Banks remain at the centre of the economic and financial architecture of any country. And Zimbabwe is no exception. The country’s banking sector, though resilient, is currently facing a myriad of challenges that threaten the viability and sustainability of financial institutions and the future stability of the sector.
By Clive Mphambela
For banks to continue to play their role in supporting the various sectors of the economy, pragmatic steps must be taken by the government and the banks themselves in order to improve the operational landscape.
For starters, the sharp decline in the level of economic activity in the country that has seen a marked slowdown in GDP growth rate in the last three years has meant that there is naturally less growth in demand for banking services to support this growth.
Zimbabwean banks also face low levels of domestic savings coupled with a ballooning external sector deficit, which two factors pose the greatest risk to liquidity in the local banking sector.
The former has caused the perennial, now proverbial “transitory deposits syndrome” which is afflicting the Zimbabwean banking sector. For a banking system to function optimally, the bulk of deposits must not be short-term in nature as is presently the case. Most bank balance sheets at the moment have largely short-term “pay-ins” represented largely by salary and wage deposits that are paid in once a month. Invariably these are mostly completely withdrawn either on the same day they are paid in or at most within a day or two after pay day.
Until we resolve the issue of transitory deposits, the low liquidity levels and the poor contribution of the traditional sources of funding for banks, we will continue to see a reduced rate of onward lending by banks.
Against a background of tight liquidity, the authorities have also directed that banking institutions increase threshold capital levels by end of 2014. At the top of the scale, commercial and merchant banks are required to top up shareholders’ funds to US$100 million by 2014, while building society’s capital requirements were raised to US$80 million.
Discount and Finance Houses are required to put up US$60 million while micro-finance banks, levels were set at US$5 million. These capital levels are, however, proving difficult for most banks and the authorities have responded favourably to submissions by banks on the need to shift the timeframe for raising the capital to take into account the prevailing economic situation.
Banks have also had to curtail the level of lending against the background of rising non-performing loans (NPLs). They are currently seized with dealing with an increasing portfolio of loans that are non-performing and this is imposing a large latent cost on banks. While the majority of NPLs are a manifestation of depressed economic activity, to some extent, these bad loans are a result of willful default by borrowers and the increasing phenomenon of over-borrowing by clients.
Other issues that the sector has been grappling with include the lack of confidence in the banking system that was engendered by the introduction of the multi-currency system when depositors woke up to find their working balances locked up in the Zimbabwe dollar accounts and the lack of a lender-of -last-resort owing to incapacitation of the central bank, which has meant that the banking system does not, at the moment, have a Big Brother lender. The latter issue has further hurt confidence in the banking system by stemming the development of an active interbank market for instruments that help alleviate short-term liquidity problems between and amongst banks.
However, the banks have not simply taken the issues lying down. There is recognition by banks that while some of the issues affecting the sector are of a broader policy nature and not within their purview, the sector can embark on a number of initiatives that mitigate the negative effects of the challenges being faced.
The banking sector has over the last few months been actively pursuing strategies to militate against the exogenous challenges faced by the sector.
For example, in February, the banks entered into a mutual arrangement with the Reserve Bank of Zimbabwe (RBZ), which was crafted in an effort to improve access to banking services and lower the cost of banking services for vulnerable groups. The result of this effort was the six-month Memorandum of Understanding etween banks and the RBZ, which has since run its course. While the MOU has had a negative bearing on bank profitability, the full impact of the agreement is being assessed.
Banks have also actively supported the capacitation of the Deposit Protection Corporation through making statutory contributions whilst they have also made representations to the government on possible avenues for the successful demonetisation of the Zimbabwe dollar in order to bring lasting confidence to the banking sector.
Banks have also through their representative body, the Bankers’ Association of Zimbabwe, embraced financial inclusion as a business principle as they deliberately aim to grow the number of people with access to banking services in the economy.
These efforts are likely to result in a larger proportion of presently unbanked and marginalised being brought into the ambit of formal banking, with positive results for national savings growth and improvement in liquidity and the size of the loanable funds in the economy.
Clive Mphambela is a banker and financial advisor. He writes in his capacity as advocacy officer for the Bankers Association of Zimbabwe. He can be reached on 04-744686, 0772 206 913, or firstname.lastname@example.org