eBusiness Weekly
Kudzanai Sharara Taking Stock
Despite high levels of economic confidence expressed by business executives in the latest Confederation of Zimbabwe Industries (CZI) Business Confidence Survey, one key economic indicator is still a major worry.
According to the latest 2018 Monetary Policy Statement presented by Reserve Bank of Zimbabwe governor Dr John Mangudya, banks are not lending. The loan to deposit ratio for the banking sector fell to 44 percent from 48,9 percent prior year comparative. This is against the benchmark of 70 percent that is expected from banks.
Between December 2016 and December 2017, the level of bank loans dropped sharply relative to the amount of bank deposits. Because of a reluctance to lend, a lack of demand for loans, or some combination thereof, the intermediation process at banks — providing funding for investment and growth — has not been working as it should.
It’s not easy to explain why banks are sitting on $8 billion in deposits and loans at 44 percent when the productive sector is in obvious need for funding. In the last couple of years we have seen deposits continue to grow — from $6,5 billion in 2016 to $8,5 billion in 2017 — but businesses and consumers still have little access to that capital.
Banks not lending, means businesses have less access to capital. This has a negative impact on economic activity, since it means that businesses receive a constricted supply of a crucial product, namely, money — worse still when there is little foreign direct investment coming into the country.
Without the much-needed credit creation by the banking sector, the economy cannot be stimulated into the recovery mode it badly needs. A fully fledged banking sector that is able to perform its roles of credit creation, is thus critical for the economy’s recovery prospects.
Why are banks not lending?
Depending on who is asked, the slowdown in lending is either, an expected response from banks that once experienced high non-performing loans, or another reason to be worried about the economy.
In 2014, RBZ governor Dr John Mangudya told stakeholders at the Zimbabwe National Chamber of Commerce that “banks have no appetite for lending because of high NPLs.” He added that the NPLs, which had reached $800 million, were dragging the economy down and giving him sleepless nights. Given such high levels of NPLs, there’s is no denying that businesses had become riskier to finance.
Most of the NPLs were, however, handed over to ZAMCO leaving banks with manageable levels. As at 31 December 2017, ZAMCO had acquired NPLs amounting to $987 million while NPLs had come down to 7,08 percent as at 31 December 2017, down from 7,87 percent as at 31 December 2016. But despite the bad loans clean up, lending has continued to come down with the loan to deposit ratio at 44 percent as at December 31, 2017 from 56,64 percent as at December 2016.
Might it be that banks have gone too far and been too cautious? There are a few reasons why banks continue to hold on to cash or choose to bury themselves in TBs.
One of the reasons is that banks simply do not have real money (US dollars) but are sitting on huge RTGS balances that are not backed by real cash. Lending money without a real cash reserve or nostro balances is not easy.
Without real cash, companies that might want to borrow to import raw materials or equipment will not find it worthwhile to borrow when they won’t have access to real money. Banks are sitting on huge piles of approved loans but companies have not been too keen to draw-down given the limited availability of foreign currency.
Another reason that has been given by analysts on why banks are not lending is that they (banks) don’t stand to miss out as much by not earning interest on lending to the productive sector choosing to invest in low risk Government TBs.
Given Government’s appetite to borrow through TBs and recently the Savings Bond, banks have an incentive to not lend, simply to collect interest from a low risk instruments.
The gains they would forgo by not making loans and choosing alternatives like fixed-income securities such as TBs are not as high as they were in the past. In fact banks argue that, given the high cost of funds, they earn more from TBs than they would with risk assets such as loans and advances.
The advent of plastic money as well as other electronic transactions has also meant banks can still be profitable without sweating their interest earnings assets.
So even as the banking industry is profitable — liquidity levels are high, capital adequacy is healthy, and NPLs are coming down — the performance of the productive sector will dictate the future for the country’s economy.
Whatever reasons are given for the subdued lending levels, the bottom line is that such an issue confirm weaknesses in economy, and could continue if the RBZ does not fix the foreign currency crisis.
