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Cautious banks sit on US$2bn, fear losses

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GROWING mistrust over the country’s official inflation figures and the need to minimise exchange rate losses has held back Zimbabwe’s financial institutions from lending nearly US$2 billion, a business leader has said.

BERNARD MPOFU

The relaxation of exchange controls following the outbreak of Covid-19 last year has seen local banks reporting steady growth in United States dollars.

But a set of financial results published by the banks over the past few weeks shows that despite this growth, most banks continue to take a conservative approach in lending.

Chris Mugaga, Zimbabwe National Chamber of Commerce chief executive, told The NewsHawks that the growing disparity between the country’s official rate and the parallel market rate had resulted in US$1.7 billion sitting idle.

“Banks have moved from a cavalier approach to a conservative approach when it comes to advances. An average of US$1.7 billion is lying idle in the banking vaults. The appetite to lend is at its lowest. Indeed, the non-interest income or non -funded income has been dominating the bottom line for most banking institutions in Zimbabwe for not less than a decade now, which is confirmation that banks are making much of their money outside advances, which come or reflect through interest income,” Mugaga said.

The local currency has over the past few weeks lost value on the parallel market as the Reserve Bank continues to manage the auction system. Officially, the Zimbabwe dollar is trading at 1:85 against the greenback while the parallel market rate is around 1:150.

The central bank also forecasts that Zimbabwe will by year-end have single-digit inflation but independent economists doubt this.

“They are not lending firstly because of the interest rate policy of the country. Banks are of the view that the real inflation figure in Zimbabwe is above the official figure, which therefore means that they would not accept any tampering or any intervention by the central bank in the setting of interest rates like you see an accommodation rate with a ceiling of 40% annualised. So banks believe the real inflation is higher than what is reported. When they are to lend, they will have a challenge in terms of interest rate charges because we have what we call negative real interest rate, where interest rates are below inflation rate. So that alone is deterring banks from lending,” Mugaga said.

“Secondly, people underestimate the role of managed exchange rate. The market perception that the auction rate is no longer reflective of market-wide exchange rate is a reality. So this is even reflected by banks. Banks will be sitting and saying if I lend this at 1:85, am I not going to take a burn? They are afraid of exchange losses. So when they lend, they would also want a cushion where the ruling exchange rate is a vote by banks, where they don’t believe that the exchange rate is at 1:85.” Official figures show that lending in Zimbabwe dollars nearly doubled as of August this year. Total banking sector loans and advances increased by 73.27% from ZW$82.41 billion as at 31 December 2020 to ZW$142.79 billion as at 30 June 2021. During the period under review, financial intermediation remained stable as reflected by a loan-to-deposit ratio of 45.84%. This position reflects that there is scope for banking institutions to enhance their financial intermediation role,” Reserve Bank of Zimbabwe governor John Mangudya said in his Monetary Policy Statement.

“The performance of loan portfolios of banking institutions was satisfactory, as reflected by the average non-performing loans (NPLs) to total loans ratio, which remained low at 0.55% as at 30 June 2021, against the international benchmark of 5%, reflecting sound credit risk management systems and internal controls. In the outlook period, credit risk is expected to remain low.”

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