Zimbabwe’s banks making a killing

Zimbabwe’s banks reported an aggregate net profit of $127.5 million last year, making this one of the most lucrative business sectors in the country whose economy has been on the decline over the past four years.

Central Bank governor John Mangudya said 15 of the country’s 18 operating banking institutions recorded profits.

“In a few institutions, increased provisioning for bad and doubtful debts, however, weighed down on their performance resulting in losses,” he said.

Only one merchant bank, Tetrad, was under judicial management.

 The banks seem to be cashing in on short-term credit to individuals with very little money being lent to the capital intensive sectors such as construction and mining.

A breakdown of the sectors shows that manufacturing beat individuals only by a small margin consuming 24.31 percent of the credit against 24.28 percent for individuals.

Agriculture was in third place with 16.36 percent followed by transport and distribution at 15.29 percent.

Mining, which is currently one of the country’s top foreign currency earners, only got 4.33 percent while construction and property was at the bottom with 0.92 percent.

Below is an extract on banking sector developments from Mangudya’s monetary policy statement.

The banking sector exhibited positive developments in 2015 as evidenced by its sustained safety and soundness, satisfactory with respect of metrics such as capital adequacy, liquidity and profitability, among others. In particular, the sector benefitted from concerted efforts by the Reserve Bank and Government to promote the resilience of the sector, bolster confidence and improve regulatory oversight to enhance the sector’s capacity to adequately support economic activity.

As at 31 December 2015, there were 18 operating banking institutions comprising 13 commercial banks, one merchant bank, four building societies and one savings bank. The figure excludes the merchant bank, Tetrad, which was under judicial management.

In addition, there were also 155 credit-only microfinance institutions, three deposit-taking microfinance institutions, and one development institution under the purview of the Reserve Bank.

During the last quarter of 2015, the Reserve Bank licensed the National Building Society Limited (wholly owned by the National Social Security Authority) and three (3) deposit taking microfinance institutions namely, Getbucks Financial Services (Private) Limited, African Century Leasing Company and Collarhedge Finance (Private) Limited.

Getbucks Financial Services Limited and African Century Leasing Company commenced operations in January 2016 while National Building Society Limited and Collarhedge Finance (Pvt) Ltd are finalising the administrative and infrastructural facilities in readiness for operations. The entrance of more players in the financial sector bodes well for efforts aimed at promoting the deepening of financial markets.

The banking sector’s capitalization levels continued to improve as reflected by the increase in the aggregate core capital base from $811.2 million as at 31 December 2014 to $982.5 million as at 31 December 2015. The increase was primarily underpinned by improved retention of earnings, as well as fresh capital injection at some banking institutions. As a consequence, all operating banking institutions (excluding Tetrad Investment Bank), were in compliance with the prescribed minimum capital requirements by year end.

Two (2) banking institutions, CBZ Bank and CABS Building Society, had already surpassed the $100 million minimum capital requirement for the Tier 1 strategic group, which is effective in 2020, while three, Stanbic, BancABC and Standard Chartered, had capital levels above $50 million.

Most banking institutions have indicated a preference for Tier 1 segment (minimum capital of $100 million by 2020), to be achieved through a combination of organic growth and fresh capital injection. The Bank continues to monitor implementation of banking institutions’ capital plans to ensure compliance with the 2020 minimum capital requirements. On an ongoing basis, banking institutions are, therefore, expected to continuously review their capital positions to assess adequacy to cover the risks assumed in the intermediation role.

The banking sector remained profitable, with a reported aggregate net profit of $127.47 million for the year ended 31 December 2015. A total of 15 out of 18 operating banking institutions recorded profits. In a few institutions, increased provisioning for bad and doubtful debts, however, weighed down on their performance resulting in losses.

As at 31 December 2015, total banking sector deposits grew by 11.2% to US$5.6 billion whilst and loans amounted to $3.9 billion, respectively. Against the background of the sluggish growth in credit, the loan to deposit ratio declined from 78.4% as at 31 December 2014 to 68.8% by the end of December 2015.

Banking sector deposits are dominated by demand and time deposits, which accounted for 46.2% and 33.8% of total deposits, respectively, as at 31 December 2015. The tenure of deposits has generally improved and largely stabilised over the past year, allowing banks to plan their funding arrangements and credit extension around a higher level of core deposits.

The banking sector remains largely constrained in meeting the long-term funding requirements of capital intensive sectors such as construction and mining. Meanwhile, the Bank expects banking institutions to continue to re-orient their lending towards productive and export sectors of the economy such as horticulture and mining in order to boost output and generation of foreign exchange earnings.

Broad money supply grew by 7.5% in November 2015 compared to a growth of 12% recorded in November 2014. This lower growth is attributable to the slowdown in economic activity, coupled with attendant external sector imbalances. As a consequence, annual growth in broad money (as measured by the stock of bank deposits, excluding interbank deposits) stood at US$4.7 billion at the end of November 2015.

The reactivation of the interbank market through the Aftrades facility, as well as other financial sector measures continue to improve monetary conditions in the economy. The Aftrades facility has also gone a long way in enhancing financial intermediation through the increased participation of banks on the interbank market. Furthermore, the fruition of various financial reform measures instituted by the Bank is expected to further boost confidence in the financial sector, resulting in improved deposit mobilization, critical for the revival of the economy.

Domestic credit is on a recovery path following the coming on board of ZAMCO and Aftrades. These measures have resuscitated confidence in the domestic money market and provided comfort for banks to resume lending to the private sector.

The ratio of non-performing loans to total loans declined markedly from a peak of 20.45% as at 30 September 2014 to 10.87% at 31 December 2015. Improvements in the level of NPLs in the banking sector is largely attributable to the disposal of qualifying loans to ZAMCO and the effective credit risk management strategies employed by banks including intensified collections and workout plans.

The institution of various resolution policy measures by banks, the assumption of qualifying NPLs by ZAMCO and the establishment of a credit reference bureau are expected to further reduce the level of NPLs. Towards this end, banking institutions are working towards reducing their NPL ratios to levels below 10% and 5% by 30 June 2016 and 31 December 2016, respectively.

During 2015, the average prudential liquidity ratio for the banking sector surpassed the minimum regulatory requirement of 30%. As a result, the banking sector average prudential liquidity ratio as at 31 December 2015 stood at 45.4% .

Monthly RTGS account balances averaged US$506 million in 2015 compared to US$408 million in 2014.

There has been notable improvements in risk management standards and capital planning processes as reflected in the Internal Capital Adequacy Assessment Process (ICAAP) reports submitted by banking institutions. However, the Bank has noted some differences in coverage, depth and quality of the ICAAP reports across banking institutions.

In order to address the identified gaps in some of the reports, the Bank is finalising guidance to the banking sector on the minimum standard required in developing ICAAP reports. The guidance is meant to elaborate on the structure and coverage required in the reports in line with international best practice. The guidance will be issued to the market by 31 March 2016.

The Microfinance sector recorded an increase in total loans from $162.2 million as at 30 June 2015 to $173.3 million as at 30 September 2015. The microfinance sector is highly concentrated with top twenty microfinance institutions contributing 89.1% ($154.5 million) of the microfinance sector’s total loans.

The National Payment Systems continued to be the prime mover of funds in the economy through its integral payment, clearing and settlement roles. The Bank is cognisant of the need to maintain a sound, efficient and safe payment system, underpinned by continuous technological enhancements and risk management processes that are consistent with international best practices.

The Bank remains committed to the modernization of the country’s payment systems. Accordingly, the Bank in close collaboration with the banking sector, successfully implemented and launched the RTGS Version 6.3.1 upgrade on 21 November 2015.

The upgraded RTGS is expected to continue to contribute to the efficient operation of financial service system in the economy. Notably, digital financial services are a key driver to achieve financial access thereby contributing to financial inclusion and stability. It is, therefore, imperative for the market and key stakeholders to continue promoting the use of electronic means of payment that are cost effective and efficient for the benefit of the transacting public.

The country continues to witness a steady growth in payment systems as depicted by transactional activities on various streams which aggregated USD57 billion in 2015.

In 2015, the activity distribution of payment methods was skewed towards the RTGS system, which accounted for 80.3% of total value. Mobile payments on the other hand accounted for 87.9% in terms of volumes of transactions processed.

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