The idea that we are in the middle of a liquidity crisis is a popular theme for business commentators and is the hypothesis that explains various ailments in the economy from the poor performance of the manufacturing sector to the high levels of non-performing loans (NPLs) that have been reported in the banking sector.
By Rufaro Zengeni
The availability of more capital and credit has often been hailed as the silver bullet that would put an end to these troubles. Cash and credit is the bread and butter of banks and the sector has frequently been the target of criticism for not doing enough to improve the liquidity situation.
According to the critics, bankers are unduly risk-averse and too often fail to recognise the potential of many businesses.
In putting together the Banks & Banking Survey 2013, we have endeavoured to let the numbers do the talking and inform the narratives, instead of cherry-picking parts of the data that illuminate our preconceptions.
The ebb and flow of the total banking deposits in an economy is not considered one of the better indicators of growth because of the many factors that drive the size of deposits.
However, given the Zimbabwean experience where there was a transition from a battered local currency to the multi-currency system, anchored mainly by the US dollar as recently as 2009; one would expect the trend in the growth of deposits to be an indicator of confidence in the banking sector in particular, and the economy as a whole. In addition, one of the smoking guns of a liquidity crisis would be a trend of ever declining deposits.
Deposits grew from $3.7 billion as at June 30, 2012 to $3.9 billion as at 30 June 2013. This 6% growth is impressive given that it is ahead of inflation and has occurred at the height of the political and economic uncertainty associated with an election year.
The $180 million growth in deposits is eclipsed by the $248 million growth in loans and advances. This means that not only did confidence in the banking sector grow; the banks’ confidence in the credit worthiness of local economic players and their commitment to them also grew. Banks therefore cannot be accused of hogging on to capital and being unsympathetic to the needs of a credit hungry market.
On the other hand, the growth in NPLs from 1.8% in 2012 to 13.78% by March 2013 may indicate that the banks took on more risk during the period under review and many of the recipients of credit were not good for it. It could also be an indicator that economic conditions have deteriorated since the loans were written and many borrowers are now struggling to make repayments.
While there has been a great deal of debate and discussion amongst market commentators about what would be an appropriate level of capitalisation for financial institutions in our country, the banks themselves have shown a tremendous amount of commitment to complying with the new regulations.
In the period under review, the banks have raised more than $100 million in fresh capital towards such compliance. This is in spite of the failure of a number of institutions post-dollarisation, a good deal of uncertainty regarding how indigenisation and empowerment will affect the sector as well as the country’s poor credit rating. Apart from the locally capitalised Steward Bank (formerly TN Bank) and CABS, the banks that raised fresh capital inContinued from A10
the period under review (BancABC, Ecobank, and NMB) raised equity funding offshore, and in the case of BancABC and NMB, from western capital markets.
This underpins the strength of the banking sector that does not have the safety net of a lender of last resort and the scope of the opportunities within it. In a world where some banks in Europe are failing regulatory stress tests and struggling to raise capital, the resilience and profitability of Zimbabwean banks should be a source of immense pride.
Profitability however, has declined for the first time since dollarization. The MoU has had a negative impact on the profitability. Banks concur that the intention of the MOU, which was an agreement between banks and the Reserve Bank of Zimbabwe by the way, was benevolent as it sought to promote banking by marginalised people. However, they argue further there is need to revisit the agreement to ensure that its prescriptions do not permanently impair the performance of banks in the country.
In addition to the MOU is the worrying growth in NPLs and the corollary provisions that accompany them. The jury is still out on whether this is the beginning of a disturbing trend in deteriorating economic conditions or simply an aberration due to once off or unusual developments.
For example, BancABC made a huge $6 million provision arising out of a dispute with a client that has more to do with the nature of the transaction than a loan going bad in the ordinary course of business. The question is, will the level of provisions made to date prove to be adequate or will more and more loans make the transition from good to bad?
The performance of the economy as a whole will, in large part, help answer this question. The bankers are certainly concerned about the growth of NPLs and have spoken with unanimity about the need to beef up credit risk management, slow down on lending, and improve the liquidity of their balance sheets.
Looking forward, in the post-election environment after the period covered by this survey, AfriAsia has announced its intention to pump $100 million into its Zimbabwean subsidiary.
It is clear that further capital will have to be raised by the other bankers to comply with the new capital regulations and there is every indication from the management of these institutions that this is in the pipeline. The liquidity has been growing every year since dollarization and more is on its way. What remains to be seen is whether the economy will sweat this capital as it grows, as it has done consistently since dollarization.