Bank profits surge as economy dies

HARARE – Zimbabwe’s banks are posting startling profits that are buttressing economists and investors’ belief that revenues from electronic transactions charges were reinvigorating the long-struggling financial sector.

This comes as most transactions are now being done electronically as buyers and sellers, employers and employees, tenants and landlords are all using electronic means to make payments.

These include EcoCash, OneMoney, TeleCash, ZipIt, credit cards, debit cards or Internet which have taken the place of cash transactions.

The banking sector’s net profit for the last financial year ranged between $7 and $27 million, representing a large increase from the corresponding period in 2016.

The super performance of banks was largely in line with what economists had been expecting: trading revenue was upbeat thanks to increased market activity; and most banks received a major boost in their nonfunded income line due to increased transaction volumes on e-channels.

All of the country’s 19 banking institutions — 13 of which are commercial banks, five building societies and one savings bank — all recorded impressive profits.

This superb performance by the banks comes at a time when the country is experiencing acute cash shortages caused by withdrawal limits, consequently leading to numerous withdrawals by depositors and translating to more income for banks from ATM fees and other withdrawal charges.

Strangely, this comes as the liquidity situation has escalated to such an extent that ATMs are empty and banks only allow customers to often withdraw $20 in bond coins a day.

This means people have become unproductive, wasting their days away queuing or even sleeping in front of banks.

The impact of the currency shortage has not been limited to everyday consumers and has seeped into other sectors of the economy. Local manufacturers are unable to fulfil the most basic of functions.

This phenomenon is also confounding Parliament’s Budget Office, which noted that the economy entered in 2018 amid several challenges ranging from chronic cash shortages, illegal multi-tier pricing, foreign currency shortages, and termination of some services that required foreign currency and company closures.

“In that regard, it was understandable that negative performance was expected for the year ended 31 December 2017 but surprisingly the banking sector recorded enormous profits,” Parliament Budget Office said in its 2018 first quarter budget performance and outlook report.

“The banking sector is in a good momentum as evidenced by its profitability in 2017. Decreased  investments and lending practices have significantly reduced non-performing loans and maintained the banking sector’s profitability.”

Low levels of confidence in the country’s banking system have ignited a high appetite to keep cash outside the banking system, thus promoting the informal economy. Cash has always been a primary method of transacting in the Zimbabwean economy. Not anymore.

Technological advancements in the form of non-cash payment variants such as plastic money and mobile payment methods have opened avenues to transact without the usage of physical currency.

A major motivator of embracing cashless transactions is basically the ease and convenience of making transactions that it brings. In light of this, the Reserve Bank of Zimbabwe (RBZ) has put in place several measures to make Zimbabwe a “cashlite economy” and in a way increasing financial inclusion.

Veteran economist John Robertson said for most of the banks, revenues from e-transactions charges now exceed revenues from interest earned.

“The much bigger growth in the number of transactions is partly because the average transaction size has fallen to much smaller sums of money changing hands, but the larger number of small transactions results in more income for the banks,” Robertson told the Daily News.

“This transaction charge income is almost risk-free and involves very low administration expense, whereas loans were sometimes not repaid on time or at all, so they were more often high risk earnings that involved lots of administration costs and these all caused bank profits to fall. So, we now have a different type of banking that is far less helpful to people wanting to invest.”

Robertson said the banks have less ability to help investors because their large deposits are no longer made up of foreign exchange that can be used to pay for imported machinery.

“These deposits now can be used only for local payments and that limits the scope of the investors. That is why the rest of the economy is making little progress,” he explained.

“Investment is the key to real growth through increasing production. Most Zimbabweans are making a very small income buying and selling goods that already exist and too often come from another country. Recovery will be on the way when we are the ones making the goods and when we can sell them to people in other countries,” he said.

Jee-A van der Linde, an economist at NKC African Economics told the Daily News that banks did well out of transaction income over this period, rather than interest income.

This comes as the RBZ reported that the value of mobile transactions increased by 45 percent q-o-q (quarter-on-quarter) during the fourth quarter of 2017, while Internet transactions rose by 38 percent q-o-q. On an annual basis these increases are even more remarkable.

“It is possible that customer needs and local banks’ attempts to provide an alternative for cash —by means of new technology and trouble-free online platforms — are starting to align. This might have contributed towards the increase in transactional activities during the latter part of 2017,” Linde said.

“Another possible reason for the observed performance in the financial sector, could be the (Zimbabwe Stock Exchange) ZSE’s  extraordinary performance during the second half of 2017: it was one of Africa’s best performing equity markets for the most part of 2017 and local banks would have profited from this.”

This superb performance of the ZSE seems to have continued into the new year.

The volume of shares traded in the first quarter at the ZSE in value terms, there was a 204 percent increase to $144 555 983 compared to the first quarter of 2017. Data from ZSE show that turnover was $34 704 376 in January rising to $66 184 479 in February and $40 667 128 in March, according to Parliament’s Budget Office.

“That said, the underlying risks pertaining to the liquidity crisis remain high. It is difficult to quantify these results — banking sector profitability — given that Zimbabwe faces such a severe liquidity shortage and considering the impact that this has on general economic activity,” Linde said.

The NKC analyst said Zimbabwe’s lack of liquidity is a serious concern.

“It inhibits economic activity, which makes normal day-to-day tasks almost impossible for ordinary Zimbabweans and companies alike. It also creates a sombre risk-off environment. This liquidity shortage has grown into an imperative issue and recent funding and support facilities, although admirable, are mere drops in the proverbial bucket,” Linde said.

Since adopting a multi-currency regime in 2009, the US dollar has established seniority as the country’s preferred legal tender, but local banks have run out of hard currency as the government attempts to accrue forex in exchange for second-rate IOUs (i owe yous). In 2016, Zimbabwe introduced bond notes which were meant to be at par with the US dollar, but have since managed to lose comparative value.

For every $100 bill Zimbabweans pay $120 in bond notes or $145 in EcoCash, $150 for bank transfer in electronic currency, an arrangement which has come to be known as the three-tier pricing system.