BY FIDELITY MHLANGA
Appetite for lending by Zimbabwean banks is waning. A look at the overall banks’ loan-to-deposit ratio (LDR) since 2015 shows a declining trend.
The loan-to-deposit ratio, as its name suggests, is the ratio of a bank’s total outstanding loans for a period to its total deposit balance over the same period. So a loan-to-deposit ratio of 100% indicates that a bank lends a dollar to customers for every dollar that it brings in as deposits.
Typically, the ideal loan-to-deposit ratio is 80% to 90%.
Looking at data from the central bank, LDR has been going down from a high of 86,07% in 2015 before tumbling to 56,64% in 2016. In December 2017 it took a nosedive to 44,81%, before plunging to 40,71% in December 2018. Last year it further dropped 36,6%.
Total bank deposits in 2015 amounted to $5,62 billion, and grew to $6,51bn in 2016 before going up to $10,32bn in 2018 from $8,48bn in 2017. Last year deposits were $34,50bn.
The figures also show that the appetite to lend by banks was relatively high during the dollarisation era. Worryingly though, during the same period non-performing loans (NPLs) became the order of the day.
Information at hand shows that as banks’ lending appetite was fizzling out, NPLs were going down in similar fashion. NPLs were 10,82% in 2015, slowed to 7,87% in 2016, went down to 7,08% in 2017,and was 8,39% in 2018 before tumbling to 1,75% last year.
It can be argued that there is a relationship between lending growth and exposure to loans defaults, but to some extent the decline in loan disbursements has repercussions on the productive sector which needs funding for capital projects.
More so, the waning in bank loans has also seen banks’ traditional source of revenue net-interest income plummeting. Net interest income typically includes commercial and personal loans, mortgages, construction loans and investment securities.
As banks shift from relying on loans as their traditional source of revenue they incline to new digital ways of generating income. Banks are now getting revenue through non-interest income being derived primarily from fees including deposit and transaction fees, insufficient funds fees, annual fees, monthly account service charges, inactivity fees, check and deposit slip fees
Implications to the banks
The country has 19 banking Institutions that include 13 commercial banks, five building societies and one savings bank.
For banks, this means dependence on non-funded income will continue rising. While it could be sustainable, it is not recommended. This is why savings rates are low. The only deposits in the banks are statutory deposits, but they are transitory.
“Going forward in the harsh economic environment, non-funded income is more sustainable than funded income. Banks are cautious and scared of NPLs given the tough operating environment,” said Zimbabwe National Chamber of Commerce chief executive Christopher Mugaga.
Consequences to the private sector
While local industry and businesses require loans to produce, dwindling appetite to lend by local banks may not affect them much. Industry is enduring a plethora of other challenges, chief among them power shortages.
“Funding for the private sector has been compromised. Lending has been biased to government than private sector through issuance of Treasury bills. But all the same private sector does not have (the) appetitive for local loans because they are short term,” Mugaga said.
Economist John Robertson buttressed the point saying due to the hostile business operating environment and unpredictability, banks are tightening their lending.
“Banks are more anxious about being repaid their money and many of those applying for loans are unable to convince the bank managers that they will be successful in this uncertain business climate. Many also lack acceptable collateral. Banks have to depend more on transaction charges for their income as they have fewer interest-earning loans,” he said.
In response to the dwindling lending appetite by banks, the central bank has set up the medium-term bank accommodation facility with a low interest rate cap of 15% to the tune of $1,5bn to lend to the productive sector. It is yet to be proven whether the model is sustainable in the long run.
Research shows that inflation allows debtors to repay lenders using money that is worth less than it was when it was originally borrowed. Thus, inflation allows debtors to repay lenders back with money that is worth less than it was when they originally borrowed it.
The country, which has been trapped in deflation since February 2014, only to slip back into the inflation quagmire in 2017. Since the inflation rate has gone up to over 500%, lending interest rates which were 12% per annum in April 2017, rose to the peak of 70% in September 2019 as inflation worsened before it was lowered to 35%.
Banks operating in a hyperinflationary environment tend to reduce their lending appetite especially when interest rates are low.
While demand for local loans has been going down for the past four years, the external loans approval has also been nose-diving.
The Reserve Bank of Zimbabwe (RBZ) approved and registered a total of 247 facilities with a monetary value of US$1,8bn in 2016. Agriculture received the largest, accounting for 47% of loan approvals during 2016, largely driven by tobacco finance facilities which are renewed seasonally.
The financial sector had 30 facilities valued at US$383,7 million (m) at 21% of total loans.
In the year 2018, exchange control approved and registered a total of 140 external loan facilities with a monetary value of US$1,28bn. This was a 3% increase in the total approvals from the US$1,23bn recorded in 2017. Last year contracted external loans plunged to US$1,014.8bn due to country risk.
The financial sector had US$38,1m in 2017 and US$204,3m in 2018.
“The country’s ability to attract offshore lines of credit has remained curtailed due to the perceived country risk. In 2019, there was a 21% decline in the monetary value of private sector external loans approved by the exchange control, was experienced compared to 2018 performance,” RBZ governor John Mangudya revealed in the 2020 monetary policy statement
Zimbabwe’s risks are compounded by internal factors such as its high reliance on primary sector exports, high import demand, endemic corruption, weak property rights protection, high borrowing costs and a yawning infrastructure deficit.
Blocked funds dilemma
Government, through RBZ, is battling to settle blocked funds – cash flows generated in Zimbabwe by foreign entities that could not be repatriated to foreign suppliers due to foreign exchange shortages — or commonly referred to as foreign exchange legacy liabilities (or debt) to the tune of US$1,2bn.
This is over and above the legacy foreign exchange obligations of US$361 million under the RBZ Debt Assumption Act.
As such, if the economic headwinds persist, the gloomy picture in the banking sector will continue to haunt the economy.
Several banks have closed branches and retrenched workers as the economic downturn take a huge knock on their operations.