Limited domestic funding forces Zim banks to seek expensive foreign capital

Nelson Gahadza

Zimbabwe’s local banks are increasingly turning to expensive external credit lines to meet their funding needs, as domestic resource mobilisation remains constrained by legacy issues and a limited pool of long-term depositors.

A number of local banks have this year been receiving lines of credit facilities from different financial institutions, such as Afreximbank, the European Investment Bank, and the Trade Development Bank (TDB), which are largely deployed into export-oriented businesses that will have the capacity to repay the loans when they are due.

Domestic resource mobilisation has been hampered by legacy issues, including depositors, pensioners, and investors losing their savings due to hyperinflation and currency changes in 2009.

As a result, the pension industry, touted as the biggest provider of long-term funds, is looking elsewhere for investment, primarily in property and equities, starving banks for long-term deposits.

Bankers Association of Zimbabwe (BAZ) chief executive Fanuel Mutogo said the gesture by international lenders suggests a positive shift in the perception of Zimbabwe’s credit risk profile. However, he noted that local banks have been receiving international lines of credit in recent times, albeit not at the desired levels.

“The primary concern, however, remains the cost of these funds and the tenure.

“The high interest rates and relatively short repayment periods associated with these credit facilities can be challenging for local banks to manage effectively,” he said.

This is the major reason the funds are being deployed into exporting sectors of the economy as banks seek to avoid defaulting when the credit lines fall due.

In most cases, the credit lines land in the country at interest rates above 10 percent, which local banks then lend at an interest rate of 15 percent, making them expensive for borrowers. According to Mutogo, despite these challenges, the increased willingness of international banks to extend credit to local banks indicates growing confidence in the country’s economic prospects.

The total deposits in the banking sector amounted to ZIG 43,6 billion as of June 30, 2024, largely driven by foreign currency deposits, which accounted for 92,52 percent of total deposits.

However, loans and advances for the same period stood at approximately ZIG 25,2 billion, giving a loan-to-deposit ratio of approximately 57 percent, a low loan-to-deposit ratio compared to regional and international markets.

Lawrence Nyazema, who is the BAZ president and CBZ Holdings chief executive officer, suggested to this publication that to improve the loan-to-deposit ratio, current deposits should be converted into savings or fixed deposits. However, he acknowledged that 90 percent of the deposits are demand deposits.

CBZ Holdings is targeting lines of credit worth US$200 million for this year, having already mobilised in excess of US$155 million, which has largely been deployed to key economic sectors, mainly export-oriented sectors, which have capacity to repay.

According to Nyazema, CBZ can raise more lines of credit, but it needs to be aware and ensure that when the time to repay comes, it has generated enough exports to comfortably repay.

Nyazema said when the group could not mobilise enough customer deposits, it started pursuing lines of credit, but had always relied on its own customers’ deposits for lending.

In June this year, the group brought in US$80 million from Afreximbank, US$15 million from Shelter Afrique, and another US$20 million from the Trade and Development Bank (TDB).

Nyazema noted that lines of credit are external obligations, different from borrowing from another local bank. It’s crucial for the whole country to ensure that banks pay their loans on time to avoid affecting the ability of other banks to borrow from external financiers.

Enock Rukarwa, an investment analyst, said on the backdrop of thin fixed-term deposit yields around 4 percent to 9 percent obtained in the commercial banking sector, historical players such as pension funds and asset managers are shunning this market for other asset classes like alternative investments.

He said local deposit mobilisation is constrained for local banks, especially fixed-term deposits. External space remains the only viable option for creating liabilities, and most local banks have been pursuing this route.

While it’s rare for a foreign bank to access these lines of credit, they are often supported by their parent banks when needed. Nedbank Zimbabwe, a regional unit for Nedbank of South Africa, has adequate reserves for on-lending in excess of US$80 million and, if needed, would be supported by parent financial institutions. Other foreign-owned banks include Stanbic and Ecobank.

According to Rukarwa, to increase demand deposits for local banks, they should create value aspects that attract big and blue-chip corporations.

NMB Holdings has running lines amounting to over US$55 million, while CABS has facilities worth more than US$25 million that are supporting exporters.