non-performing loans, limited lines of credit and a tight liquidity situation.
Against this background there have been calls for the central bank to restore financial stability to enhance economic performance and development.
The central bank’s framework for promoting financial stability entails an ongoing comprehensive analysis of potential risk and vulnerabilities in the financial system.
Notwithstanding some of the problems the financial sector is facing, the banking sector has noted significant improvements in the level of support by banking institutions to the key productive sectors of the economy since the introduction of the multiple currency system.
According to the RBZ, over the last 35 months, developments in the financial sector have been progressively upwards with the deposit base now estimated at US$3,3 billion by end of September this year.
The Ministry of Finance says the deposit base could have been much higher had the institutions fully embraced the mobilisation of all potential domestic savings.
It is estimated that an additional US$2,5 billion could be circulating in the economy outside the formal banking channels simply because the transacting public has got limited confidence in the country’s financial sector.
Finance Minister Tendai Biti in his 2012 National Budget statement said the deposit base is estimated at above US$3,8 billion, of which about 80 percent will be available for lending. Lending to the productive sector grew to US$2,59 billion over the period, constituting 78,4 percent of the total deposits.
Primary beneficiaries were in the sectors of agriculture consuming 18 percent, manufacturing 20 percent, distribution 19 percent and mining 6 percent.
Compared to previous years, it shows that there is a gradual shift in the production of lending towards services, construction, communication and individuals, while the share of lending to agriculture, mining and manufacturing remained relatively stagnant.
Beneficiaries continue to face high lending interest rates of about 15 to 30 percent, against deposit rates of as low as 0,2 percent.
The level of credit support to the private sector in relation to deposits is largely comparable to regional and international averages, which average between 70 and 90 percent.
In spite of the liquidity constraints, the market has been an improvement in the tenure of loans offered, particularly mortgage financing, with some building societies now offering facilities of up to 10 years.
Reserve Bank Governor Dr Gideon Gono in one of the papers represented recently said the progress in the financial sector is commended as the Zimbabwean situation is characterised by scourges of sanctions and failure to access offshore credit lines.
The International Monetary Fund and the World Bank are not lending to Zimbabwe, as bank deposit base has remained short-term and transitory in nature.
“As such banks have had to tread a tight rope strike entailing balancing liquidity and supporting industry which has plenty of viable projects, through credit extension,” said Dr Gono.
The most visible threat to the country’s banking sector is the state of capitalisation of banking institutions.
As of July 30 this year three banks were undercapitalised and they were working with the central bank to regularise their capital adequacy.
It is understood that Genesis Bank has been sold to a new consortium while ZABG and Royal Bank were given up to next year to regularise their capital. Renaissance Merchant Bank is still under curatorship.
As at June 2011, 15 out of 16 asset management companies were compliant with the minimum paid up capital requirement of US$500 000.
Dr Gono said various extensions on capitalisation deadlines and numerous calls for market-oriented solutions including mergers and acquisitions for the few banking institutions, which are not yet in compliance capital requirements should not be mistaken for regulatory foreberance.
The Governor is on record as saying banks should finalise their capitalisation recapitalisation initiatives and contribute meaningfully to economic growth and development.
“Otherwise there won’t be further social justification for existence of these banks if they are not serving their communities effectively,” said Dr Gono.
This also indicates that those banks, which fail to meet the required standards will face the chop, a repeat of 2003, which saw three banks falling by the way side.
To deal with troubled banks and length of curatorship periods the central bank has proposed improvements to the legal and regulatory framework.
The financial sector further be compounded by low savings owing to low salaries and wages and low interest income against high operational costs.
Liquidity remains a challenge due to the short-term nature of deposits, the absence of an active interbank market and lender of the last resort facility at the central bank.
In a bid to restore the lender of the last resort facility, Minister Biti in the 2012 National Budget announced a US$100 million fund to revive the lender of last resort facility and interbank market trading.
However, financial stability is also based on external elements or preconditions. These preconditions have a direct impact on the effectiveness of efforts in practice.
External factors include sound and sustainable macroeconomic policies, a well developed public infrastructure, effective market discipline and mechanisms for providing an appropriate level of systematic protection.
Recently the Bankers’ Association of Zimbabwe proposed a cocktail of measures which they believe will restore confidence in the banking sector and key to it mobilising deposits for on-lending to the productive sector.
Key among the proposals are refunding of the Corporate Foreign Currency Accounts funds that the Reserve Bank of Zimbabwe utilised at the height of hyperinflation and foreign currency shortages.
Compensation of the Zimbabwe dollar account holders who lost their money when the local currency was demonetised in February 2009 and the re-capitalisation of the Deposit Protection Board.
BAZ is also advocating for the restoration of the role of lender of last resort by the Reserve Bank and the taking over of bank statutory reserves by the Finance Ministry.
BAZ said the ministry should take over the statutory reserves debt of ±US$70 million owed to banks by the Reserve Bank of Zimbabwe.
Against this background it seems there are no significant indications that the financial sector might become unstable in the near future.
Dr Gono indicated that monetary authorities would maintain existing policies and update them for structural changes in order to prevent future imbalances.