Banks in Zimbabwe are making very huge profits despite negative operating environment. Much of the profit is coming from Government debt papers which may hardly sustain their profitability in the very near future.
Realisation of this notion by banks may help them implement sustainable products that will help them sustain their earnings. What is happening in Zimbabwe’s banking sector is synonymous to occurrences in some emerging markets during the global financial crisis where banks stocked much of their assets in treasury paper. However, most banks quickly realised that investment in debt papers will not sustain their levels of profitability and started to implement new consumer finance products focusing more on agriculture, small and medium enterprises, trade finance and microfinance. In Zimbabwe, the same can be adopted and the future lies in these four areas instead of investment in Government paper.
Almost all banks have experienced a decline in loans to the private sector in the six months to June2016 whist increasing their exposure to Government through treasury bills. This may not be sustainable and will only boost short term earnings. According to RBZ, 18 out of 19 operating banking institutions recorded profits during the period ended 30 June 2017. These profits are up 48% to record $100.59 million from $67.97 million recorded last year same period. The numbers are supported by latest banks’ midyear financial results which have shown strong growth in most banks profitability emanating from treasury bill holdings.
It is true that banks have taken advantage of the crisis in the secondary market accruing unpreffered Government paper, enjoying huge discounts on purchases of up to 40%. All banks except a notable few have capitalised on this debatable paper and boosted their short term earnings. After making these big profits by investing in debt papers, banks should apparently realise that they need to lend more to the private sector to sustain their profitability in 2017 and beyond. There is hunger of cheap credit in the entire agriculture sector, most segments of industry and the consumer sector. Given positive interventions by the RBZ through functionalisation of Credit Reference Bureau, banks should be focusing on reaching out to some unbanked segments of the population through well-structured microfinance products.
Currently, banks earnings are under severe threat from both the regulated environment, unforeseen risks surrounding treasury paper and increased competition from microfinance institutions. By June 2017, banks loans to deposits ration (LDR) had fallen to as low as 52% even though banks’ year to date profits have risen tremendously. This trend of low LDR and high profits is chiefly a result of banks’ investment in debt papers that has surpassed $2.5 billion due to Government’s relentless high borrowings.
Banks’ lending to the private sector has slowed by 2% from a year ago to $3.6 billion. There are strong signs that Government borrowings are crowding out private sector credit in the banking sector. Banks’ net investment should be an important aggregate to follow and it is understandable that the bulk is driven by Government paper. Despite all this, banks provision to bad debt is falling due to banks’ strong focus on non-performing loans recoveries and generally much cleaner books. A decrease in banks’ appetite for Government debt papers, a marginal increase in lending to the private sector and better loan quality management will all have a positive effect on the sector going into the full and beyond.
Although ceilings on lending rates imposed by the RBZ are partially blamed for reduced lending appetite by banks, competition in the sector and increased demand for affordable credit would have naturally pushed rates down. Banks may cite high cost of funds due to country risk which has limited affordable credit lines and lower cheap deposits for high lending rates. However, banks in Zimbabwe have not been making serious efforts to bring deposits from unbanked people into banking system which would have solved their cost structure. There is a booming informal market which banks should tap into through innovative products. That way, banks will return to core activity which is financial intermediation. This function entails using resources from customers to offer financing to the same or other bank customers.
