(First Published in the Banks & Banking Survey 2016 Magazine)
History has many documented case
studies where the pursuit of patriotism and heroism has always brought
suffering, regret, and in other cases, triumph. And that analogy can revealingly
be used to assess the risk-reward trade-off in the local banking industry.
After a decade of economic meltdown, dollarisation brought so much optimism and
the bankers, holding the keys to credit, became once again the protagonists on
whose hands the fate of companies got decided. Considering that only $475
million existed in the whole banking sector at the time of dollarisation and
with that having to be shared amongst all the banks, the resultant aggressive lending
for survival was inevitable.
Resultantly, almost every dollar that got
deposited was loaned out in its entirety, with the situation being made worse
by the absence of reserve ratio as policy makers opted to allow the market to provide
as much credit as possible to kick start the economy.
This excessive risk-taking
behavior by the bankers over the years, in part motivated by the desire to ramp
up profits to shore up capitalization levels that had been set at staggering
levels, explains how the loan-to-deposit ratio has hovered precariously above
90% for the majority of the smaller banks, with the sector average rising to a
peak of 84% in 2011.
And today, even as it stands at 69%, the load to deposit ratio remains quite high
when compared to regional peers such as Zambia where it stood at 57% as at 30
June 2016. In response to the high
loan-to-deposit ratio and the excessively exorbitant cost of credit that
hovered above 50% annualized during the first three years of dollarisation,
monetary aggregates in Zimbabwe ballooned phenomenally, from a modest $475
million in 2009 to around $5.6 billion at the moment.
A quick glance at Ecuador,
which dollarized in 2000, reveals how monetary aggregates increased only 3-fold
to $15 billion by 2007, exactly 7 years after its dollarisation. Zimbabwe’s
have increased a whopping 11 fold over 7 years!
This huge appetite to lend, in
part explained by bankers as being patriotic and being responsive to the calls
by policy makers to generously liquefy the credit markets, was not overly
misplaced after all. Zimbabwe, having no formal arrangements with the big
international lenders and multilateral development financial institutions at
the point of dollarisation, had to look to itself to make it work.
The bankers,
with haste, responded to the call and proceeded to provide credit, albeit with
reckless abandon. And indeed the majority of the progress that this economy has
achieved to this day is attributed to the courage and relentless patriotism of
the bankers that, in the absence of lender of last resort functionality at the
RBZ, took massive gamble with deposits on their balance sheets and sacrificed
liquidity for loans. And indeed the economy responded. GDP growth peaked to
around 11% in 2012, thanks to the bankers that traded prudence for patriotism.
Unfortunately this patriotism or
excessive risk-taking behavior, whichever descriptions suits best the gesture,
has plunged the banking sector and the economy at large into a crisis that may
take very long to unwind and amortise. The massive expansion in monetary
aggregates in Zimbabwe unfortunately contrasted against prices that started to
correct sharply for the domestic economy that had suddenly opened to the world
on account of dollarization and near-abolishment of exchange controls.
The
resultant competitive challenges for the domestic market meant that most
companies could not compete largely with cheaper imports from SA, spurred in
part by the Rand whose depreciation has been a boon for exports into Zimbabwe
that has been using the stronger US$. And as expected, a significant portion of
these loans issued began to turn bad, itself very bad news for the bankers that
had driven loan-to-deposit ratios to the ceiling.
As the belly of the economy
continues to throw up dead companies at a remarkable rate, the mess has,
unfortunately but rightfully so, been piling up in bank balance sheets. And
cleaning up that mess has not been easy, the very reason why the banking sector
has good statistics to its credit of banks that collapsed under the burden of
bad dirty debts culminating from a lending binge that has its roots dating back
to 2009.
Interfin, AfrAsia, Royal, Trust and Renaissance and Allied Bank, among
others, became the statistics in a very short space of time. And with that, as
expected, came the suffering of depositors who lost their wealth and savings.
An estimated $200 million from over 54,000 depositors went up in smoke! And
many continue to count their losses to this day.
Although natural selection has
weeded out the bad boys for now, the sector remains burdened by non-performing
loans. Inasmuch as official statistics on non-performing loans report them at
around 10.8% as of December 2015, the fact on the ground points otherwise, more
so when history of collapsed banks such as Interfin, AfrAsia and Renaissance,
among others, revealed shocking levels of non-performing loans that could not
be easily reconciled with reported levels of non-performing loans in the market
just before their collapse.
At a time where capitalization
levels are tight for shareholders that literally had to start afresh in 2009,
restructuring problematic loans becomes the next best strategy to manage
provisioning levels and write-downs that, in effect, would require more
injection of capital to comply with the prudential capital adequacy
requirements.
In light of the deflationary environment that has impacted
heavily on the ability of borrowers to service their loans as revenues and
margins have been coming down steeply, the bankers are left with little choice
but to re-negotiate with their struggling borrowers and restructure loan
covenants. And this restructuring of loans in an economy facing declining
consumer demand and low confidence can only but post-pone the inevitable.
Bad debts shall keep piling! Although ZAMCO,
a company set up to buy bad debts from banks, has licked part of the mess to
the tune of $357 million worth of bad debts to this date, it should not be seen
as the ultimate antibiotic to cure the disease. Its funding model, that largely
from TBs, cannot be pursued sustainably, moreso at a time there is growing
chorus for government to halt spending beyond its means to protect the market from collapsing on itself.
In any case, sooner there shall be consensus that the big corporates that are
failing should indeed be left to die as the economy renews itself in creative
destruction mode. And foreclosure will spike.
The banking sector is therefore
in for a long and pernicious cleaning process as the economy continues to throw
more mess on their balance sheets! And as if that is not been enough trouble,
the incoming cash crisis has created new headaches for the bankers, save that
this particular problem is one they look up to the regulator to print bond
notes for salvation.
