BancABC, the local subsidiary of regional financial services group Atlas Mara, says the Zimbabwean government’s decision to suspend bank lending will choke financial intermediation and the sector as institutions would be forced to engage in malpractices to survive.
Lending is a primary function of banks and a source of most of their income. Primary functions of banks include accepting deposits, granting loans, advances, cash, credit, overdraft and discounting of bills, while their secondary roles entail issuing letter of credit, undertaking safe custody of valuables, providing consumer finance and facilities educational loans.
President Emmerson Mnangagwa announced a raft of desperate measures aimed at containing currency and exchange rate volatility fuelling the collapse of the Zimbabwe dollar and the renewed inflation spiral amid growing social unrest.
This comes as year-on-year inflation approaches the three-digit mark as the local unit continues to crash.
Annual inflation climbed to 96.4% in April of 2022, from 72.7% in March, reaching the highest since last June. Main upward pressure came from prices of transportation (106.1% vs 84.3% in March), of which fuels and food (104% vs 75.1%), as Russia’s invasion of Ukraine has led to bread prices soaring in importing countries like Zimbabwe. On a monthly basis, consumer prices jumped 15.5%, the most since July of 2020.
In its analysis of the executive announcement, BancABC warned that starving banks of income interest, the bloodline of the banking sector would destabilise the financial services sector.
“Growth is local currency which in turn is blamed for fuelling parallel the market cannot be attributable to bank lending alone, as government is well-known for injecting huge liquidity as and when it makes payments to local contractors. The move to suspend bank lending is unprecedented as it goes against the norm of economic recovery, and contrary to the rational of supporting economic recovery,” AtlasMara said in a statement.
“Government is adopting non-conventional practice in an attempt to avoid dealing with currency reforms. Bank lending is the core function of banks financial intermediation process. Banning lending activities will threaten survival of banks as this will wipe out 20-50% of their incomes. Consequently, this could push banks to embark on risk and/or non-permissible activities to compensate for the loss of incomes. This could also push bank charges upwards as banks devise survival strategies.”
BancABC said local companies would find it difficult or would not survive without working capital facilities.
“On the other side, companies cannot survive without working facilities. This will lead to scaling down of operations, shortages of goods, further price increases, viability challenges and possible company closures and job losses. No economy can survive without access to working capital, ” the bank said.