There have always been worries and talk about Zimbabwean banks not doing enough to let credit flow into the economy, more or less the same worries that gripped the world after global banks suddenly slowed on lending after the sub-prime mortgage market crisis induced recession.
Governments around the rich world responded through “quantitative easing”, flooding the markets with liquidity to ease banks’ worries of liquidity crunch. The International Monetary Fund (IMF) still worries today that hastened withdrawal of this fiscal support to the markets could jeopardise the global recovery process.
Of interest therefore to Zimbabwe is the rate of credit creation in the economy, and in particular, the ability of banks to generate loans from the deposits at hand, measured by the loan-to-deposit ratio.
Total bank deposits are currently sitting at about US$1,3 billion, with the loan-to-deposit ratio at 49%. The general perception in the economy is that the banks are taking a very cautious approach towards lending and they should instead let credit flow more freely into the thirsty economy.
Understanding the behaviour of the banks would be very important in creating and stimulating the right policies that will support the commendable economic recovery process the country is currently enjoying. What exactly is the position of regional countries on the ability of banks to create loan on their balance sheets, and are Zimbabwean banks so much off the mark? Let us look across Africa and see if we can draw any important lessons on this important aspect.
Across the Limpopo, South Africa sits on about US$321 billion in deposits, with loans at US$306 billion, thus giving one of the highest loan-to-deposit ratios in sub-Saharan Africa at 95%.
The structured finance market, which doesn’t exist in Zimbabwe, is active in South Africa. Globally, securitisation has brought about the ability of banks to increase liquidity and spread risk, implying more loans can be generated on bank balance sheet. For now let us pay a blind eye to some of the challenges of securitisation that emerged from the sub-prime mortgage market crisis where greedy originators tricked the markets, and indeed successfully.
Securitisation is dead in the Zimbabwean markets, which means therefore that banks have to keep a closer eye on both liquidity and credit risks as assets sit permanently on their balance sheets until they mature.
Looking at it closely reveals that in fact there aren’t any meaningful assets to securitise because the asset classes in the market are too narrow. Impliedly, it would therefore be dangerous for banks to have high loan-to-deposit ratios because they cannot repackage and sell these on the secondary market to generate liquidity and spread risk.
Expecting Zimbabwean banks to quickly follow the South African model and shore up the loan-to-deposit ratio to around 90% or thereabout may be expecting too much. Although this high loan to deposit ratio existing in South Africa hit the banks hard during 2009 when by June 2009 impairments had reached US$18,5 billion due to slowdown in economic activities, the South African banks continue to create more value in loans ahead of the traditional liquid assets, with the liquid asset ratio at only 5%.
A rather efficient loan distribution mechanism exists in the South African economy where private households account for the greatest chunk of credit, taking up 38% of the total loans. The manufacturing, mining and agriculture sectors take up only 4%, 3% and 1,5% of total loans respectively.
Across the Zambezi, Zambia’s deposits stood at only US$3,1 billion in October 2009, with a loan to deposit ratio of only 57%. Although having witnessed strong GDP growth of above 5% for the six years to 2008, the depth of the financial markets remain very shallow in Zambia, just like Zimbabwe.
The shallow markets have constantly resulted in the poor transmission of monetary policy in influencing real economic activities on the ground. Resultantly, Zambia’s borrowing rates have remained very high and prohibitive. The excessive credit spreads reveal huge underlying inefficiencies in the market borne out of inherent high credit risk in an economy whose fortunes correlate strongly with the swings in copper prices.
It is important to note that key developments have taken place in the Zambian market, which overall is good for the development of the credit markets.
The central bank’s aggressive liquidity sterilisation exercise that responded to the influx of donor funds and high copper prices then in the 2004-2008 period in order to tame inflation has moderated. Subsequently, the yields on government paper have come down significantly from about 18% in December 2008 to about 9% currently.
This has somewhat reduced the past overbearing influence of the government crowding out private sector borrowers, and the loan-to-deposit ratio should therefore be expected rise from the current levels, whilst the liquid asset portfolio, which makes up 19% of total assets, should be coming off as banks should now be pursuing the lucrative credit markets.
However when evaluated against its GDP, Zambia’s deposits to GDP at only 20% reveal a huge challenge in the ability of the local financial institutions to influence growth at the household level, and that explains why consumer credit in Zambia from micro-finance companies is among the highest in the world at around 10-15% per month, whilst credit from mainstream banking at around 25% is high considering the inflation and yield curve dynamics in the economy.
The important lesson we are drawing from Zambia is that the current economic stability in Zimbabwe may not necessarily imply reduced cost of credit and efficient market pricing mechanism. A lot of work still needs to be done at the policy level to avoid market failure, and that starts with the need to understand the importance of a secondary market.
When one then compares Zimbabwe to South Africa, Zambia, Tanzania, Kenya etc, there is definitely an anomaly on the low loan-to-deposit ratio that is peculiar to Zimbabwe. Kenya, with about US$12 billion deposits on a US$35 billion GDP, has a loan-to-deposit ratio similar to Tanzania at around 68%.
The issues affecting the flow of credit can therefore be summarised as follows: First, credit risk is still very pronounced in Zimbabwe at the moment, and banks wouldn’t want to buy into economy-wide risks that much yet. Banks would argue that quality borrowers are very few, and because of the depressed markets, the securities being offered by most of the borrowers would be so difficult to turn into cash when push comes to shove.
With the banking sector now having to contend with tough capital requirements, rising impairments out of exuberant lending may claim scalps in the boardroom.
Only foolish shareholders would subsidise management inefficiencies and imprudence manifesting in high loan-loss ratios. Second comes the absence of a risk-free liquid asset portfolio in the Zimbabwean financial market, and that ties up well with the nonexistence of lender-of-last-resort functionality due to poor capitalisation of the central bank.
This compels the banks to keep more of the cash close to the chest. Third, we have the deficiency of a strong market pricing discovery system due to the absence of a yield curve and the defunct secondary market for credit securities.
This puts a lot of risk on loans, more so when trying to generate liquidity on bank balance sheets in times of need.
Lastly, the country risk, on the back of huge debt level, is still very high and the international banks’ country exposure limits remain low.
Brains Muchemwa is an economist.