By Perry Munzwembiri
To be absolutely clear, there is a banking sector crisis unfolding in Zimbabwe. The chief catalyst of the current crisis that is likely to see some banks fold is the country’s long standing currency conundrum.
The wider use of the Zimbabwe dollar, ushered in through Statutory Instrument 142/2019, has left banks technically insolvent. The jaw dropping and seemingly outsized profits being posted by banks should not, and cannot, mask this reality. They are, for all intents and purposes, only paper profits, driven in part by the highly inflationary environment, where inflation levels are at their highest in over a decade, fair value adjustments and exchange gains.
These (non-monetary) profits and the oft glossy commentaries that accompany them in the financial statements of banks, featuring a lot of high-sounding but meaningless crackle of “resilience”, “enhanced focus on digitalisation”, “cost containment” and “mission focus”, cannot make up for the fact that the same banks are encumbered by US dollar denominated foreign debts and lines of credit that they have no capacity to repay. Some analyst estimates put these at around US$300 million for the entire sector, which translates to about 31% of total banks’ capital.
The longer term impact of this, of course, is that in addition to irate foreign funders who have their funds trapped locally, foreign capital which is typically very fluid, and follows the path of least resistance will turn its back on the country. Waning Foreign Direct Investment in general, and declining offshore loans to the financial sector specifically, buttress this point. According to the RBZ’s own data, offshore loans to the country’s financial sector were down 42% in 2019, compared to 2018.
Similarly, the mirage of increases in the capital levels of banking institutions propelled by revaluations of non-current assets, on the back of the free-falling Zimbabwe dollar, do not imply more capital to lend as these are mere non-monetary increases. One just has to look at the banking sector’s overall loan to deposit ratio as at the end of December 2019, at only 37%, against a sub-Saharan Africa sector average of around 78%.
In fact, total loans for 2019 totalled 12.63 billion according to the RBZ, and while this may sound like a substantial pile of money, consider however this amount converted at the current fixed exchange rate of 1:25, and you only have around US$505 million. To put this into context, Delta Beverages requires in the region of US$60-80 million yearly to import raw materials and operate optimally, while Innscor Holdings needs about US$100 million annually for its raw materials.
While the immediate focus of the Zimbabwean authorities is on suppressing and mitigating the spread of the COVID-19 virus, and rightly so, the longer term implications on an already fragile banking sector are daunting. The disruption of supply chains affecting the movement of goods and people across borders is likely to have a marked impact on the trading activities of both exporting and import dependent entities alike.
Exporters of manufactured goods and minerals have no one to sell these to, as borders are closed with whole countries under lockdown. This also affects import dependent companies which have no easy way of bringing in key inventories. Adding to the maelstrom of challenges presented by the Covid-19 pandemic is the fact that commodity prices have tanked.
“There is a risk of a resurgence in non-performing loans…”
Then there is the very real possibility that even after the lockdown, some businesses will not have a viable financial path to restoration of normal trading. What this means is that there is a risk of a resurgence in non-performing loans, already bearing in mind the constrained economic environment prevailing even prior to the Covid-19 outbreak.
Compounding this are the relatively high interest rates averaging between 40-45% (notwithstanding that even at these rates, banks are earning negative real rates). More crucially, the implementation of the IFRS 9 credit model, which essentially dictates the immediate recognition of expected credit losses on loans, will likely affect banks’ impairments and provisions levels in light of the ramifications of the COVID-19 pandemic on borrowers.
There is diminished capacity (unwillingness) of banks to lend, amid a highly inflationary environment where they are earning negative real rates, and where borrowers are in stress and bank balances are shrinking in real terms. This means that there is limit and consequence to banks playing their financial intermediary role, through lending, to kick-start some semblance of economic growth post the COVID-19 crisis.
In fact, expecting banks to do so would be unfathomable at the moment. Banks are in a moment of crisis themselves, and will not be spared by the current turmoil. There is the existential spectre of bank failures in Zimbabwe caused in part by an acute shortage of liquidity, a rise in loan defaults and a decline in banks’ profitability, precipitated by the COVID-19 outbreak.
Already, the South African Reserve Bank is considering lowering the liquidity coverage ratio and the specified minimum capital requirement and reserve funds to be maintained by banks, as part of measures to ensure the long term viability of South African banks. For its part, the RBZ has to date decreased the statutory reserve requirement of Zimbabwean banks from 5% to 4.5% to relieve liquidity pressures in banks and to avail more room for lending.
Perhaps the silver lining in the current COVID-19 crisis is that it may force banks to quicken their digitisation initiatives and strengthen their abilities to serve clients more efficiently, leveraging technology and breaking away with the traditional brick and mortar model. On the whole, however, like most economic sectors, the banking sector is not being spared by the COVID-19 crisis, and carnage awaits.