AFTER analysing the economic situation in Zimbabwe immediately after dollarisation in 2009 in the last article, this week we look at some of the reasons that led to post dollarisation banking failures and what efforts have been made to address them.
Reasons for post 2009 NPLs
Over Statements of collateral by clients. In most instances of personal Non-Performing Loans (NPL), banks were comforted with the immovable security that would have been registered as collateral but overlooked the secondary risk of failure to dispose of the asset due to liquidity problems in the market. Most of the mortgaged properties were overvalued and in the event of default, most banks were not able to recover the loaned amounts leading to massive losses. Some borrowers in post 2009 Zimbabwe misrepresented the status of their assets and banks only discovered this anomaly at the point of disposal rather than visiting the properties before registering the bonds which led most banks to be faced with high default rates on loans advanced and these NPLs led to some banking institutions collapsing.
Poor knowledge of borrowing clients by banks
After dollarisation most companies did not have financial statements. Documentation that was supplied by the companies was in Zimbabwean dollars and in particular share capital contributed by the companies. The basis of lending was mostly historically based with bias towards listed companies and this was not a true valuation of the financial positions of most companies in Zimbabwe as most of the shares were over-valued in United States dollar terms. Most of the information that was provided by borrowers suffered from creative accounting. There was lack of due diligence and proper knowledge of the client’s business. This saw most banks lending to borrowers with no capacity to service and repay back their loans, therefore leading to high NPLs.
Rapid and ill-planned expansion drives which were not synchronised with the overall strategic initiatives of the banks concerned exposed them to greater risk of loss. In response to the huge demand for loanable funds the banking sector total loans and advances grew by 70 percent from US$1,7 billion in 2010 to US$2,9 billion in 2011 with slightly more than half (53 percent) concentrated in five banks which are CBZ, Stanbic, BancABC, CABS and Standard Chartered. The 70 percent growth rate in total loans and advances outstripped the 27 percent growth rate in deposits by a factor of 2,6.
This is a sign of unsustainable credit growth and an indication of the deterioration of the quality of the loan portfolio. This led to (NPL) rising from two percent in 2009 and the ratio peaking at 21 percent in September 2014 (IMF, 2015).
High Levels of Non-Performing Insider Loans
Some loans were being granted based on relationships with the requirers of funds. Loans were being approved for the directors’ and senior management’s relatives. In some instances paperwork would come after disbursements of funds. It was also noted in some banks that functions of committees such as Asset and Liability Committee, Credit Committees and all credit sanctioning committees were reduced from decision making to rubber stamping already made up decisions. Most of such borrowers would fail to honour their obligations because they would not have been properly assessed. Poor corporate governance practices, weak underwriting and monitoring standards, as well as ill-planned growth contributed to excessive levels of non-performing insider loans. Some banking institutions disregarded set prudential lending limits notably to insiders and related parties. In some cases, interest was not charged on insider loans and the loans were eventually written off without board approval. As a result of illicit dealings with insiders and related parties and/or due to operational losses, a number of banking institutions failed to meet the prescribed prudential capital adequacy ratios.
Multiple borrowing across banking institutions
Another cause of NPLs was that clients were overburdened. Most companies and individuals, even executives of companies accessed loans from more than one bank. Individuals were moving pay points from one bank to another in order to have access to loans. In addition to bank loans, most individuals had purchased furniture from other retail credit offering institutions. The absence of a Credit Bureau (CRBs) made it difficult for lenders to have access to such information. Some clients deliberately borrowed from multiple sources with no intention of repaying loans and thrived on the information asymmetry that prevailed.
Non-existent and weak bank Internal Systems
All locally owned banks were caught unaware on the strength of their internal systems. The shift from the Zimbabwean dollar to the multiple currency systems required re-alignment of the usual systems to suit the new environment. Most banks rushed to grow their loan books as soon as the economy was dollarised. When a bank grants more loans, it tends to loosen its loan standards, which resulted in higher NPLs. The failure by some commercial banks to carry out a proper monitoring of loans including ad hoc site visits led to clients’ misuse of the funds advanced.
Post 2009 RBZ Initiatives to deal with NPLs
Zimbabwe Asset Management Corporation (Private) Limited (Zamco). As part of its multi-pronged approach to tackle the high level of NPLs, in early 2014, the RBZ, with IMF assistance, established Zamco. The level of NPLs had increased steadily, since early 2012, and peaked at 21 percent in September 2014. Zamco was tasked with acquiring, restructuring, and disposing of NPLs. Zamco commenced the first phase of NPLs acquisition in October 2014, focusing on the top 100 NPLs, in terms of absolute size, across the financial sector (out of a total NPL portfolio of $816 million), and on those NPLs where the underlying companies have prospects of viability if the loans are restructured. The restructuring involved extending the loan repayment period, reducing interest rates, capital repayment holiday or conversion of the debt into equity. As at December 2015, Zamco had purchased mortgaged-backed NPLs amounting to US$360 million, financed by long-term Government debt securities.
Zamco’s operating costs were initially met by the RBZ but since October 2015, Zamco has been self-sufficient, generating its own funding through arrangement fees, interest from restructured loans, and dividends from preference shares. The work of Zamco helped to restore financial sector viability by strengthening banks’ balance sheets and providing them with much-needed liquidity (IMF, 2016). The level of NPLs, while still high, has been reduced significantly from the peak of 21 percent in September 2014 to 7,95 percent with some banks having disposed of loans to Zamco amounting to US$898,57million as of June 2017.
Deposit Protection Corporation (DPC)
In general terms, deposit protection is a bank deposit guarantee scheme which ensures that depositors are reimbursed part or all of their deposits in the unlikely event of a bank failure. In Zimbabwe, the Deposit Protection Scheme was established on 1 July 2003. In terms of the law, the principal objectives of the DPC’s statutory responsibilities are to: protect depositors; contribute to the stability and public confidence in the financial system; participate in problem bank resolution; and protecting the Fund against loss. Among other responsibilities, DPC is required to: monitor and assess risk of members and carry out where necessary special examinations, curatorship and liquidations.
Since its inception in 2003, DPC has compensated depositors of nine failed banking institutions which were subjected to liquidation, namely: Century Discount House; Rapid Discount House; Sagit Finance House; Genesis Investment Bank; Royal Bank; Trust Bank Corporation; Interfin; Allied Bank; and Afrasia Bank and payments to Genesis, Royal, Trust, Allied Bank, Interfin and Afrasia depositors are still on-going.
Credit Reference System
The RBZ has set up a Credit Reference Bureau (CRB) and all banking institutions and micro-finance institutions are mandated to provide credit information both positive and negative, to the databank and all private credit bureaus will be able to access, at a fee, information from the databank.
Due to the confidentiality nature of banking sector information and to ensure the integrity of the databank, any person seeking to conduct any activity which involves the collection and dissemination of credit information from banking institutions, deposit taking micro-finance institutions and micro-finance institutions should conform to minimum requirements set by the RBZ which accredits private credit reference bureaus.
Financial Inclusion Strategy
The RBZ, in collaboration with key stakeholders developed a national financial inclusion strategy whose goals for 2020 are to broaden access to financial products and services (from 69-90 percent); increase the proportion of banked adults from 30-60 percent. Despite the increase in the portion of the population accessing formal financial services, there are still gaps particularly in the level of access to, usage, and quality of financial products and services. The gaps are more pronounced among the rural population, women and youths, SMEs, and the small-scale agricultural sector. The main barriers to financial inclusion have been high levels of poverty, low disposable income, unavailability of affordable and appropriate products and services, cost of services, low levels of financial literacy and lack of confidence in banks and this has been seen more in recent times as Zimbabweans have failed to access their monies in most banks and electronic transactions have become more expensive and less efficient leading to people preferring to use informal sources of payments or demanding cash for goods and services.
-Butler Tambo is a Policy Analyst who works for the Centre for Public Engagement and can be contacted on firstname.lastname@example.org