Fundamentals in the local financial services sector have improved over the past few years, with the sector rightly poised to finance economic requirements, the central bank has said.
In the past, a number of bank failures in the country were caused by poor corporate governance, insolvency and imprudent lending activities.
This was worsened by low confidence in the banking sector due to high transactional costs and marginal rates on deposits.
But both monetary policy intervention and strategies on the part of the banks themselves, have pulled the sector out of the doldrums.
Reserve Bank of Zimbabwe (RBZ) principal economist, Dr Nebson Mupunga, pointed out some key indicators on which the sector is doing well.
“As at March 31, 2021, Zimbabwe’s banking sector was characterised by well capitalised banking institutions with average capital adequacy ratio of 30.04 percent above the regulatory limit of 12 percent, and sound asset quality with non-performing loans ratio of 0.36 percent well below the international benchmark of less than 5 percent.
“It’s a resilient banking sector as attested by limited vulnerability to extreme shocks as indicated by latest RBZ stress test results; viable and profitable sector as shown by positive profitability ratios, ROA (0.97 percent) and ROE (5.90 percent); good liquidity indicators as shown by an average liquidity ratio of 68.56 percent well above the stipulated benchmark of 30 percent,” he said.
“These factors are critical for banks to be able to underwrite significant business as well as to support the envisaged average economic growth of above 5 percent under NDS1.”
Dr Mupunga was addressing delegates to this year’s Zimbabwe Finance Conference hosted by Financial Markets Indaba in partnership with Business Weekly that was sponsored by Nyaradzo Group.
During the first quarter of 2021, there has been a significant uptick in the sector’s level of financial intermediation.
Central bank data shows that the sector’s loans to deposits ratio, for example, rose to 44.16 percent as at the close of the first quarter 20, an improvement from 39.45 percent as at the end of 2020.
An analysis of the figures also shows that the loan to deposit ratio is gradually recovering towards the desired historical levels of above 70 percent as inflationary pressures recedes.
Both the monetary and fiscal authorities have been implementing measures to curtail inflationary pressures, and the results are positive.
From a high of 837.5 percent last July, Zimbabwe’s annual rate of inflation has declined to 194 percent as at April 2021. The authorities are targeting to reduce inflation to 10 percent by year end.
Dr Mupunga said improved lending as a result of the stable macro-economic environment, will reflect on banks’ performances.
“The recent pick-up in bank lending is expected to increase the contributions of interest income and reduce the share of fees and commission. This is also critical for enhanced financial intermediation,” he said.
PUBLIC CONFIDENCE STILL LACKING
Notwithstanding the improved fundamentals, the local financial services sector still needs to regain lost trust.
Said Barings Asset Management director Brian Mangwiro during the conference: “There is need for confidence in the banking sector, and that confidence will attract savings, which are critical for the economy.
“Without these savings companies are forced to borrow externally, and with current sovereign risk, these borrowings tend to be very expensive. So it becomes a vicious cycle. Policies for the financial services sector need to increase confidence.”
Zimbabwe’s financial services sector has in the past been hit by periods of hyperinflation and currency changes, with the burden of value loss absorbed by the banking public.
The Zimbabwe dollar was re-introduced after a 10-year hiatus through Finance Act No.2 of 2019 and Statutory Instrument 212 of 2019, which provide for exclusive use of the Zimbabwean dollar to settle all domestic transactions, as well as penalties for failure to do so.
Adjustments have since been made to allow for United States dollar transactions.
Commercial attorney Chipo Mafunga, told the Zimbabwe Finance Conference that the country’s financial policies need to be better aligned.
“The current financial market policies are fragmented. There are many policies that affect the sector, but they are not necessarily working in unison.
“A more unified policy will create a level playing field for players in the sector,” she said, adding that local financial institutions need to be more proactive in the development of policies that directly affect them.
“Banks must lobby for more comprehensive financial sector policies. There is need for a stable policy environment with effective institutions, as this will create clarity on how organisations and individuals should operate.” – Business Weekly