- Aggregate loans rose 9.76%, while deposits fell 15.47% in real terms
- Foreign currency deposits jumped from US$300M to US$1.6B by September 2023
- Sector should develop low-cost accounts for diverse customer profiles, abandoning the one-size-fits-all approach.
Harare - During the first half of 2023, the banking sector experienced notable changes in various key indicators. One such indicator was the aggregate total loans, which saw a significant increase of 9.76% in real terms. Interestingly, a majority of these loans, comprising 94%, were denominated in foreign currency. This suggests a reliance on foreign funds within the banking industry, likely influenced by economic factors and the need for stability in financing. Another positive development was the marginal improvement in the Loan-to-Deposit Ratio (LDR), which rose from 53.7% to 55%. This indicates a more balanced lending and deposit structure within the banking sector. Additionally, agricultural loans held a significant share, accounting for 23% of loans in the productive sector. This emphasizes the importance of supporting the agricultural industry as a driver of economic growth.
However, despite these positive trends in lending, the banking sector faced challenges concerning total deposits. During the same period, total deposits experienced a notable decline of 15.47% in real terms. This decline can be attributed to thin liquidity within the market and the ongoing process of dollarization in the economy, where the use of foreign currency becomes more prevalent. Examining the composition of deposits, it is evident that fixed-term deposits constituted a substantial 87.5% of total deposits. This reflects reduced demand deposits resulting from low incomes and inflationary pressures, as individuals and businesses opt for longer-term investment strategies. Furthermore, foreign exchange (FX) deposits accounted for 88% of the overall deposits, mainly driven by the depreciation of the local currency. The depreciation likely prompted individuals and businesses to seek more stable foreign currencies for their financial holdings.
During the first half of 2023, banks experienced a slight decrease of 9.12% in total assets. However, they demonstrated adaptability and managed to maintain profitability when measured in real terms. This was primarily attributed to their non-interest income, which played a crucial role in generating profits. One example of a bank that struggled to capitalize on this trend was MetBank. Aggregate profits for the banking sector as a whole showed an impressive increase of 63% compared to the previous year, reaching US$792 million. This indicates positive growth in overall profitability. Non-interest income continued to be a significant contributor, accounting for 65% of total income, which marked a rise from 55% in 2022. This highlights the importance of diversifying revenue streams beyond interest-based earnings and the adaptability of banks to leverage non-interest income sources. However, concerns persist regarding the quality of income within the banking industry. It is crucial to assess the sustainability and reliability of the sources of income to ensure long-term stability and profitability. In this context, MetBank struggled to capitalize on the opportunities presented by non-interest income, potentially impacting its overall performance.
In terms of asset quality, the banking sector maintained a favorable position with a non-performing loan ratio of 3.5%, well below the benchmark of 5%. However, it is worth noting that this figure has experienced a notable increase from 0.3% in 2020. This indicates a growing concern regarding the quality of assets, influenced by factors such as reduced US dollar cash flows for servicing foreign exchange loans, a shrinking loan book in real terms, thin liquidity, relatively high interest rates, and efficient borrowing, particularly in the productivity sector, which stands at a staggering 78%.
The gradual erosion of assets in real terms by 9.12% raises concerns, particularly given the impact of inflationary pressures. This highlights the need for banks to navigate cycles of inflation and manage their asset portfolios effectively to mitigate risks. Furthermore, the state of financial intermediation remains subdued, as reflected by the Loan-to-Deposit Ratio (LDR) at 55%. This indicates a cautious approach to lending and highlights the challenges faced by banks in stimulating credit growth.
According to the Reserve Bank Governor, confidence in the banking sector has experienced a significant upturn, as reflected by a substantial increase in foreign currency deposits, soaring from approximately US$300 million in 2018 to an impressive US$1.6 billion by the end of September. Around 95% of local currency transactions in the country are being conducted through electronic payment systems, contributing to a financial inclusion rate of approximately 84%, largely due to digital financial services, including mobile banking. Electronic payments account for a staggering 80% of the total value of transactions. The governor emphasized the need to educate the public about the Real-Time Gross Settlement (RTGS) system, clarifying that it encompasses local currency, USD, and the newly introduced ZiG currency, rather than being mistaken for a distinct local currency in everyday language.
The governor also highlighted critical areas for improvement within the banking sector, specifically emphasizing the need to enhance financial inclusion. One key aspect in achieving this goal is the development of low-cost accounts that cater to the diverse profiles of different customers, moving away from the outdated concept of a uniform approach. Recognizing that a significant portion of Zimbabwe's economy relies on the informal sector, which comprises approximately 60% to 90% of economic activity, it is imperative to create tailored solutions that address their specific needs.
To enhance accessibility for the informal sector, the banking industry should focus on reducing transaction costs associated with their operations. One way to achieve this is by implementing a "pay as you go" account model, similar to cellphone billing, where charges are incurred only when banking services are utilized. For instance, customized accounts could be designed to cater to specific time periods, allowing individuals to incur charges only for the duration they require banking services. Additionally, the banking sector could introduce incentives, such as allowing a certain number of transactions without incurring costs. These measures can effectively contribute to the goal of banking the unbanked population. By adopting these strategies, banks can encourage the informal sector to engage with formal financial systems. Recognizing the prevailing reality in Zimbabwe and the broader sub-Saharan region, where the informal sector comprises approximately 83% of employment, it becomes imperative to implement targeted measures that promote financial inclusion. Therefore, through the reduction of transaction costs and the introduction of tailored account models and incentives, the banking sector can effectively address the needs of the informal sector and improve financial inclusion.This approach acknowledges the prevailing reality in Zimbabwe and the broader sub-Saharan region, where the informal sector accounts for approximately 83% of employment, underscoring the need for targeted measures to improve financial inclusion.
In addition to the aforementioned areas, the banking sector in Zimbabwe faces a pressing need to address cyber security concerns to combat fraud and money laundering effectively. Instances have arisen where individuals have replaced the chip on a Foregn Currency card with a chip from Zimbabwean dollar card to engage in fraudulent transactions that deceive the system into treating Zimbabwean dollars as US dollars. To mitigate such risks, banks must adopt cutting-edge technologies, including artificial intelligence, to proactively manage financial risks and ensure compliance. Furthermore, forging partnerships with universities can establish innovation hubs that foster advancements in financial technology, particularly in the realms of open banking and open finance. By nurturing innovation and collaboration, the banking sector can stay ahead of emerging threats and foster a secure and dynamic financial ecosystem.
Another critical area for the banking sector's attention lies in enhancing counterparty risk management systems based on the principles set forth by the Bank for International Settlements (BIS), a global financial institution. A robust and sound counterparty risk management framework is essential for promoting a vibrant interbank market. Strengthening the integrity of the banking sector requires implementing enhanced customer due diligence (CDD) measures and leveraging electronic know-your-customer (e-KYC) principles. These measures ensure that banks thoroughly assess their customers' backgrounds, monitor transactions, and promote transparency in financial dealings. By adhering to these principles and bolstering risk management practices, the banking sector can instill confidence among stakeholders and fortify the stability of the overall financial system.
The macroeconomic dynamics have presented various challenges for financial institutions, including thin liquidity resulting from austerity measures, the introduction of the auction system, and liquidity mopping. These factors have had implications such as high borrowing costs, reduced lending activities, and shrinking deposits. Elevated interest rates, reaching as high as 150%, have further exacerbated financial intermediation and dampened the demand for credit. Additionally, the uncertain currency position post-2025 has fostered policy uncertainty, leading to a cautious "wait and see" approach. As a consequence, the financial sector has observed reduced mortgage lending, decreased appetite for US dollar credit facilities, and a limited interest in long-term foreign exchange investments. An interesting observation is the mismatch between the number of banks and the total assets, with mergers and acquisitions diluting the asset base. The upcoming merger between ZB and CBZ raises the question of whether the banking sector is overbanked, warranting a closer examination of its structure and efficiency.
In conclusion to assess the growth of the banking sector, it is crucial to compare the performance in the first half of this year with the pre-COVID era in 2018. Non-Performing Loans (NPLs) have shown improvement, decreasing by 42% from 6.22% in June 2018 to 3.62% in June 2023. However, the overall balance sheet assets have experienced erosion over the years. Total assets, loans, and advances, as well as total deposits, have declined by 62%, 36%, and 71% respectively. The only positive aspect was the increase in the loans-to-deposit ratio, which grew by 26%, standing at 43.53% in June 2018 and reaching 55% in June 2023.
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