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Banks heading towards crisis

ZIMBABWEAN banks are trading on shaky ground amid growing fears of a further rise in systemic vulnerabilities in the fragile sector and a lack of implementation of risk containment measures urgently needed to avert a crisis.

 

Documents obtained from bankers by the Zimbabwe Independent this week show that while the banking sector slightly recovered after the restoration of macro-economic stability last year, it however still faces serious troubles that pose a threat to its viability.

The documents show that 10 out of 25 banking institutions recorded losses during the first quarter ended March 31. The losses were for the most part caused by high non-interest expenses — mainly salaries, employment benefits and general administration expenses. Many banks are currently saddled with unsustainably high costs against a background of low income generation capacity.

As a result of those problems, banks such as CFX, Kingdom, MBCA and even Barclays have adopted cost-cutting measures — including retrenchment of staff and rationalisation of branches — to reduce costs and ensure survival.

A number of banking groups such as Kingdom Financial Holdings, MBCA Holdings, Interfin Holdings and CBZ Holdings have consolidated their operations or are in the process of doing so via proposed mergers, disposal of non-core assets and divisionalisation of subsidiaries.

Although banks like CBZ, CABS and Standard Chartered recorded profits in excess of US$1 million during the first quarter, a number of banks also posted losses and are in dire straits.

Zimbabwe has 15 commercial banks, five merchant banks (the registration of NDH Merchant Bank was cancelled following voluntary surrender of its licence on June 9), four building societies and one savings bank. There are 16 asset management companies and 95 micro-finance institutions.

Due to financial problems, banks have been struggling to meet their capital adequacy requirements even if the central bank had given them a phased plan for September 30 last year to pay half the amount and March 31 to meet the fully prescribed capital levels. As at May 31, 15 out of 25 banking institutions had complied with paid-up capital requirements which are US$12,5 million for commercial banks and US$10 million for merchant banks and building societies. At least 10 banks failed to pay up.

Following its recent visit to Harare to discuss Finance minister Tendai Biti’s draft mid-year budget statement (mid-term fiscal policy review), the International Monetary Fund (IMF) said insolvent banks should be closed if they could not be rescued.

The IMF also said vulnerable banks should be put under heightened supervisory scrutiny and be required to resolve their capital adequacy or liquidity problems through prompt corrective action plans. It said monitoring of systemic risks stemming form rising interbank exposures needed to be stepped up. Banks that fail to meet their obligations must be closed, it said.

“Those banks that remain undercapitalised after appropriate notice should be closed without delay,” the IMF wrote to Biti on June 9.

An IMF mission visited Harare from June 2-10 to review recent economic developments and assist the government in the preparation of the mid-year budget statement.

The IMF said despite last year’s economic recovery, high-frequency indicators now suggested the economy was slowing down and financial vulnerabilities were intensifying. It said monthly exports, credit money and government revenues suggested the economy was decelerating, while the banking sector vulnerabilities were growing due to lower liquidity and severe undercapitalisation of banks, especially the weak and smaller ones. The IMF said there must be efforts to rescue troubled banks without using public funds, but those beyond redemption must be closed.

However, Biti told the Independent this week that his ministry was working with the Reserve Bank to prevent bank closures.

“We are working closely with the Reserve to ensure no bank will be shut down. The banking sector is very fragile, but we have got a duty to make sure no bank is closed,” he said.

Zimbabwe suffered a series of bank failures mostly in 2004 due to a liquidity crisis triggered by the economic meltdown, hyperinflation and mismanagement.

Currently, many banks are struggling for survival due to various problems dogging them in the market. Some of the problems facing the banking sector include liquidity constraints, volatility of deposits, cash-based transactions due to lack of alternative means of payment, high overhead costs against a background of low income generation capacity, lack of lines of credit and the failure of the central bank to act as a lender of last resort due to bankruptcy.

Liquidity problems are mainly caused by poor export performance and lack of international capital inflows. Lack of lines of credit and donor support also compound the problem.

The Reserve Bank’s inability to offer lender-of-last-resort facilities has exacerbated the liquidity crisis in the economy and the banking sector in particular. As a result of this, there is no active inter-bank market where banks, which have no acceptable collateral instruments, can borrow to cover their liquidity gaps.

Documents show that the current banking sector deposits profile largely comprises short-term transitory deposits, mainly driven by salary adjustments. At May 31 demand deposits constituted the bulk of the total deposit bases, while savings and wholesale deposits were slightly lower.

“In view of the volatile nature of deposits, banks have taken a cautious approach to lending as reflected by the ratio of loans to deposits which sat at 58,10% as at June 11 compared to international norms of over 70%,” documents show.

“The predominance of short-term deposits has, among other factors, constrained the banking sector’s potential to provide effective financial intermediation of the productive sectors of the economy.”

Bankers with an optimistic disposition and a feel-good approach say the banking sector remains “safe and sound” despite current problems. They observe that the multi-currency regime helped promote financial intermediation. Deposits with banks tripled between March and December last year. Banks’ loan portfolios grew six-fold, although from a very low base. Strong credit growth supported the nascent economic recovery, but it also contributed to a widening current account deficit and rising vulnerabilities in the banking system.

Analysts are, however, still seriously concerned that the current macro-economic environment characterised by poor liquidity, low savings and volatile deposits poses a grim threat to the survival of banks.

Dumisani Muleya

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