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RESERVE BANK OF ZIMBABWE

Business Editor
The banking sector oils the wheels of the economy. A poor banking sector means a weak economy. Banking sector deposits were sitting at US$3,9 billion in September while an estimated US$3 billion to US$4 billion is outside the formal banking system.Our gross domestic product stands at US$10,8 billion and the ZSE market cap is sitting at US$5,59 billion with less than 10 companies driving the industrial index while there is little to talk  about in the mining sector.

In the 1990s to early 2000 Zimbabwe had a vibrant banking sector with merchant banks, investment banks, discount houses, commercial banks, building societies, which blended very well with micro-finance institutions, asset managers and pension funds.

And there was serious activity from HSBC London, Standard Chartered International, Societe Generale, JP Morgan, the Chase among the international banks that supported local financial markets.

We had distinguished bankers such as Nicholas Vingirayi (Intermarket), Nigel Chanakira (Kingdom), William Nyemba (Trust), the NMBZ trio comprising Julius Makoni, Otto Chekeche and James Mushore and the outstanding financial engineers Tawanda Nyambirai and Mthuli Ncube (Barbican).

We had several entrepreneurs that were born and these created opportunities for university graduates. We also had some eccentric characters masquerading as bankers such as Roger Boka, who led United Merchant Bank and Mushambadzi at UniBank, all this is now history as most of these men are now fallen heroes who had varied exit strategies that saw them willingly or painfully being forced out of the banking sector into other businesses, politics and in exile seeking greener pastures.

From 2009 to date the industry remains oligopolistic in nature with a few commercial banks setting the pace.

Commercial banks continue to dominate in all aspects with CBZ firmly set in the driving seat.

Most banks seem to be struggling as indicated by the negative net interest margin, more than 50 percent cost to income ratio (losses) and weak capital adequacy ratios.

The high perceived risk associated with Zimbabwe which has been magnified by policy uncertainty. MFIs continue to be risk averse and are all focused on the payroll-based lending with the Salary Service Bureau under serious pressure as civil servants are the major customers.

There is serious lack of innovation in MFIs to tap into agriculture and distribution sectors which are turning out to be the most rewarding sectors.

Asset management companies are also struggling due to lack of innovation and are likely to suffer serious viability problems.

Liquidity challenges continue to persist, with low volumes of deposits and their transient form militating against the intermediary role of the financial sector.

The situation is compounded by the lack of the lender of last resort function by the central bank which is a necessary safety net for banks as they trade their positions.

Operating expenses remained the major challenge for the sector with the average sector cost to income ratio still well above the 50 percent level.

Pressure continued to be exerted on staff-related expenses with the militant labour union frequently negotiating for salary increases.

A modest increase in deposits is projected given the current liquidity constraints in the economy in addition to the little inflow in terms of lines of credit.

An analysis of the deposits profile indicates that the bulk of these are short-term deposits which negatively impacts on the banking sector’s ability to on-lend. The proliferation of micro-finance houses offering loans and advances will impact on the net interest margins for banks as the market appears to be overcrowded.

Non-interest income continued to be the major revenue source for all banks as interest income remains subdued.

The transitory nature of deposits and the high credit risk due to the liquidity challenges has impacted on the banks’ ability to generate interest income. Non-interest income is generally inelastic compared to net interest income as banks can create competitive advantages which allow them to earn high commissions and fees.

Poor deal origination and execution haunted the post-dollarisation Zimbabwe financial sector. Banking relies heavily on skilled labour not corrupt deal origination.

Deal makers or rain makers are no longer in corporate finance, mergers and acquisitions, corporate banking, international finance, project finance and structured finance and the bankers’ national anthem is risk.

Clients are made to open corporate accounts in five banks or more and not even one is able to approve a loan due to the following frequent excuses: (a) Liquidity challenges, (b) The focus is now on recoveries and not lending, (c) The short-term deposits prevailing in the market cannot support long-term lending. Innovative deal structuring on term loans is the only solution for the development of our industrial base especially mining, agriculture and manufacturing and distribution.

Collateralisation should not rely on the brick and mortar or immovable property as it is now an expression on the forehead of every banker and there are so many ways of mitigating default risk. Fire the rent seekers and irrelevant skills that have also overstayed in the same position.

Profitability for banks has been affected by the high operating costs in comparison to the level of income. The cost drivers are staff costs and administrative expenses hence most banks have embarked on rationalisation programmes which includes reducing headcount and the number of branches through closures and amalgamation of some divisions.

Pressure from the militant labour union will remain a thorn in the flesh for most banks as they battle to contain staff costs. We believe there is need for rightsizing in most institutions but doing that as an end in itself will not bring the much needed profitability if efforts are not made to grow the income side and improve efficiencies.

The liquidity challenges have seen reluctance by banks to advance loans as they fear to suffer huge impairments. A look at most banks indicates that impairments are still not fully disclosed and are not within manageable levels with the exception of a few banks that have manageable impairments. Advances to the retail market has been the mainstay, though not productive, however, we do not expect to see an upsurge in defaults as most of the repayments are done through the payroll.

Strong credit risk management remains critical for the management of the impairments while collateralisation should enhance recoveries in the event of defaults. Kingdom, CBZ and BancABC are the major culprits.

Key drivers for the growth of Zimbabwe’s financial sector include:

• Performance in the agriculture, mining and finance sectors.

•  The absence of notable investment in infrastructural development and rehabilitation of water and energy utilities would, however, suggest that the growth experienced thus far may be more technical than sustainable. The absence of growth in capital stock as well as labour force productivity reinforces our view.

Until such time that capital starts flowing in to fund long-term infrastructural and utility projects, observable growth in the interim period will be devoid of sustainability. We further opine that such long- term investment in utility rehabilitation and infrastructure development will only happen when indigenisation legislation less threatening to foreign investment and a sustainable strategy is implemented to reduce the huge sovereign debt balance (estimated around US$9 billion).

•  Skills and productivity — skills audits indicate that potentially 30 percent to 50 percent of labour force is not skilled and thus labour force productivity is very low.

Their credit analysis is biased towards risk aversion and misinformed decisions are made by the credit analysts, relationship managers and even their executives and board members.

Without relevant skills in credit analysis, risk management, relationship management and the executives and board members Zimbabwean businesses will not see growth in the next five years just like the previous five years.

These are clerks who have been promoted on the back of loyalty, and not competency. They are not even keen to develop their careers through further studies.

In a number of institutions surveyed the bosses are clerks that have been promoted and are even managing and supervising degreed and skilled employees.

The current employees have become irrelevant to the banking business, just rent seekers and they resist changes to the new banking business models it would be better for them to be kicked out of banking before the business kicks them out.

Trust Bank, Kingdom Bank and Royal Bank are key indicators where the business sends employees home rather than management.

The board should be worried when employees stay for more than 10 years in one place without personal skills development and this includes chief executives because they also become a risk to the business.

The current crop of bankers lack in product knowledge and most of them fail competence tests as noted as well.

•   Innovation — The Zimbabwean banking sector continues to lack innovation especially towards capital raising, deal origination, deal execution, and risk management. The practices are traditional and skills are archaic.

Most of the bankers cannot walk the talk as we have noted with lack of activity in mergers and acquisitions. Some bankers have been paid fees for capital raising and failed to bring investors to the table.

Lines of credit have been difficult to access for most banks chiefly due to corporate governance and non-performing loans and shareholder related issues.

The failure to capitalise banks to underwrite more business has been caused by the failure to take advantage of the multi-currency regime and raise debt and equity through innovative long term funding structures.

The focus is not on meeting US$50 million capital requirement but on raising US$200 million capital in 2018 or 2020.

Allied Bank and Trust Bank continue to struggle with capital raising and any liquid bidders for equity are welcome.

International financial markets have developed instruments suitable for continuous capital raising through debentures, preference shares, equity line of credit and so many hybrid instruments.

This is why we now have Steward Bank as the only standing privately owned indigenous bank in Zimbabwe.

Zimbabwean businesses seek turnaround strategies, recapitalisation and retooling not only with new equipment like what Delta and Schweppes have done but also with human skills like what TSL did so that we witness growth in Zimbabwe and a vibrant stock market emerges.