Finance

New hurdle for banks

  • New capital threshold set 
  • Poor asset quality dogs sector

LIVINGSTONE MARUFU

Zimbabwe’s financial services sector could soon lurch into a fresh crisis after the Monetary Policy Committee (MPC) instructed players to have a minimum capital requirement of US$30m or Zimbabwean dollar equivalent by December at a time the sector is battling poor asset quality.

Before this directive, banks were required to have a threshold of US$100m but the reintroduction of the Zimbabwe dollar saw many undercapitalised banks getting a reprieve after the central bank allowed banks to have ZWL$100m as minimum capital.

The decision to set new minimum capital requirements according to the MPC is to improve the sector which is under serious distress.

However, most analysts contend that given the current inflationary environment very few banks will be able to reach that US$30m mark by December 31.

“The MPC noted the need for banks to hold sufficient capital to ensure continued stability and soundness of the financial services sector, as well as ensuring that banks continue to be able to underwrite financial transactions that are necessary for improving production and productivity,” said Reserve Bank of Zimbabwe governor John Mangudya who also doubles as MPC chairperson.

“In this regard, minimum capital requirements for banks have been reviewed by the Bank to ZWL$ equivalent to the following USD amounts.” Large indigenous commercial banks and all foreign banks should reach a minimum capital requirement of US$30m or Zimbabwean dollar equivalent by end of December while commercial, merchant banks and building societies are expected to reach US$20m or equivalent.

Deposit-taking micro-finance banks should reach a minimum of US$5m while credit only microfinance institutions areexpected to reach US$25, 000 by the end of the year.

Out of 17 banks, only CBZ has already reached the new minimum capital requirement with US$34m; others are still to work out some plans to reach that figure.

The MPC resolved to maintain the Bank Policy Rate on Overnight Accommodation at 35%. The interest rate on the Medium-term Bank Accommodation (MBA) facility shall continue to reflect the yield on the Treasury Bills auction rate which is currently between 15 to 18%.

The committee said access to the MBA window depended on the quantum of medium and long-term productive lending undertaken by banking institutions.

Following its decision in October 2019 to increase the quantity of banknotes and coins in the local market to try and reduce the premium being incurred on cash and to give the public more access to their cash balances with financial institutions, the Bank has imported additional banknotes and coins to the tune of ZWL$400m. An amount of ZWL$150m was disbursed in the last quarter of 2019 to give a total of ZWL$1.1bn of notes and coins in circulation in the country as at December 31 2019.

This represents 3.2% of total banking sector deposits of ZWL$34.5 billion as at December 31 2019. The norm is that 10% of total banking sector deposits should be in notes and coins.

This means that RBZ has to print an additional ZWL$2.35bn.

Imara Asset Management chief executive John Legat said the reintroduction of the domestic currency had a huge impact on the financial services sector.

“The effects of the decline in the value of the ZWL$ upon Zimbabwe’s banking, insurance and pensions sectors have been devastating in real USD terms,” Legat said.

“In short, the local capital markets will find it hard to fund any meaningful investments as we start the next decade, implying that only foreign capital has that ability.

Sadly foreign investors are no longer much interested in Zimbabwe although they continue to keep a close eye on events should the investment climate change.

The danger therefore is that Government will step in but financed through the printing press, which as we all know will undermine the ZWL$ further.”

Meanwhile, on Tuesday the Supreme Court ruled that all debts incurred before February 22 last year must be settled in the local currency at a 1:1 rate against the US dollar in line with Statutory Instrument (SI) 33 of 2019.

The SI abolished the multi-currency regime and reintroduced the Zimbabwe dollar. Chief Justice Luke Malaba made the landmark ruling in an appeal case involving Zambezi Gas Zimbabwe (Pvt) Limited against mining services provider N.R. Barber (Pvt) Ltd and the Sherriff of Zimbabwe.

MPC highlights

  • Inflation ended the year at 15%.
  • Year-on-year inflation expected to come down to about 50% by December 2020.
  • Reuters platform went live on December 2 2019
  • US$1.5bn has so far been traded on the interbank market
  • ZWL$800m disbursed under the MBA window
  • ZW$1.1bn of notes and coins now in circulation

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