The dust never seems to settle in the banking sector in Zimbabwe, one sector that has been accused of any possible act of sabotage under the sun in Zimbabwe. In 2006-8, the accusations of fuelling the foreign exchange parallel market, creating artificial cash shortages, turning the stock market into a casino and others too many to mention kept the blame game in motion as hyperinflation saw prices of goods doubling on a daily basis. Not all of the accusations were without basis however as a few lousy banks were caught pants down as the Reserve Bank took further steps to prove some of the allegations. However, objective evaluation of the wider accusations always led one to more bigger challenges in the economy beyond the scope of banking, to which banks responded by engaging in ‘depression-bursting techniques’ to stay afloat just like any rational economic player in the economy who has survived to date.
Now the accusations have surfaced, aimed at big banks accused of stashing away cash instead of lending to the needy economy that is running on very thin working capital base relative to the needs of the industry. These accusations, considering the income challenges that the banks are facing in Zimbabwe today and coupled with lack of alternative assets in the market, seem to be largely bizarre. Reading through the accusations, there is one conclusion one can make; only banks with brainless credit risk policies will be found sitting on disproportionate large amounts of non-interest earning cash, whilst only stupid banks will lend every coin they have on their balance sheets and collapse tomorrow. That closes the analysis.
Now the accusations have surfaced, aimed at big banks accused of stashing away cash instead of lending to the needy economy that is running on very thin working capital base relative to the needs of the industry. These accusations, considering the income challenges that the banks are facing in Zimbabwe today and coupled with lack of alternative assets in the market, seem to be largely bizarre. Reading through the accusations, there is one conclusion one can make; only banks with brainless credit risk policies will be found sitting on disproportionate large amounts of non-interest earning cash, whilst only stupid banks will lend every coin they have on their balance sheets and collapse tomorrow. That closes the analysis.
Without any other interest earning asset portfolio existing other than the loans and advances today in Zimbabwe’s banking sphere, and with banks facing huge operational costs and adjustment challenges, any bank with sizeable deposits is in a better shape to meet obligations to staff, shareholders and clients through creating assets on the balance sheet via loans and advances. It therefore would be bizarre to find a bank sitting on excessive cash balances. Doing so would be too is too risk averse and such banks don’t deserve a place in the market. The other balancing side of the coin however gives better insight to policy makers and interest groups that may want to blame the banks for not lending every coin of their deposit. And that is the issue of liquidity. Traditionally, the RBZ acted as the lender of last resort whereby banks in short positions would get accommodated, whilst at the same time the interbank market has always been active with TBs being used to secure such transactions. Today there is virtually no accommodation from the RBZ for banks in need of liquidity because the central bank itself has no sufficient buffers of currencies, whilst on the same note the interbank market is sticky as few bankers’ acceptances are acceptable as security amongst banks. The listed companies, whose shareholders cannot respond to right issues as they have equally been decimated by a decade long hyper-inflation, have swooped on the credit markets, suffocating the smaller unlisted companies since their bankers’ acceptances are deemed liquid to some extent.
The market is therefore very illiquid, and those in the know understand the disastrous impact of running a bank with a very high loan-to-deposit ratio in a market that is as illiquid as Zimbabwe’s. That bank may not live long to be recognised as a bank that made the difference. True, the economy needs to resuscitate production, but the deposits in the banking sector at around $500 million in May 2009 are too thin to meet the needs of the thirsty economy. As long as Fidelity Printers is not printing US$ and with the RBZ having to rely on legitimate built-up of reserves, it will take a long time for the RBZ to accumulate sufficient foreign currency buffers to oil operations of the interbank market. And as long as the interbank market is not efficient, whilst the accommodation policy of the RBZ is dead, the banks have therefore every right to maintain huge liquidity buffers. Unfortunately because of the market dynamics, this liquidity portfolio will be in the form of cash. Considering the painful adjustment mechanism companies are going through, bad loans are now a potential threat in the banking sector that had gone for the last 5 successive years with the lowest loan loss ratio in the world due to inflation that kept borrowing the most lucrative thing. Banks therefore have to balance the liquidity issue and solvency needs, more so now they need to boost capital levels to the new requirements around $12 million after losing all the capital to inflation.
With this complete picture in mind, the banking sector in Zimbabwe is treading on one of the most difficult paths in its history, and criticism that does not take into account the intricacies of these liquidity dynamics will largely miss the point. Instead, the government should scrutinise itself and evaluate what it has done to assist in credit creation. Instead, the issue of reducing the statutory reserves to zero should be a key priority in a market that is sitting on arguably the lowest deposit base in Africa relative to its capacity.
Elsewhere, the challenges are more or less the same. The huge disparity between the lending rates and repo rates in Tanzania and South Africa have been misconstrued by some policy makers as inhibiting the interest rate pass through, hence undermining the efficiency of monetary policy to influence real economic activities. In Tanzania, with the banking sector sitting on total deposits of about $5 billion and $6.1 billion in assets, the big banks have about 50% of balance sheets in loans and advances and a sizeable 16% in government securities. What has attracted attention is the average annualised cost of borrowing of about 20% per annum compared to mild annual inflation running at 11.3% year-on year ( May). The sector has been accused of reaping off borrowers and therefore inhibiting credit extension mainly to the small companies that are in the growth phase. The call to reduce interest rates in Tanzania would be very difficult for banks that would likely see more bad loans as the economy feels strains of collapsed global prices of cotton, Tanzanite and the negative impacts of slowing tourism activities. The government securities, in particular the one year TBs, aren’t attractive anymore for the banks considering the yields have been coming down sharply over the last 10 months, from as high as 18% in October 2007 to the current yields averaging 11%, closely matching inflation that has been coming down in line with commodity prices cooling off.
In SA, the debate sparked by Tito Mboweni with the big banks seems to reinforce the general notion in many African counties that the banks are insensitive to needs of the wider economy, and will go an extra mile in maximising profit. As SA’s Reserve Bank has been hastening the cuts in repo rate to make credit more available in the recession-hit economy, the banks have not been reducing their lending rates at the same pace, attracting attention of the central bank. The efficiency of monetary policy is very important in SA, Africa’s biggest economy with total assets in the banking sector at around $300 billion. With one of the highest loan to GDP ratio on the continent at 78%, the transmission mechanism of monetary policy would need to be more efficient to allow policy makers to manage wider macroeconomic risks and shocks in the quest of maintaining sustainable inflation and unemployment levels. The decision on 25 June by the SA’s Reserve Bank to keep the repo rate unchanged at 7.5% brought even more special interest groups such as Cosatu in condemning the high interest rates, this time the anger being directed at the Reserve Bank for failing to stimulate the economy.
Whilst many African economies are still far from accommodating consumer loans on banks’ balance sheets, SA runs deeper, with home loans and mortgages to total assets at about 31%. This ratio is not significantly different from zero for banks in Tanzania, Zimbabwe, Angola, Mozambique and Zambia, making the interest rate debate in these economies less emotional. Combined with household debt at about 75% of disposable income, the interest rate factor becomes an important issue in SA’s macro-economic framework. In most of the debates around bank interest rates however, many fail to understand the link between the central banks’ provision of liquidity to the banks and the determination of the lending rates based on the repo rate. As long as banks are not borrowing from the central banks to manage their short positions, it will always be difficult for the lending rates to be very responsive to the policy rates. And in such instances, moral suasion would need to do the trick
The market is therefore very illiquid, and those in the know understand the disastrous impact of running a bank with a very high loan-to-deposit ratio in a market that is as illiquid as Zimbabwe’s. That bank may not live long to be recognised as a bank that made the difference. True, the economy needs to resuscitate production, but the deposits in the banking sector at around $500 million in May 2009 are too thin to meet the needs of the thirsty economy. As long as Fidelity Printers is not printing US$ and with the RBZ having to rely on legitimate built-up of reserves, it will take a long time for the RBZ to accumulate sufficient foreign currency buffers to oil operations of the interbank market. And as long as the interbank market is not efficient, whilst the accommodation policy of the RBZ is dead, the banks have therefore every right to maintain huge liquidity buffers. Unfortunately because of the market dynamics, this liquidity portfolio will be in the form of cash. Considering the painful adjustment mechanism companies are going through, bad loans are now a potential threat in the banking sector that had gone for the last 5 successive years with the lowest loan loss ratio in the world due to inflation that kept borrowing the most lucrative thing. Banks therefore have to balance the liquidity issue and solvency needs, more so now they need to boost capital levels to the new requirements around $12 million after losing all the capital to inflation.
With this complete picture in mind, the banking sector in Zimbabwe is treading on one of the most difficult paths in its history, and criticism that does not take into account the intricacies of these liquidity dynamics will largely miss the point. Instead, the government should scrutinise itself and evaluate what it has done to assist in credit creation. Instead, the issue of reducing the statutory reserves to zero should be a key priority in a market that is sitting on arguably the lowest deposit base in Africa relative to its capacity.
Elsewhere, the challenges are more or less the same. The huge disparity between the lending rates and repo rates in Tanzania and South Africa have been misconstrued by some policy makers as inhibiting the interest rate pass through, hence undermining the efficiency of monetary policy to influence real economic activities. In Tanzania, with the banking sector sitting on total deposits of about $5 billion and $6.1 billion in assets, the big banks have about 50% of balance sheets in loans and advances and a sizeable 16% in government securities. What has attracted attention is the average annualised cost of borrowing of about 20% per annum compared to mild annual inflation running at 11.3% year-on year ( May). The sector has been accused of reaping off borrowers and therefore inhibiting credit extension mainly to the small companies that are in the growth phase. The call to reduce interest rates in Tanzania would be very difficult for banks that would likely see more bad loans as the economy feels strains of collapsed global prices of cotton, Tanzanite and the negative impacts of slowing tourism activities. The government securities, in particular the one year TBs, aren’t attractive anymore for the banks considering the yields have been coming down sharply over the last 10 months, from as high as 18% in October 2007 to the current yields averaging 11%, closely matching inflation that has been coming down in line with commodity prices cooling off.
In SA, the debate sparked by Tito Mboweni with the big banks seems to reinforce the general notion in many African counties that the banks are insensitive to needs of the wider economy, and will go an extra mile in maximising profit. As SA’s Reserve Bank has been hastening the cuts in repo rate to make credit more available in the recession-hit economy, the banks have not been reducing their lending rates at the same pace, attracting attention of the central bank. The efficiency of monetary policy is very important in SA, Africa’s biggest economy with total assets in the banking sector at around $300 billion. With one of the highest loan to GDP ratio on the continent at 78%, the transmission mechanism of monetary policy would need to be more efficient to allow policy makers to manage wider macroeconomic risks and shocks in the quest of maintaining sustainable inflation and unemployment levels. The decision on 25 June by the SA’s Reserve Bank to keep the repo rate unchanged at 7.5% brought even more special interest groups such as Cosatu in condemning the high interest rates, this time the anger being directed at the Reserve Bank for failing to stimulate the economy.
Whilst many African economies are still far from accommodating consumer loans on banks’ balance sheets, SA runs deeper, with home loans and mortgages to total assets at about 31%. This ratio is not significantly different from zero for banks in Tanzania, Zimbabwe, Angola, Mozambique and Zambia, making the interest rate debate in these economies less emotional. Combined with household debt at about 75% of disposable income, the interest rate factor becomes an important issue in SA’s macro-economic framework. In most of the debates around bank interest rates however, many fail to understand the link between the central banks’ provision of liquidity to the banks and the determination of the lending rates based on the repo rate. As long as banks are not borrowing from the central banks to manage their short positions, it will always be difficult for the lending rates to be very responsive to the policy rates. And in such instances, moral suasion would need to do the trick
