DATA from the Reserve Bank of Zimbabwe (RBZ) show that banks’ appetite for lending to the private sector and individuals has drastically fallen over the years, to levels that deter economic growth. According to the central bank, only $5 billion of the $23,4 billion in deposits as at September 2019 was lent out to the private sector and individuals as loans and advances. This suggest an average banking sector loan-to-deposit ratio of only 24% and this ratio has been coming off year-on-year since 2015.
The loan-to-deposit ratio is a measure of the extent to which deposits within banks are sweated as loans, a core business for all banks. Theoretically, banks are expected to express a greater degree of the funds they receive from clients as deposits to areas of deficit in the form of loans at an interest. A close study of the central bank data shows that Zimbabwe’s loan-to-deposit ratio peaked at 73% in 2015 and eased in successive years up to 2019 to a low of 24% as at September 2019.
In absolute terms, loans only grew by 23% to $2,6 billion between 2013 and 2018, while deposits grew by 183% to $8,6 billion within the same period — a huge disparity. The global benchmark for the loan-to-deposit ratio sits at between 80% and 90% with that of the United States standing at around 72%, while that of South Africa’s major banks stood at 95% at the end of 2018. Study has shown that lending to the private sector can be a key catalyst for economic growth as businesses borrow for enterprise and expansion. It is interesting to further look at why the banking sector in Zimbabwe has shied away from extending loans to the private sector despite the sharp growth in deposits.
In 2016, Zimbabwe’s banking sector faced a serious risk emanating from non-performing loans. The value of loans which were outstanding stood at a fifth of the total outstanding loans extended to the private sector. This heightened systemic risk, given the wide and deep levels, as well as the incapacitation of intervention by the RBZ in cases of failure, in the absence of monetary policy flexibility. The RBZ went on to intervene through a programme of bad-loan acquisitions through a statutory board known as the Zimbabwe Asset Management Corporation, created for that specific task. Another key factor to have deterred lending to the private sector is the emergence of government as a competing borrower.
Under strain from budgetary excesses, government willy-nilly issued Treasury Bills more aggressively from 2016 onwards. The Treasury Bills carried a coupon rate of 10% paid bi-annually, with prescribed asset status and lenders salivated at the near risk-free asset derived from a sovereign debt. These features and near short-term maturity (90 days to 180 days) lured banks into channelling more of their funds from the not-so-productive productive sector to government.
Likewise, a look at the structure of the deposits shows that a significant portion of the deposits has remained largely transitory in nature (demand deposits), which reduces banks’ flexibility to extend the funds as loans. The private sector in Zimbabwe has largely been in need of long-term capital and, given the nature of banks’ available liquidity, could not find comfort locally.
Post-dollarisation, banks continue to face the same challenges, a worse off economy means borrowers are more likely to default on loans now than before, heightening default risk and the occurrence of NPLs. High inflation and low regulated benchmark rates also mean banks are lending at a loss and this coming with a possibility of failing to recoup the whole amount lent out as stated earlier. However, from a customer perspective, especially individuals, the option of cheap money which could be used for speculative moves such as currency trading may be tempting thus motivating borrowings.
For corporates, most will continue to see available funding as expensive and inadequate to cover their long-term needs. Banks will have to find ways of safeguarding customer deposits in an inflationary environment in order to preserve value, although very few choices, if any, are available at present.
Gwenzi is a financial analyst and managing director of Equity Axis, a financial media firm offering business intelligence, economic and equity research. — firstname.lastname@example.org