THE current financial and liquidity crisis in the country and the world has resulted in unfair comments against bankers. Historically, those in the banking profession have not been spared by comedians the world over. For example, Mark Twain (1835-1910) an American writer and humorist wrote “A banker is a fellow who lends you his umbrella when the sun is shining, but wants it back the minute it begins to rain.” Berthold Brecht (1896-1956), an influential German poet and playwright, wrote; “Bank robbery is an initiative of amateurs. The true professional robbers start a bank.”
Report by Tapiwa Chizana
Yet still, a businessman once defined a bank as “an institution that lends you money, but only after you have been able to prove to them that you actually don’t need the money!”
Behind the veil of humour, we see that there is often an expectation gap between the business community and the banking sector. The truth is we cannot expect the bankers to work miracles or to make all our problems go away. However, there is need for greater dialogue between the banking community and business sector so as to better understand the prevailing dynamics.
Above is an analysis of the deposit to loan ratios, per geographical sector, for a certain local bank in Zimbabwe, at a certain point in time during the first half of 2012.
The table illustrates that 1% of the bank’s total deposits were from customers in Kwekwe, and that the bank lent 4% of its total loans to customers in Kwekwe. The other percentages per location are shown in the table above. Treasury relates to funds managed directly from head office, received and utilised by businesses located throughout the country. The above information is useful and cultivates healthy debate around the receipt and deployment of the scarce financial resources in the banking sector. We cannot legislate who banks should lend to, neither am I advocating that.
However, such statistics contribute towards painting a picture of the state and condition of our country.
Best practice risk management procedures require banks to spread their loan book across different geographical areas. This is part of managing credit risk. The question is; to what extent are banks in Zimbabwe adhering to this? What would be the market response if such disclosure was made mandatory by the monetary authorities?
When information is in the public domain, it enables people to confront one another and tell each other the truth. Some businesspeople need to be told point blank: “Your credit rating is bad”. Branch managers will increasingly become interested in the bankability of the businesses in their region. Bank managers will be at greater liberty to instruct credit-unworthy customers on how they can improve their credit rating. Policymakers can also strategise and implement various interventions if the people in their constituencies cannot come up with bankable projects!
Despite the thirst for cash and loans, borrowing is not the only solution for companies in need of assistance. In 1994 Baring Venture Fund London invested in 200 startup businesses. Of the 200, only 40 were clearly successful. They decided to select the top 10 businesses and carried out an in-depth analysis of these businesses. They discovered that of the 10, eight never took a loan, and were totally debt-free. They also selected the bottom 10 performers, and noted that these entrepreneurs had high debt and low equity. Nine out of the 10 failing businesses were highly dependent on short term debt. In five of these cases they accused the bankers of contributing to their demise by dictating to them the terms and conditions for the utilisation of the funds.
In conclusion, banks should continuously analyse the receipt and advancing of funds per geographical segments to ensure they manage their credit risk appropriately. This should be monitored continuously by the monetary authorities and Bankers Association of Zimbabwe. Policymakers should use such information to better understand the dynamics of our economy and identify the areas of rapid economic growth or stagnation
Companies should seek to raise finances through other means, other than just loan financing. This may include the disposal of assets and optimising shareholder funds as appropriate. There should be increased dialogue between the business sector and bankers, so as to reduce the expectation gap. Perhaps the bankers are our friends after all? The debate continues…
- Tapiwa Chizana is a Partner at Deloitte Chartered Accountants, and writes in his personal capacity. E-mail: email@example.com