Credit boom backfires on banks

BANKS are bound to fail from time to time according to research by Morgan Stanley. History in the financial markets has always shown that before any major crisis occurs it follows some laxity in the regulatory environment and market wide deficiencies in corporate governance and risk management frameworks of market players.

Recalling the 2007 sub-prime mortgages crisis that initial emerged in the United States of America and later spread to the European markets and led to the global financial crisis precedent to this crisis was a poor regulatory environment. 

The crisis was primarily as a result of excessive lending which was done to borrowers who clearly lacked capacity to repay the loans. These loans were then bundled up together to form structured notes (derivative instruments) and then there were traded all over the world by Wall Street investment bankers who made a killing on trading these notes in the absence of proper regulations to govern the trade of these assets.

Sooner than later these notes became seriously bad loans (toxic assets) anyone holding these notes was burnt out in the process. An analysis of financial reports of quoted companies since dollarisation reveals that there was a general increase in bank debts fuelled by short-term liabilities as companies jostled to borrow to recapitalise operations when dollarisation was introduced as operating costs were suddenly denominated in foreign currency.

Banks in Zimbabwe started operating with paper thin balance sheets when dollarisation was introduced in 2009. During the first 12 months of trading banks adopted a conservative lending approach with Standard Chartered Bank Zimbabwe one of the biggest banks in the country based on its balance sheet size at one point was sitting on a loans to deposit ratio of less than 20 percent when the market average was at 45 percent implying a conservative lending strategy market wide.

The Reserve Bank of Zimbabwe was of the view that this approach by banks was too conservative and also that the role banks play as wheel-greasers of the economy, allocating and underwriting flows of credit to allow capital to be used as productively as possible was being undermined.

The RBZ and the Ministry of Finance then persuaded banks to increase lending to the productive sector which banks have over done as shown by their insatiable appetite for risk with average loans to deposit ratios now sitting at 84 percent according to the latest Banks and banking survey report of October 2011.

The present excessive lending by banks leaves a lot to be desired on the quality of their loan books and the strict adherence to their credit policies and their credit risk oversight functions.

The economy has not grown that much and the fundamentals that existed in 2009 when the banks were conservative in their lending strategies still remain largely the same, so the big question is what has caused the change in strategy by banks considering that industry is still operating below 100 percent, actually it’s operating at 57 percent according to information released by the Confederation of Zimbabwe Industries report.

Interfin Commercial Bank, the latest bank to join the fray of struggling banks, has been hit by serious liquidity challenges as clients are going for days without accessing their cash. Information gathered from the market is that problems at Interfin are stemming from a bad loan book.