Zimbabwe’s undying but slowly suffocating problem has been inflationary pressures and the MPC implored multiple tools to reduce the pressures. The financial sector has remained the focal point for controlling the incessant macroeconomic problem.

The recently published banking sector review for the Q3 period has shown sound financial performance improvements, showing an insignificant reaction from tight monetary policies that includes more than double bank lending cost hikes. The recorded stellar financial records are owing largely to non-interest income, which comprised of fees and commission, revaluation gains from investment translation gains on foreign currency-denominated assets.  

Summary of key financial records

Total banking sector assets amounted to ZW$3.11 trillion as of 30 September 2022, up from ZW$1.94 trillion as of 30 June 2022. The major assets on the banking institution’s balance sheets were loans & advances (29.58%), balances with foreign institutions (13.95%) and balances with the central bank (12.65%). The return on assets and return on equity ratios were 16.48% and 53.25% as of 30 September 2022, compared to 8.23% and 31.87% as of 30 September 2021, respectively.

The projected performance for the sector turned out otherwise as the monetary instruments were pointed in reducing the liquidity from circulation hence tightening the money supply. The Article intends to assess the impact of monetary instruments on the third quate financial performance.

Bank Policy Rates

The central bank raised the interest rate from 80% to 200% on 24 June 2022 as a measure of reducing speculative borrowing and stabilising the exchange rate. The policy came as a slam to the banks making finances from lending. The firms with outstanding loans engaged in premature debt settling and this negatively affected the performance of the manufacturing and operational sector direly. However, the banking sector recorded an insignificant change in the loan deposits ratio (from 53.69% to 52.83) which in the end recognised significant interest income.

The intended discouraging of borrowing and lending was in vain whilst the instrument was a success in reducing speculative borrowing and stabilising the exchange rate. As it is evidence of much-reduced inflation by a higher margin, speculative borrowing did not add value to the sector but inflation to the nation. Also, the exchange rate recorded some stability with reduced premium levels to below 2% which has given insights into the convergency theory.

Temporary Suspension of Lending by Banks.

On May 7^th 2022, the central bank temporarily suspended lending by banks to allow comprehensive investigations by the Financial Intelligence Unit (FIU) into abuses of commercial bank loan facilities by business entities. This model realised success in the detection of significant abuse of loan facilities by borrowers through arbitrage, multi-dipping, borrowing on behalf of third parties and diversion of foreign exchange obtained through the foreign exchange auction system to parallel market activities. This would have negatively affected the interest income for the bank as the loans (the bank’s assets) were narrowed.

The improved stellar records in the third quarter are owing to the sector’s strategized operational model. The non-interest income comprised up to 70% of the sector’s earnings. Deposits in the period under review increased by 70% from ZWL1,124.73 bn to ZWL1,911.57 bn in September with a slight decrease in liquidity ratio by 1.27 percentage points from 60.78% to 59.51%. The temporary suspension of the bank lending couldn’t impact largely the earnings of the sector owing to above mentioned major drivers of Q3 income.

Statutory reserves, the most important portion of funds by depositors to be kept as reserves were maintained at 10% whilst time deposits remained at 2.5% for the half-year period. An increase in broad money saw statutory reserve balances increases from ZW$20.11 billion on 31 January 2022 to ZW$64.8 billion as of Sep 2022. This shows a significant jump in deposits and the made operational profits of 25.77%.

Foreign Exchange Market

As a support system in clearing arbitrage opportunities, the Central Bank moved to eliminate the gap between the official rate and the black-market rate. This has boosted forex deals for the banking sector owing to a reduced premium between the weighted auction rate and the official rate. Forex deals increased and the banks utilised the opportunity and made up to 27% of the total earnings out of forex deals.

The auction market, carried every week has been a driver of a productive sector contributing 41% of funds to raw material importation and 22% to machinery and equipment imports. As such the companies have been bidding on the trade rates and then the central bank uses the weighted average as the official bank rate

 Mosi-oa-Tunya Gold Coin Trading

The monetary policy committee also introduced gold coins into the Zimbabwean market as an alternative stable investment product for value preservation. This helped the banking sector in retrieving the excess funds circulating in the black market and the foreign currency pool that was pilling on the black market was channelled to buy the gold coins

The gold coins moped excess liquidity and the accelerated forex deals were a result of the accelerated demand for local currency. The banks have made investments in other financial assets to as great significance to its profitability.

Mosi-oa-Tunya Gold Coin Trading has given banks access to their flesh and restored the legacy of the sector. The centralisation of funds is essentially giving the banking sector chance to bring back the lost confidence from the public and slowly take the nation into the zero-arbitrage formal economy.

The outlook remains positive for the banking sector owing to slaking inflationary pressures easing since August. The operating environment however has an operational risk as the parallel exchange rate and the black-market gap is widening with the latest premium at 37% (official of 666 vs black market of 900). As the central bank is on the urge of paying contractors and higher importation Bill payments, the banking sector will continue to play an important role in supporting the funding requirements of the economy as recovery gains traction. The banking sector is expected to bring back a stable banking environment in future.