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Kudzanai Sharara
Zimbabwean banks are finding it extremely difficult to play their critical lending role with balance sheets having been significantly weakened by the switch to domestic currency after years of using the US dollar as an anchor currency, it has been learnt.
The country outlawed the use of a basket of foreign currencies including in June last year and adopted Zimbabwe dollar as mono-currency. Zimbabwe had abandoned its local currency in February 2009 — rendered worthless due to galloping inflation.
The banking sector plays an important role in the modern economic world through its financial intermediary role of channel funds from savers to borrowers.
Putting it differently, banks play an important role in the creation of new capital (or capital formation) in a country and thus help the growth process.
However, observations by Business Weekly show that local banks have long stopped playing this critical role and now rely heavily on other banking services such as treasury, advisory, and facilitating transactions where the bulk of their earnings are now coming from.
Just to mention a few, NMB Bank made $26 million from their lending business for the nine months to September 30, 2019, against $37 million from fees and commission, $31 million from other income and $79 million from foreign currency exchange gains.
At CBZ, just $90,3 million was generated from the lending business while more than $906,1 million was generated from non-lending business.
At ZB Bank, non-funded income contributed 86 percent of total revenue, while net interest income contributed 14 percent for the nine months to September 30, 2019. The low net interest income contribution to total income was a result of constrained lending activities, management said.
Loan deposit ratios
Another clear sign that banks are no longer playing their critical role is reflected at the level of the loan to deposit ratio (LDR).
The loan-to-deposit ratio, as its name suggests, is the ratio of a bank’s total outstanding loans for a period to its total deposit balance over the same period. So a loan-to-deposit ratio of 100 percent indicates that a bank lends a dollar to customers for every dollar that it brings in as deposits. But this also means that the bank doesn’t have cash on hand for contingencies.
A combination of prudence and regulatory requirements suggests that a loan-to-deposit ratio of around 80-90 percent would be a good benchmark.
But the latest performance update from CBZ, puts LDR at 26,1 percent. Many banks are at similar levels; very few banks are above 50 percent. In 2011 CBZ had a 95,2 percent LDR, which dropped to 77,2 percent in 2013 and 26,1 percent in September 2019. Indications are that the figure will plummet again in 2020. It’s been in reverse mode all along.
Now when the main engine of growth is in reverse gear, obviously the entire economy will be affected. Or rather you could say it’s actually the economy which is in reverse gear and the banking sector is just a mirror reflecting that.
Banks run out of
quality customers
Bank executive Ron Mutandagayi told Business Weekly that the sector is running out of quality customers with the capacity to service their loans.
The know-your-customer exercise has since been extended to know your customer’s customer, he argued. The banks would rather sit on a huge deposit base than risk depositors’ funds.
The cautious approach in the numbers that banks are reporting, reveal that the productive sector is being shunned.
At NMB Bank for example, the material concentration of loans and advances to individuals are at 35 percent followed by the services sector at 27 percent.
Another school of thought, however, argues its banks themselves who are being shunned.
The colour of money they have (local currency) is not adequate to fund the productive sector.
As pointed out by investment firm Imara Edwards, the level of bank capital and reserves is approximately $3,9 billion or just US$257 million, hardly enough to fund big projects. ZB alluded to this in a recent update saying; “The cost of doing business continues to increase and the value of the group’s capital has been eroded.”
Businesses are also looking at hard currency to import raw materials or plant and equipment and banks don’t have that kind of money both in colour and quantity.
Mutandagayi said credit lines are difficult to access and even when they have them, they cherry pick export oriented businesses.
Imara notes this: “Bank balance sheets were falling rapidly in real terms as compared with their client base as a result of bank assets largely being held in Zimdollar denominated assets, while their clients’ revenues and profits could move more in line with inflation.
“Put simply, banking sector borrowers have become far greater in balance sheet terms than the banks themselves.”
For instance, NMB’s regulatory capital (Tier 1 and Tier 3) calculated in terms of the regulatory guidelines was $180,6 million as at September 30, 2019. That’s approximately US$10 million at current interbank exchange rate. Not much business can be underwritten.
It’s something the Monetary Policy Committee deliberated on and decided it needed a review.
Minimum capital requirements for banks were reviewed to ZW$ equivalent of US$30 million for banks that fall under Tier 1 (Large Indigenous Commercial banks and all foreign banks).
The effective date for compliance with the new minimum capital requirements is December 31, 2020 but market watchers are of the opinion banks will seek for an extension. The currency changes that were introduced in the recent past left most assets decimated and few shareholders have the muscle to capitalise the banks. There is also a strong belief that even if they have the capacity to inject more capital, such capital will lie idle given banks are themselves cautious to lend.
Economist Tony Hawkins summarised it quite well: “When bankers start to believe that depositors are redundant, they are veering towards destroying their businesses.”
Online Reporter