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Banking: No one to bail you out

By Frank Chikowore in Harare and Patrick Smith
Posted on Wednesday, 22 September 2010 15:49

Political wrangling and falling revenues have reversed ?the fortunes of some of the country’s biggest banks.A shake-out now looms

The roaring boom has come to an abrupt halt and Zimbabwe’s banks face pressure for a wide-ranging restructuring. Their profitability is crashing and many are struggling to meet their capital-adequacy requirements. What a visiting IMF team described in July as “rising banking-system vulnerabilities” translates into serious pressure on the country’s 25 financial institutions. Out of the 25 (15 commercial banks, five investment banks, four building societies and a savings bank), 10 recorded losses in the first quarter of this year.

By the middle of the year, 10 of the financial institutions had not met their capital-adequacy requirements. Most of the banks are cutting back on their payrolls and administrative expenses. Some are retrenching staff.This follows last year’s boom, when banking deposits tripled and lending increased six-fold between March and December 2009. The boom was fuelled by inflows from companies looking for opportunities brought by the new coalition government and the government’s pressure on the banks to lend to farmers.

A financial friend in need

Banks can expect little help from the Reserve Bank of Zimbabwe (RBZ), still under the control of presidential appointee Gideon Gono and embroiled in a political dispute over its management. The RBZ is itself “financially distressed”, according to the IMF. Far from acting as a lender of last resort to banks with difficulties, it has become another drag on the economy.

The RBZ’s governing board is not operating and it did not have an approved budget last year. Instead, “without appropriate oversight”, Gono used $80m of the country’s international reserves and sold $38m of the bank’s portfolio shares on the Zimbabwe Stock Exchange to finance its operations, the IMF reports.

The coalition government and the IMF agree that using public funds to bail out insolvent banks is not an ?option. The IMF speaks of “ensuring an orderly exit of non-viable banks.”?

Creative destruction?

Finance Minister Tendai Biti insists that all of Zimbabwe’s banks will weather the storm and wants them to do more to encourage savings and cut lending interest rates. “High lending rates – as high as 30% – attributed by banks to liquidity constraints in the economy, the short-term nature of deposits and high risks against low deposit rates – as low as 2% – ?penalise borrowers and discourage savings,” Biti said in his mid-term policy review in July.

The founder of TN Bank, Tawanda Nyambirai, says many of the banking sector’s problems are politically induced: “There are still some issues amongst government of national unity partners and every time there is discord amongst them, it affects market confidence.” This means that most of the liquidity in the market is short-term, according to Nyambirai.

Local companies and banks find that those regional institutions that will take on Zimbabwean risk, such as the Africa Export-Import Bank and the PTA Bank, have extremely protracted procedures, Nyambirai says. “As a result, very few companies have been able to access funding of a long- term nature from these institutions.”?

Nyambirai, whose bank has a retail and treasury-deposit base of $40m and plans to expand across the region, advised authorities to make policy clear and predictable to boost investment in the financial services sector. In the meantime, Zimbabwe’s bank deposits total an estimated $1.9bn, according to the Bankers’ Association of Zimbabwe, not nearly a strong enough financial base to contribute to a rapid economic recovery.

This article was first published in the August-September edition of The Africa Report.