Are local banks safe?

via Are local banks safe? | The Financial Gazette – Zimbabwe News. 19 June 2014 by Paul Nyakazeya

BANKS promise depositors that they can withdraw their money on demand, but truth is a few are struggling to raise the cash to pay out for withdrawals. Bank failures in Zimbabwe over the past 10 years have affected people’s confidence in the banking sector, a situation which is detrimental to the sustained development of the country.

Economist, John Roberston, said the fragility of the banking sector had affected domestic savings over the years, and hence it was important for the Reserve Bank of Zimbabwe to come up with new measures to stimulate savings in the country and protect depositors. “It is critical for the monetary authorities to reassure the market that the banking sector is safe and sound,” said Robertson.

The market wants reassurance that appropriate measures would be put in place to ensure that banks that do not meet the new capital requirements by 2020 will have a safe exit from the sector and that depositors’ funds will be protected if a bank shuts down. Recently the RBZ cancelled the licence of Capital Bank Corporation at the bank’s request after the major shareholder, National Social Security Authority, indicated that it was no longer able to inject additional capital into the institution. Capital had become severely undercapitalised.

In December last year, the RBZ cancelled the banking licence for Trust Banking Corporation over allegations of abuse of depositors’ funds and violation of the Banking Act. The closure marked the second time in eight years that Trust Bank lost its banking licence. The closure of Trust Bank followed the closure of Interfin Banking Corporation, currently still under curatorship, and several others including Genesis Baking Corporation.

According to a survey by Industrial Psychology Consultants (IPC), Zimbabweans prefer to keep their money with  foreign-owned financial institutions managing their funds over local banks due to perceptions over stability among indigenously-owned banks. The survey by IPC, which sought to establish banking sector customer engagement, ranked Standard Chartered Bank as the most customer-friendly financial institution in the country.

“Findings reveal that more customers want to move to other banks today than they did in 2012. Eight in every 10 bank customers said they want to move away from their current bank,” IPC said.

The most preferred international banks were Stanbic, Standard Chartered and Barclays. The preferred alternative local banks were FBC Bank and NMBZ Bank. The central bank says the banking sector is sound. This is despite seven banking institutions being currently monitored under the Troubled and Insolvent Bank Policy.  Since the beginning of the year, Allied Bank and MetBank have been facing liquidity challenges.

Banking institutions worst affected by increasing non performing loans (NPLs), such as the closed Capital Bank, AfrAsia Bank, Allied Bank and Tetrad, have instituted various measures to manage the high NPLs. These measures include curtailing lending activities and focusing on recovery efforts as well as bringing in new shareholders. In fact, Allied, AfrAsia and Tatrad have been bailed out by foreign shareholders.

The majority of locally-owned banks recorded marginal profits or losses, while all foreign-owned banks posted profits. Generally, banks that recorded losses lacked critical mass to generate sufficient revenue to cover operating costs. In a report recently, MMC Capital said banking sector earnings are expected to fall this year on the back of sluggish economic growth.

Total profit after tax for banks listed on the Zimbabwe Stock Exchange slowed to US$83,8 million in 2013 compared to US$131,86 million in the prior year, weighed down by a RBZ directive capping interest rates and service charges.  NPLs stood at 15,92 percent as companies and individuals defaulted as the economy slowed down after averaging a 9,3 growth between 2009 and 2012.

“Worsening non-performing loans position continues to be an albatross around the banking sector’s neck and the result has been reduced lending to the economy which has further worsened the NPLs situation,” MMC Capital said.

“As the local economic activity slides further, our view is that industry NPL ratio will continue to rise as borrowers fail to repay. Reduced lending is disastrous to an economy as key productive sectors will starve from working capital,” said MMC Capital

The report was based on earnings from 13 commercial banks, three building societies and one savings bank, with a focus on key performance measures of profitability, deposits, loans and advances and total assets. To remain sound local banks say they want autonomy on interest rates, and say a new directive which gives the Reserve Bank final call on the matter was inhibiting competition. The new order followed the expiry of a year-long cap on rates and fees imposed by the Reserve Bank last year following a public outcry over bank charges.