Zimbabwe central bank reforms pay off as bad loans decline, but there's a catch

by Justice Zhou

A reported slight decline in bad loans may allay fears that Zimbabwe’s banking sector is on the brink of a crippling credit crisis.

The decline follows a special programme by the central bank in which it buys toxic loans from lenders through its recently formed asset management company.

Non-performing loans (NPLs) in Zimbabwe’s eighteen banks dropped to 15% in the first quarter of 2015, from 20% last year.

So, it would be tempting to believe the sweeping reforms introduced by central bank governor John Mangudya, after his appointment last year, have started to pay off.

Commercial banks have sold roughly $383 million worth of NPLs to the Zimbabwe Asset Management Company (Zamco); local media quoted the central bank head as having said.

The ratio of NPLs to total loans stood at 18.5 percent as of November 2014; up from 16 percent in the previous year.

But in a country plagued by a severe liquidity crisis, renewed economic meltdown is fast gaining momentum.

A waning economy spells trouble for the central bank because it could easily thwart its ambitions to curb NPL’s and nurse the financial sector.

The recent patch-up of its lender of last resort function hasn’t helped prevent some banks from buckling under the weight of toxic loans.

As has always been the case in Zimbabwe, minor lenders are the hardest hit by the current liquidity crunch. They also are the most vulnerable to defaulting borrowers amid slowing growth and as depositors shun banks.

According to the Reserve Bank of Zimbabwe (RBZ), the six smaller banks that went bust over the last twelve months posed low systemic risk. Hence, the threat of domino effect, in a landscape with such foreign giants as Barclays and Standard Chartered, has been ruled out.

Anyhow, the major lenders managed to keep safe because they enforced stricter lending criteria. This included measures whereby loans were only given to borrowers considered to have the ability to pay them back.

Is there every reason, thus, for people not to freak out too much about the health of Zimbabwe’s banking system? Hang on people, there’s a catch in all of these financial metrics.

Apparently, the bad loan decline can be linked in part to the collapse of several smaller banks. Their exit from the scene eventually takes their balance sheets out of the central bank accounting equation.

Besides, rising provisioning levels for bad loans mean that getting them written off has put a damper on banks profitability. 

To make matters worse, institutions filing for bankruptcy often find it hard to repay depositors while their liquidation is being processed.

Research by MMC capital, a top brokerage firm, shows that banks’ after-tax profits slumped 17% last year as impairments soared.

Companies and households’ inability to repay loans stems primarily from the fact that Zimbabwe’s economy is once again in a tailspin.

With foreign investment drying up and firms shutting down due to tight liquidity, unemployment has worsened, putting paid to disposable income.

The RBZ is already grappling with confidence in the financial sector, which is at its lowest ebb. A widespread lack of public trust in the banks is partly due to the reserve bank’s controversial policies legacy.

Authorities have laid part of the blame for lack of confidence on poor lending practices and weak corporate governance by financial industry executives.

They argue some bankers have been the authors of their troubles, dipping into customers’ accounts and diverting funds into dodgy and risky financial market dealings.

With about 18 banks scrambling to get their hands on meagre deposits, some critics say the industry is inundated.So it might as well be a blessing in disguise for players that cannot survive stiff competition to cave in and exit the scene. But, is it a good idea to encourage banking sector oligopoly?

Now, let us unpack how this conundrum of toxic loans came about. Well, it all emanated from an orchestrated consumer credit bubble which formed between 2009 and 2013, when the economy was pumping during Zimbabwe’s coalition government era.

Everyone was optimistic that the country’s prospects will keep getting brighter. And then, smaller banks indulged in a wild lending frenzy, doling out unsecured loans in an excessive fashion.

With bank credit awash for households, people went on buying sprees for cars and houses, among other expensive goods without regard for the possible consequences.

By December 2012, toxic loans had swelled to 14%, from 1.6% in 2009.The lending blitz was probably motivated by the strong belief that a new government was soon to take over from President Robert Mugabe’s ruling party.

But all that did not happen as Mugabe claimed to have been re-elected in a disputed poll in July 2013.There was a run on the banks just after the elections, as major depositors and investors felt their money was no longer safe under Mugabe.

The 91-year-old leader’s nationalist threats to seize control of foreign firms have spooked investors and put his disrespect for property rights in the spotlight.

To a larger extent, the massive withdrawal of funds exposed some minor banks to defaulters, leaving them vulnerable to collapse.

And when credit could not be created to keep factories running, many companies scaled down or shut down altogether while loan defaulters grew in number.

For that reason, problems in the banking sector are far from over even as it looks like the reserve bank is finally pricking the consumer credit bubble. Without the much-needed foreign investment to help boost liquidity, nothing will stop NPLs resurfacing.

And the problem of bad loans being the main reason for banks that go bust is nothing new in Zimbabwe, much to the chagrin of customers. When several banks failed in the past, none of the depositors were refunded, a development which has made efforts to restore public confidence more difficult.

The scale of the erosion of confidence became apparent when Zimbabweans resisted "bond coins" which were introduced last year to tackle the lack of US coins. Zimbabwe shelved its worthless dollar and adopted the greenback in 2009 to rein in hyperinflation following decade-long political instability and economic crisis.

Although the paper greenback has since been readily available, coins were hard to come by. This prompted  Mangudya to bring in the new "bond coins" last year. A $50 million bond was floated to mint the money in neighbouring South Africa, hence the name.

Some depositors had watched helplessly as their money was engulfed by hyperinflation during the crisis. Critics blame the RBZ’s role in fuelling depositor losses during the crisis, having continuously printed and pumped money into the system, stoking hyperinflation.

The government forecasts GDP growth this year of 3.2 per cent, while the International Monetary Fund expects Zimbabwe's economy to weaken further this year after growing by 3.1 per cent in 2014.

Justice Zhou is a Johannesburg-based freelance journalist and blogger. He writes in his personal capacity and can be contacted via email: justice_zhou@yahoo.com