The Zimbabwean banking sector is seen stagnating owing to a credit crunch with client loan growth projected to contract by 4% by year-end given the rate at which Zimbabwean banks are buying Treasury Bills (TBs) at the expense of lending.
By Melody Chikono
According to a Fitch research company BMI, across the banking sector, TB purchases rose by around 30% in the year while loans and advances to other areas of the economy stagnated.
“Government debt is crowding out private sector finance and potentially exposing the banking sector to a default. The amount of TBs being held by Zimbabwean institutions — mostly banks — had risen by over 20% in over H1 2017 to US$2,5 billion, of which over a third was used to finance government expenditure.
“As a result of the credit crunch, we believe client loan growth will remain slow, reaching 2% year-on-year (y-o-y) by year-end 2018, after contracting by a projected 4% y-o-y by year-end 2017,” BMI says.
BMI said the reliance of the sector on electronic money which, although it supports the industry’s earnings, was insufficient to offset its substantial exposure to sovereign risk over the coming quarters.
The banking sector is currently reporting rising profitability and strong deposit growth, as a reflection of the increased use of electronic money in the face of severe cash shortages.
According to BMI, the unsustainable growth and high risks in the banking sector contain the potential for a systemic crisis.
“The Zimbabwean banking sector appears to show rising profitability and a growing asset base, but headline figures mask inherent structural weaknesses. A large portion of Zimbabweans are now rely on electronic transfers to make payments, rather than hard cash, which allow banks to levy transaction fees. Although this supports the sector’s profits, we do not believe it is sufficient to offset its substantial exposure to sovereign risk over the coming quarters,” the report says.
Plastic and electronic money now accounts for over 70% of the payments in Zimbabwe and the central bank have been periodically revising transactions fees downwards to encourage usage of the facility.
While central bank intervention has helped bring down non-performing loans (NPL)s ratios over the past year, the country’s micro-finance institutions (MFIs), which represent around 6% of the total loan book in the financial sector, are faced with potentially significant NPLs as the liquidity crisis hits the ability of companies and individuals to repay their debts.
At-risk loans were 12,4% at end Q1 2017, up from 8,3% at end-2016, which was against the overall trend in the banking sector and threatens to climb with inflation.
With around 100 MFIs in Zimbabwe, BMI noted that consolidation and capital injections are necessary to maintain and grow services in under-banked rural areas.