Assessing US$100m capital requirement for local banks

Almost five years ago, the Reserve Bank of Zimbabwe (RBZ) increased the minimum capital requirements for commercial and merchant banks to US$100 million from US$12,5m and US$10m respectively. With 13 operating commercial banks, only two have surpassed the minimum capital requirements ahead of the 2020 deadline.

Financial Matters: Tinashe kaduwo

Given a background of bank failures, the RBZ policy measure could have been aimed at strengthening the capital positions of the banks operating in the country to ensure a solid future while at the same time guaranteeing safety of deposits for account holders. Sufficiently capitalised banks would be able to effectively respond to the financial requirements of the members of the business community and other potential borrowers, with appropriate loan facilities.

However, with the turn in macroeconomic events, there is a need to scrutinise whether the US$100m statutory requirement is still appropriate in a small economy like Zimbabwe. Indeed, other countries such as Zambia have implemented such policies to strengthen the banking sector and maintain its stability. With 13 operating commercial banks, the policy measure entails that there be a minimum of US$1,3 billion in commercial banks’ capital lying idle. Banks can lend up to 10 times their capital. This means that, potentially, commercial bank loans should rise to US$13bn for banks to fully enjoy the benefits of having huge capital.

Currently, banks are struggling to disburse loans due to lack of quality borrowing clients and regulated lending rates that at times may not cover specific banks’ credit risk. With loans to the private sector at US$3,6bn, representing roughly 25% of GDP, increasing loans to US$13bn requires a constant annual average growth rate of over 80%. The practicality is questionable given the country’s bleak economic outlook in the short to medium term.

Loans-to-GDP averages 18% in Sub-Saharan Africa and, at 25%, Zimbabwe is on the high end. Maintaining the status quo, a US$100m minimum capital requirement, in a country with 13 operating commercial banks requires growing the economy to around US$52bn for commercial banks to fully enjoy the benefits of having such high minimum capital levels. Currently, minimum capital requirements are set at US$25m and all commercial banks have met the set level.

Banks’ aggregate core capital of US$1,15bn as at 31 December 2016 is above the minimum requirement by more than eight-fold. This suggests that banks have capacity to create as much as US$11,5bn in loans. Low economic activity and lack of quality borrowing clients have seen bank loans stagnating at US$3,6bn with almost all banks having huge sums lying idle on RTGS. Setting a high requirement may not be appropriate for our economy. Banks’ minimum capital requirements should be a function of an economic aggregate such as GDP.

However, it is envisaged that, when fully met, these capital requirements will help in ensuring that the banks are adequately capitalised for them to remain resilient to financial instability as the result of external and internal factors. Sufficient capital buffers enable banks to take on big transactions and improve the banking sector’s access to funds which the banks can easily loan to local depositors and various markets. Above all, it is envisaged that this will lead to a situation where the banking sector will contribute more to the growth of the national economy while effectively serving the local people and organisations.

That, however, remains to be witnessed because previously the government through its various wings, including the RBZ, has come up with several well-intended policy measures which have ended up being frustrated by other stakeholders. A relook into the policy might be necessary given the underlying macroeconomic difficulties. Although banks have continued to remain profitable, most of them have capitalised on opportunities arising from the cash crisis and Treasury Bills (TBs). The current cash crisis has seen transaction volumes skyrocketing, boosting banks’ non-funded income. Banks have increased their holding of TBs, enjoying huge discounts in the secondary market to boost short-term returns. Income from lending activities should generally be the key driver of banks’ income in a normal economy, not other things.

Kaduwo is an economist at Equity Axis. — tinashek@equityaxis.net or kaduwot@gmail.com

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