ZIMBABWE’S financial sector is still vulnerable and needs continued vigilance, especially given the country’s “destabilising” indigenisation policy and collapse of banks such as Interfin Banking Corporation and the closure of Genesis Investment Bank, a report by the visiting International Monetary Fund team has disclosed.The IMF team is deeply concerned about the destabilising effect Zimbabwe’s controversial Indigenisation policy could have on the country’s banking sector and on investment.
An IMF report seen by the Zimbabwe Independent shows that the fund sees policy risk stemming from heightened government calls to indigenise the banking sector.
The IMF team headed by Alfredo Cuevas and comprising Murna Morgan, Christian Henn, Eliza Lis and Futoshi Narita was in Harare between June 13-27 to conduct Article IV consultations with the country’s authorities.
The team met officials from government, the Reserve Bank (RBZ) and other stakeholders.
“A policy risk relates to the potentially destabilising effects of indigenisation policy on the banking system, as well as its chilling effect on investment more broadly,” the report reads.
“Other risks stem from fiscal slippages and financial sector instability, including liquidity constraints and questions over the quality of governance in small banks.”
The IMF commended efforts to enhance regulatory framework on the part of the central bank, pointing to the order forcing undercapitalised banks to meet minimum capital requirements by the end of March 2012 or merge with stronger banks.
The fund said 12 banks were either below or just above minimum capital requirement levels as at December 31 2012.
After the collapse of Interfin from non-performing insider loans and its subsequent placement under curatorship, and Genesis surrendering its banking licence after failing to meet minimum capital requirements, the IMF still feels the country’s financial sector remains vulnerable.
“As noted, a number of banks remain barely capitalised, and while several weak banks have met the minimum capital requirement following capital injections, credit risks remain high, particularly for smaller banks that have low capital buffers,” the report says.
The report also notes that asset qualities deteriorated in the last year and a half — a development the fund says reflects unsound lending practices and poor risk management. Non-performing loans were at 9% in March 2012, up from 4% in the same period last year with wide variations across the banks.
The IMF report says loan origination from weak banks remained strong, funded by unstable short-term deposits.
“The serious improprieties uncovered at Interfin would seem to confirm persistent concerns over the quality of corporate governance in some of the smaller banks, underscoring the need for active supervision,” the report says.
While the liquidity situation in the banking sector improved, there was uneven distribution, the IMF said.
The IMF says rapid credit growth last year saw loans-to-deposit ratios of banks rising sharply, and a liquidity ratio of 27% at the end of December 2011, with 15 banks below 25% of the prudential liquidity ratio.
The report lauds the central bank’s move to have banks remit offshore funds held in Nostro accounts, saying the move lifted the prudential liquidity ratio from 25% to 30% towards the end of this month.
“The government issued bonds in March 2012 to reimburse the commercial banks for the US$83 million of statutory reserves blocked at the RBZ. Nevertheless, while the bonds are nominally tradable, their durations (2-4 years) and sub-market interests (3 %) means that banks are holding on to these bonds, preventing their use as collateral to foster reestablishment of the Interbank market,” the report says.
The report says there is a need to amend the Banking Act to strengthen the Troubled and Insolvent Bank Resolution Framework to incorporate swift corrective actions, and deal with corporate governance deficiencies.
According to the report, an amended Banking Act would be presented to cabinet by August 2012.
The IMF added that there should a debate on the need to consolidate the small and weaker banks going forward.