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Inflation and rising costs seen eroding bank capital

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THE Zimbabwean unit of Africa’s largest bank, Stanbic, says inflationary pressures confronting the economy and rising operating costs will erode capital levels in the banking sector.

According to the Reserve Bank of Zimbabwe, as of December 31 2021, out of the 18 operating banking institutions (excluding POSB with no statutory minimum capital requirement), 13 banking institutions had complied with the new minimum capital requirements.

 However, cognisant of the disruptive effects of Covid-19 and the need to complete banks’ capital-raising processes currently underway, the Reserve Bank has extended, on a case-by-case basis, the compliance deadline to 31 December 2022.

“The growth in profitability for banks at 59% is below the rate of operating costs growth (which is in line with parallel market rates estimated at above 100%). These slow profitability growth rates are like[1]ly to result in capital erosion,” Stanbic said in a post monetary policy review.

For the year ended 31 December 2021, the banking sector reported unaudited aggregate profit of ZW$59.29 billion, an increase of 69.63% from a profit of ZW$34.95 billion reported for the corresponding period in 2020.

During the year under review, interest income from loans and advances contributed 34.99%, compared to 17.82% in December 2020, of the total income, an indication of a shift towards the traditional sources of revenue such as income from financial intermediation activities, which is considered stable and sustainable.

Non-interest income, the apex bank said,  was driven by fees and commissions due to increased transactional volumes on digital platforms in the wake of Covid-19, as well as initiatives by banking institutions to promote the use of plastic money.

 Translation gains on foreign currency-denominated assets, as well as revaluation gains from investment properties also contributed to the growth in other non-interest income.

 Total banking sector loans and advances increased by 61% from ZW$142.79 billion as at 30 June 2021 to ZW$229.94 billion as at 31 December 2021, largely attributed to the translation of foreign currency-denominated loans.

As at 31 December 2021, foreign currency-denominated loans constituted 36.87% of total banking sector loans, an increase from 30.16% reported as at 30 June 2021.

During the period under review, financial intermediation improved from 45.84% recorded in June 2021 to 48.27% as at 31 December 2021.

The central bank projected that the demand for loans is expected to continue improving in line with the incremental recovery of economic activity from the Covid-19 pandemic. —STAFF WRITER

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