via Zim Asset blueprint will rejuvenate the economy Sunday, 24 November 2013 Sunday Mail
Government recently adopted a new economic blueprint dubbed Zimbabwe Agenda for Sustainable Socio-Economic Transformation (Zim Asset) that seeks to spearhead the turnaround and development of the economy in the next five years. However, the country is currently under a biting liquidity crunch that has degenerated into a crisis as depositors are now failing to access cash from several banks. Our Senior Business Reporter KUDAKWASHE MUTANDI (KM) caught up with Bankers’ Association of Zimbabwe (BAZ) president Mr George Guvamatanga (GG) to get a perspective on the economic challenges that are being experienced.
KM: Many businesses are citing a lack of access to and high costs of capital as the reason for declining levels of economic activity. As banks are the main suppliers of credit, what are the factors limiting availability and driving the cost of such credit?
GG: Since the adoption of the multi-currency system in 2009, the country has really faced the liquidity challenge. The main sources of liquidity in this multi-currency system are: domestic savings; foreign direct investment (FDI) inflows, Diaspora inflows, export proceeds and foreign lines of credit. These sources have failed to meet the demand for working capital and growing capital needs of the economy. As long as the supply of liquidity remains scarce, the cost of the credit will remain high. There is need to grow the domestic deposit base in the economy through mobilisation of savings in the economy. For the foreign lines of credit, their pricing include a risk premium that reflects some of the structural weaknesses of our economy.
KM: From BAZ’s perspective, how is the economy performing?
GG: The economy is slowing down and the manufacturing sector survey by the Confederation of Zimbabwe Industries (CZI) has painted a gloomy picture with capacity utilisation in industry declining. The revision of Gross Domestic Product (GDP) growth forecasts for 2013 signifies that the economy is not performing well. We think the new economic blueprint, Zim Asset, will be able to rejuvenate the economy if properly implemented.
KM: How are banks performing in general in this current economic environment?
GG: Both the Ministry of Finance and our regulator, the Reserve Bank of Zimbabwe, have been consistent in reiterating the soundness of our banking sector. As bankers, we are confident that the banking system remains sound. Looking at the trading results posted for the half year ended June 30, 2013, shows that on balance there continues to be modest but encouraging growth in both the quantum and quality of bank earnings.
KM: But what really is driving the liquidity and capital crunch in the economy, and what are the possible solutions to address this?
GG: Since the adoption of the multi-currency, the country has been characterised by the liquidity crunch. This system disables the country to print its own currency, hence, the problem we are facing. To resolve this problem, there is need for all stakeholders to play a role. Firstly, there is need to restore confidence in the economy so that foreign capital flows can come to Zimbabwe. FDI, debt and other capital flows are critical. Secondly, we need to deal with the balance of trade and drive productivity and exports up so that the country becomes a net exporter. Thirdly as a nation, we need to develop a culture of saving. The economy needs to generate its own internal savings starting at individual or household level. Right now, I am saddened to say the bulk of our banking sector deposits are short-term in nature because as a nation we have not yet regained our sense of the need to save long-term.
This also means that consumptive imports, which are acting as a huge drain on domestic liquidity, should be managed down, and, as bankers, we would like to advocate for local procurement of inputs and consumption goods so that the scarce cash resources circulate locally.
KM: It has been estimated that up to U$1 billion may have been withdrawn from formal banking sector between January to August 2013, most of which has failed to make its way back into the formal banking sector. What are the possible reasons for such large amounts of funds to be outside the formal banking sector? Also, how can BAZ encourage greater deposit of funds into the formal banking sector?
GG: Banks have continued to encourage and promote the use of the formal banking system and the public continues to express its growing confidence in the banking sector. Quite the contrary, it is not correct that US$1 billion left the banking sector in the period in question. Bank deposits actually grew from the beginning of the year from US$2,9 billion to US$3,4 billion for commercial banks.
Between August and September 2013, commercial bank deposits surged from US$3,1 billion to US$3,4 billion.
Merchant bank deposits show a slight decline from US$737 million in December to US$687 million at the end of September, having peaked at US$760 million in April 2013. There were at US$598 million in August; therefore, leaving an overall combined growth in deposits for the banking sector between January and August 2013 of about one percent..
KM: Why is it that the bulk of credit facilities available in the country are of a short term nature (up to 12 months) when many businesses in productive sectors require medium term facilities to upgrade their plant and equipment?
GG: Banks are keenly aware and sensitive to the needs of our industry to retool and re-equip using longer term facilities. However, the major constraint is that the bulk of the deposits in the economy are of a short term nature and therefore highly transitory. As a measure of prudence, banks will lend money to productive sectors but remain cognisant of the need to repay depositors as and when they come in to withdraw funds. This means, therefore, that if the bulk of deposits in the banking sector are of a short term nature, banks are also forced to lend for short periods of time.
KM: What is the role of the Bankers’ Association of Zimbabwe (BAZ) in ensuring access to cost-effective medium and long-term credit for productive sectors of the economy?
GG: As I alluded earlier. However, Government’s role is to continue to create a conducive and supportive environment that promotes business. We also believe Government can play a role in enacting policies that promote a culture of savings in the economy.
KM: To what extent has the Distressed Industries and Marginalised Areas Fund (Dimaf), which we understand was supported and administered by Old Mutual and CABS, solved the needs of companies in distress? How much has been disbursed, what are the interest rates and how long is the repayment period?
GG: Dimaf is an ongoing Government programme and it would be inappropriate to comment on it. May I suggest that you contact the relevant Government ministries for a clear answer.
KM: A recent Reserve Bank of Zimbabwe analysis of total loans extended by banks indicated that the bulk of lending by banks in 2013 was to individuals rather than to productive sectors. Why is this so?
GG: Banks lend, predominantly, to the productive sectors. The latest RBZ Economic Bulletin shows that up to 85 percent of total bank lending is to the productive sectors of agriculture, manufacturing and transport, whilst loans to individuals are averaging between 15 percent and 17 percent .
Bear also in mind that loans to individuals are being given to salaried people employed in the productive sectors. These loans support the acquisition of assets, education and so on, but banks are also aware that the bulk of the loans to individuals are supporting small micro businesses such as chicken rearing in the back yard, and other trading activities and may not be purely consumptive loans.
KM: What is level of lending by the banking sector to agricultural sector?
GG: The average banking sector loan exposure to agriculture is about 20 percent of total loans and advances. For the 2013/14 season banks managed to pool together US$620 million for lending to the agricultural sector.
KM: What have been the results of the voluntary agreement between BAZ and RBZ concluded end 2012 to cap bank charges for certain levels of deposits?
GG: The MOU was an agreement between the BAZ and the RBZ (the regulator) hence it is not prudent for us to comment on this one.
KM: There is a perception that there is a wide disparity between the interest paid by banks on deposits compared to the interest charged by banks on lending. Is this the case?
GG: Different banks have different pricing models for both deposit and loan products depending on their adopted strategies and target market segments. The individual banks would be able to give a clear answer depending on their strategies.
KM: We understand that there is a high incidence of non-performing loans advanced to private sector due to declining levels of economic activity, which has resulted in borrowers failing to service interest or capital payments on loans. How serious is this situation, what are the implications and possible repercussions?
GG: According to latest reports NPLs are hovering around 13 percent of the Banking Loan portfolio. Ideally we would want to be below five percent or six percent Better still the preference is for a lower ratio. We need to highlight that NPLs are a cost to the economy as they contribute to the further tightening of liquidity. Much as banks are advocating for a strong savings culture in the economy, we are equally advocating for the restoration of a strong credit culture as well to ensure long term sustainability of the economy.
KM: The absence of U$ coins in many parts of the country increases the costs of retail transactions and complexities of managing change. The southern and western parts of the country, use of South African coins is fairly widespread to address the change/coinage issue-but not so in northern part of country. What has BAZ done to address this matter? What are your recommendations for change/coinage to facilitate ease of transactions?
GG: The issue of availability of coins is a function of the huge cost of acquiring and transporting coins which are heavy and quite bulky. There are various models and alternatives being looked at but in the meantime the BAZ is also promoting the use of alternatives such as cards and electronic means of payment to alleviate the absence of coins.
KM: What is view of banks to indigenization laws and policies?
GG: As the BAZ has always said, we fully subscribe to the concept of indigenisation as prescribed in our law. We remain pleased that there is a healthy level of ongoing engagement and dialogue between the authorities and the banking sector and the minister responsible for indigenisation has made all necessary pronouncements regarding the government’s stance with regards to the process.
KM: Can you comment on the recent commitment by the Minister of Finance that Government would reimburse funds that were appropriated from FCA accounts in 2006/7 by Reserve Bank of Zimbabwe. How are banks handling this matter with their clients in the meantime?
GG: It is a positive development that should boost confidence in the financial sector.
KM: It is estimated that up to U$7 billion is circulating outside the formal banking sector-mainly in informal and small & medium enterprises. What can banks do to attract a higher level of deposits into the formal banking sector ? What can Government do?
GG: Banks are seized with this issue and there is ongoing research by our economists aimed at answering that question. In the meantime banks are increasing their outreach and have instituted an Advocacy Unit aimed at enhancing financial Inclusion and promoting financial literacy. This is in recognition that access to basic knowledge about financial and banking products, is a key step towards building financial inclusiveness and bringing the unbanked resources into the ambit of banking. Government can support these efforts by enacting policies that encourage savings, and the sharing of infrastructure such as mobile banking gateways that promote the development and delivery of banking products to a wider audience.
KM: Has BAZ made any recommendations/proposals to Ministry of Finance regarding 2014 budget? Please share main recommendations/expectations?
GG: We have made our submissions and the relevant ministry will make these public at the appropriate time.
KM: What is BAZ view of ZimAsset program?
GG: Zim Asset is a Government Programme and the role of Banks is clearly defined in the document. The banks have always worked within the macro economic frameworks set by the Government and Zim Asset is not different from other programmes.
KM: It seems that increasingly, the only difference between mobile phone companies and banks in terms of products/services provided to clients is that one has a mobile phone license and the other has a banking license-and the lines between the two businesses are becoming increasingly blurred. What is BAZ view of this development?
GG: Globally there is a natural convergence between the Mobile space and the Banking space. Zimbabwe is no exception and our view is that Zimbabwean Banks are embracing these complementary technologies and have integrated them into their e- and m-commerce as part of their multichannel strategies aimed not only at enhancing their product offering, but also at extending the reach of financial services to a wider population. Our regulators, The RBZ are also working closely with other regulators in the telecoms industry to come up with a framework for branchless banking and regulations that incentivise the adoption of electronic commerce, the business case for inclusive finance, interoperability of infrastructure and this will have a huge market impact.