Good agric season could boost bank’s lending

Good rains that the country has received this year will likely result in banks increasing their lending levels which have been below international benchmarks for the last couple of years.

At the last official count for the three months to September 2020, the loan to deposit ratio for the banking sector stood at 36,75 percent.

Sitting on deposits amounting to $154,47 billion during the period under review, the banking sector only managed to lend $56,76 billion.

By volume, the number of individuals or institutions which accessed loans is likely to have been significantly lower considering the $56,7 billion “was largely attributed to the translation of foreign currency-denominated loans”, according to the Reserve Bank of Zimbabwe (RBZ).

The global benchmark for the loan-to-deposit ratio (LDR) sits at between 80 percent and 90 percent.

In Zimbabwe, the LDR peaked at 73 percent in 2015 but has struggled to breach the 40 percent mark in the last three years.

In its Banking Sector Industry-Report for the quarter ending September 30, 2020, the central bank attributed this subdued financial intermediation in the sector to “cautious lending by some banking institutions.”

Other observers say the nature of deposits has contributed to the low lending levels.

According to available statistics from the central bank, the deposit base for the banking sector continued to be dominated by FCA deposits and demand deposits, which accounted for 51,26 percent and 43,42 percent of the total nonbank deposits for the period under review.

Banks have not been able to extend much of the FCA deposits given the associated risks. Instead, the lenders have been very selective, choosing to only lend to exporters and individuals that earn in foreign currency.

The majority of economic players and individuals are however not exporters nor paid in foreign currency respectively.

Short terms deposits reduce banks’ flexibility to extend the funds as loans. Players in key economic sectors such as mines need medium to long term funding, while manufacturers are in need of long term capital or foreign currency denominated loans which most cannot access due to the risk of default given their local dollar earnings.

Central bank governor Dr John Mangudya is however, of the opinion that the level of lending is likely to increase this year.

A good rainy season, according to Dr Mangudya, is a good attraction for lenders given the significance of agriculture in the economy.

Dr Mangudya said most bank loans were concentrated in the agriculture sector and good rains increased activity and the appetite to lend into that sector.

As at September 30, 2020 the bulk of the loans at 25,04 percent went to the agriculture sector while the manufacturing sector was a distant second at 15,68 percent.

Dr Mangudya blamed the current low levels of lending in the banking sector on the drought that the country experienced for two consecutive years.

He said the trend has been that whenever there is drought, banks will become averse to lending as they look at the associated risks.

“Yes lending has been low in the past year, but we expect it to be higher this year because of the fertile ground for lending especially to agriculture.”

“You will remember that in the past two years there was drought and this year we are so happy that the rains have done us proud.

“So because there was drought, lending to agriculture was very low, but going forward with the country receiving good rains, and companies and entities becoming more productive, as the central bank, we are going to use moral suasion for banks to increase lending to the productive sectors of the economy.”

Dr Mangudya blamed low uptake of loans to the Covid-19 pandemic which hit most sectors with the tourism sector being the hardesthit.

Meanwhile, the central bank believes the banking sector is functioning “satisfactorily despite the varied impact of covid-19 on the different economic sectors of our economy.

According to the Banking Sector Industry-Report for the quarter ending September 30, 2020, all banking institutions were compliant with the minimum capital adequacy requirements with average capital adequacy and tier 1 ratios of 47,16 percent and 27,61 percent, which were above the regulatory minima of 12 percent and 8 percent, respectively.

During the period under review, asset quality continued to improve, as reflected by the shift in the non-performing loans (NPLs) to total loans ratio from 1.03 percent as at June 30, 2020 to 0,41 percent as at September 30, 2020.

The average prudential liquidity ratio for the banking sector was 71.69 percent, a marginal decline from 74,85 percent reported as at 30 June 2020, against the regulatory minimum requirement of 30 percent.

In terms of earnings, return on assets was 12,5 percent (2019: 7,91 percent), return on equity 39,92 percent up from 26,85 percent the prior year comparative.-businessweekly