The banking crisis in Zimbabwe

The banking crisis in Zimbabwe
Published: 06 October 2013
By Hope Nyandoro of Zimnat Asset Management.

Zimbabwe has always been known for defying the tried and tested laws of economics, and many prominent scholars have often been puzzled as to how the country has on numerous occasions escaped the jaws of total collapse. Recently, prominent US professors such as Craig J. Richardson and Steve H. Hanke have written several articles on the Zimbabwean economy all of which were trying to understand how a fundamentally flawed economic system, since dollarization, can function and even grow at a remarkable rate of above 5%. The conclusions to such papers have often stated that "such a situation cannot be sustainable in the long run".

Most recently, despite the slowing economic growth, flat/declining corporate earnings, and pessimistic economic outlook, investors on the Zimbabwe Stock Exchange have witnessed the strongest bull run on the market since dollarization. No one really has a solid explanation for this anomaly, resulting in most analysts pointing to foreigners, who are responsible for the bulk of trades that are pushing the market upwards. But the question remains, what is it that they are seeing that us the locals are not in this market?

Another recent anomaly that we are seeing on the local financial market is that deposit interest rates are declining against a tightening liquidity base. Textbook economics clearly states that when money supply is tight the cost of funds (interest rates) should go up, simple demand and supply principle. Although the stock market boom still admittedly baffles us, a closer look at the declining interest rates scenario reveals that it has its roots in the memorandum of understanding (MOU) signed between bankers and the Reserve Bank of Zimbabwe (RBZ).

With the June reporting season now over for banks, it is very clear that earnings across the industry have been under a significant amount of pressure with most banks struggling to make a profit. This was mainly attributed to slower growth in net interest income as well as an increase in impairment provisioning, given the increase in non-performing loans (NPLs) in the sector. The MOU signed earlier this year between the RBZ and the BAZ was cited as the main cause for the decrease in interest and non-funded income. According to the MOU, banks are obliged to cap lending rates at 12.5% above their weighted average cost of funds, and pay 4% on every $1,000 deposited for at least 30 days. In addition, accounts with deposits of less than $800 have restricted withdrawal charges, which is a serious problem for bankers because most workers in Zimbabwe earn below $800 per month.

In the face of worsening liquidity conditions as witnessed by the decline in annual broad money supply, a sharp increase in NPLs, increasing banking regulatory capital requirements and a restrictive RBZ MOU, bankers were once again forced to think outside the box to survive. The first phases of measures implemented by banks to restore viability were of a cost cutting nature in which they retrenched heavily and upgraded their information technology platforms, especially their ATM machine networks. However, there is always a limit to cost cutting measures that a bank can implement and the squeeze on topline growth as a result of the MOU implied that bankers would have to look elsewhere to maintain or grow their earnings. Whilst there is a huge appetite for credit across all productive sectors of the economy, the downside default risks associated with lending to some of these sectors have been devastatingly high, forcing banks to take a more conservative approach when lending. One only has to look at the number of companies going into liquidation to understand the severity of the situation.

There is strong belief by analysts that the stagnant/declining interest rates on the local money market despite the tightening liquidity conditions may be a function of bankers having to increase their interest rate margins through lowering their money market deposit rates, to compensate for the loss of non-funded and interest income as a result of the RBZ MOU. In addition, because bankers are now more conservative with their lending, it means that they have a bit more cash to play around with and despite the liquidity crunch are not desperate to chase expensive deposits which they also have to lend out at an expensive rate which increases the probability of defaulting.  The loans to deposits ratios of a number of leading banks we have looked at are ranging between 60 and 70 percent as at 30 June 2013.

However, joining the chorus conclusion of scholars on the Zimbabwean economy; it is clear that the above interest rate scenario cannot be sustainable in the long run because there is a downside limit to which investors on the money market are will to place their funds and also if the deposits base continues to shrink, banks will have no choice but to look for innovative ways to increase their interest income.

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Hope Nyandoro
Research Analyst
Zimnat Asset Management,
17 Plover Road, Mount Pleasant, Harare
P.O. Box 2417, Harare, Zimbabwe
Work cellular lines: +263-772161846/7
Work landlines: 04-884351, 882827, 883895
Email: hope@zam.co.zw
- Hope Nyandoro - Zimnat Asset Management
Tags: Zimnat, Banking, Crisis,

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