BULAWAYO - Confidence and stability in the local financial sector is gradually being restored as 23 out of 26 banking institutions have met the minimum capital requirements as at October 31, 2009.According to latest money markets report by Kingdom Stock Brokers (KSB) the development has averted any major potential shocks within the industry. The report notes that the dollarization of the economy, and the resulting demonetization of the Zimbabwean dollar, impacted negatively on banking institutions as Zimbabwe dollar deposits were rendered useless.
As a result confidence in the banking sector reached rock bottom with economic agents preferring to keep their foreign currency holdings rather than depositing them with financial institutions. This impacted negatively on the viability of banks which traditionally rely on deposits as the cheapest source of funding, reads part of a report. As of October 31, 2009 the total deposits with banks amounted to US$1,016 billion, up 44 per cent from US$706 million recorded in June 2009.
CBZ had the largest deposits with at total of US$250 million followed by Stanbic with US$150 million while Barclays and Stanchart had deposits of US$112 million and US$103 million respectively. The four institutions held 61 per cent of the total deposits. The sector also registered an improvement in loans and advances of US$501 million from US$263 million in June 2009, which has resulted in a corresponding increase in the sector loans to deposit ratio, which stood at 49.3 per cent as at October 31 from 37.3 per cent recorded in June this year, said KSB.
The stockbrokers, however, noted that most of the lending was limited to short financing for working capital requirements with short payback period. This has prompted the central bank in setting threshold to guide banks in their lending to the productive sectors which required long-term working capital. Banks are compelled to orient their lending portfolios so as to achieve 30 per cent of their deposits to the agricultural sector, 25 per cent each to manufacturing and mining sectors and 20 per cent to other remaining sectors.
KSB said confidence building in the banking sector was essential to ensure that depositors were comfortable with investing for longer periods. Over 90 per cent of the deposits in the economy are under 30 day investments. The dominance of short term deposits together with absence of lender of last resort is affecting the banks ability to advance money to borrowers. Among the deposits are statutory reserves, FCA balances, ZIMRA money and government money in transit which can not be lent out. It is therefore incorrect to blame the banks for the low loan to deposit ratios without considering the nature of the deposit, reads part of the report.
KSB said the economic environment would continue to present many challenges, particularly because of pressures emanating from foreign currency shortages. With unavailability of lines of credit and direct foreign investments in the near future, the liquidity challenges will persist and this impact negatively on the capacity of banks to raise deposits of a long term nature which can allow them to on lend for long term projects. It said most of the lending will remain limited to short financing for working capital requirements with short payback period.
The absence of the lender of last resort will likely see banks continuing with conservative lending policies to reduce the incidence of bad debts, noted KSB.
Post published in: Mining