daniel chigunweEconomy Uncensored with Tapiwanashe Mangwiro
The Reserve Bank of Zimbabwe (RBZ) Governor recently made a striking observation about the country’s banking sector; banks have shifted their focus from their core function of providing credit to businesses and individuals and have instead become property developers.
Through investing heavily in real estate, particularly housing, banks have tied up significant amounts of capital in illiquid assets. This, the Governor argued, has created a ‘liquidity crunch’, leaving them unable to fulfill their primary role of lending.
This development reflects a broader economic concern, the misallocation of financial resources. Banks, as intermediaries, are meant to channel savings into productive investments that drive economic growth.
When they divert funds into real estate, they not only constrain liquidity but also amplify risks associated with asset bubbles and financial instability. Zimbabwe’s experience is a cautionary tale, but it is far from unique.
Global parallels and lessons
The issue of banks overexposing themselves to real estate has played out on the global stage before, often with disastrous consequences. Consider the United States during the mid-2000s. Banks there heavily invested in real estate through mortgage-backed securities, fueling a housing bubble. When the bubble burst in 2008, the global financial system was thrown into chaos.
Banks that had prioritised real estate over traditional lending were particularly vulnerable, unable to withstand the ensuing economic shock.
Similarly, Japan in the 1980s offers a stark lesson. Banks, flush with liquidity, poured funds into speculative real estate and stock market ventures. The resulting asset price bubble burst in the early 1990s, plunging the country into its infamous “Lost Decade.”
Japanese banks, burdened with bad loans and diminished liquidity, were unable to support the economy’s recovery, exacerbating the stagnation.
In both cases, banks’ over investment in real estate created systemic risks, constrained credit availability and undermined broader economic growth. Zimbabwe now risks following a similar trajectory unless decisive action is taken.
Economic theories at play
Several economic principles explain the pitfalls of banks prioritising real estate investments. The ‘financial intermediation theory’ posits that banks are vital conduits for mobilising savings and directing them into productive investments. When banks deviate from this role, as seen in Zimbabwe, they fail to stimulate economic growth effectively.
Another relevant concept is the ‘asset price bubble theory’, which warns of the dangers of speculative investments driving asset prices beyond their intrinsic value.
Real estate, being illiquid and capital-intensive, is particularly susceptible to such bubbles. If prices correct sharply, banks can find themselves holding devalued assets, exacerbating liquidity problems.
Finally, the ‘liquidity trap theory’ highlights the risks of capital being tied up in non-liquid assets. Banks unable to meet short-term liquidity needs due to overexposure to real estate are less likely to provide loans, further stifling economic activity.
The Zimbabwean context
Zimbabwe’s banking sector has justified its real estate investments by citing a “tight liquidity position” and the need to secure returns in a challenging economic environment. However, this strategy has created a self-reinforcing cycle: by tying up funds in real estate, banks have exacerbated the liquidity crunch they claim to be addressing.
The implications for the broader economy are dire. Small and medium-sized enterprises (SMEs), which rely on bank credit to grow, are starved of funds. Infrastructure projects, agricultural ventures, and other productive sectors also suffer, as banks divert resources into housing projects that may take years to yield returns.
Breaking the cycle: Solutions for Zimbabwe
The RBZ Governor’s call for banks to liquidate their real estate investments is a necessary first step, but it must be accompanied by structural reforms. Zimbabwe’s policymakers can draw on lessons from other countries that have faced similar challenges.
The central bank should introduce measures to ensure banks prioritise lending over speculative investments. For example, lending quotas tied to key sectors like agriculture, manufacturing and SMEs can help redirect funds into productive areas.
The RBZ must ensure that banks have access to sufficient liquidity through mechanisms such as reduced reserve requirements or targeted credit facilities. These measures can incentivise lending without compromising financial stability.
Banks should be encouraged to diversify their portfolios.
Investments in infrastructure, technology, and renewable energy projects can provide stable returns while supporting long-term economic growth.
Enhanced oversight is critical to prevent banks from overexposing themselves to real estate in the future. Stress tests and transparent reporting requirements can help regulators identify and address vulnerabilities early.
A way forward
Zimbabwe’s banking sector stands at a crossroads.
Through liquidating their real estate investments and returning to their core mandate of providing credit, banks can play a pivotal role in revitalising the economy.
This shift will not be easy, given the entrenched nature of current practices, but it is essential for fostering sustainable growth.
The lessons of history are clear: when banks prioritise real estate over lending, they risk undermining both their own stability and the broader economy.
Zimbabwe has an opportunity to chart a different course, one that prioritises productive investments, supports entrepreneurship, and lays the foundation for long-term prosperity.
For this to happen, policymakers, regulators, and financial institutions must work together to realign incentives and restore the banking sector’s focus on its primary role. Only then can Zimbabwe’s economy realize its full potential, free from the constraints of illiquid capital and speculative excesses.
◆ Tapiwanashe Mangwiro is a resident economist with the Business Weekly and writes this in his own capacity. @willoe_tee on twitter and Tapiwanashe Willoe Mangwiro on LinkedIn
Bongani Ndlovu