Banks’ reluctance to lend sparks controversy
The economy has been hit by liquidity challenges since the last quarter of 2024 and the central bank has indirectly acknowledged the situation as it seeks to free funds through the recently announced Targeted Funding Framework (TFF).
However, it continues to say banks are not utilising the interbank market, to which the Bankers Association of Zimbabwe (BAZ) president, Lawrence Nyazema, has shed light on disputing the claims.
The BAZ president revealed a tangled web of risk aversion, constrained interbank lending and government policies that he said have left banks teetering on the edge of a liquidity crunch.
“Banks are lending to each other on an overnight and short-term basis. There is not much medium-term lending going on,” Nyazema stated, underscoring the reluctance of some financial institutions to extend credit for longer periods.
The reasons are clear, most banks are struggling to meet the credit demands of their own clients, let along lending to others. However, Nyazema also hinted at a deeper issue, a lack of trust among banks themselves and the law.
“Interbank lending is governed by the risk appetite that banks have for each other. There are lending limits between and among banks and that has a bearing on the level of lending among market players even if liquidity is in abundance,” he revealed.
This startling admission by Nyazema paints a grim picture of local banks not only battling liquidity shortages but also grappling with mutual suspicion, a scenario that could stymie any efforts to revive the economy.
Adding fuel to the fire is the contentious role of Non-Negotiable Certificates of Deposit (NNCDs), which Nyazema described as a necessary evil.
“I do not think there are many financial institutions that prefer to invest in assets such as NNCDs. Given a choice, most financial institutions would not voluntarily invest in them,” he said.
These instruments, designed as liquidity management tools, have inadvertently become a sinkhole for excess funds. Instead of fostering interbank lending, banks are parking their liquidity in NNCDs at zero interest.
This practice, according to Reserve Bank of Zimbabwe (RBZ) Governor, Dr John Mushayavanhu is a glaring paradox.
“Surprisingly, instead of lending to the bank next door and getting interest income, some banks are content with RBZ taking their excess funds and parking them in NNCDs at zero interest,” he remarked.
The governor’s statement raises uncomfortable questions about the efficacy of Zimbabwe’s monetary policies and the willingness of financial institutions to support each other in navigating these turbulent waters.
Amid this financial dilemma, Finance, Economic Development and Investment Promotion Minister, Prof Mthuli Ncube’s reassurances ring hollow. While Prof Ncube insists that the government is meeting its obligations and managing liquidity to stabilise the domestic currency, his comments reveal a deeper prioritisation of macroeconomic stability over immediate liquidity relief.
“Our liquidity management programme is designed to maintain macroeconomic stability,” Mthuli asserted.
He pointed to the targeted facility programme by the RBZ aimed at releasing liquidity into productive sectors like manufacturing, mining and agriculture. Yet, these measures appear to be a drop in the ocean, with banks still reluctant to lend and businesses struggling to access much-needed credit.
Critics argue that the government’s obsession with curbing liquidity to stabilise the Zimbabwe Gold (ZiG) has come at a huge expense of economic growth.
“Excessive liquidity management is choking the economy,” economic analyst Namatai Maeresera noted, pointing to the widening gap between policy intentions and ground realities.
The liquidity crisis is more than just a financial issue; it is a crisis of confidence. Banks’ unwillingness to lend to each other reflects a deep-seated mistrust that could have far-reaching implications for the economy.
As Nyazema put it, “It would not be ideal for a bank to lend to another bank for six months or a year when it has a pipeline of credit requirements from clients that it is failing to meet.”
This lack of trust, coupled with the voluntary nature of NNCD investments, has created a vicious cycle where liquidity remains trapped in unproductive assets. Even the RBZ’s targeted facility fund (TFF) is predicted to fail to unlock the liquidity needed to kickstart lending.
The time for half-measures is over, financial authorities must take bold action to restore confidence in the banking sector and free up liquidity for productive use. This could involve revisiting the role of NNCDs, enhancing transparency in interbank lending, and creating incentives for banks to extend credit to each other and their clients.
The revelations by Zimbabwe’s top financial authorities expose a fragile banking system crippled by liquidity constraints, mutual distrust, and questionable policy choices. As banks hoard liquidity and the government prioritises currency stability over economic growth, the country risks plunging deeper into financial turmoil.-ebsinessweekl
