eBusiness Weekly
Tapiwanashe Mangwiro
Zimbabwe’s banking sector was thrown into a state of shock when President Mnangagwa announced last Saturday that financial institutions in the land had to stop lending to clients forthwith as a way to deal with a runaway parallel market rate.
However, the lending ban has started taking toll on sugar farmers as the country’s largest and sole sugar processors, Hippo Valley Estates Limited and Triangle Limited announced suspension of payment to farmers who supply the firm with sugar cane.
“It is with regret that the millers advise of the immediate suspension of advance payments until further notice.
“We normally fund the advances from loan proceeds that we access from the banks. Following the recent suspension of lending by banks we find ourselves unable to continue offering advances,” said Hippo Valley Estates Limited and Triangle Limited chief operations officer James Bowmaker.
But money supply growth has been blamed on bank lending to individuals, private sector and government, as this is said to be the reason why the exchange rate has been running away.
‘‘Lending by banks to both the government and the private sector is hereby suspended with immediate effect, until further notice,’’ President Mnangagwa said in his Saturday statement.
The Head of State and Government accused unnamed speculators of borrowing huge sums of Zimbabwe dollars at below-inflation interest rates and using the money to undermine local currency.
The Zimbabwean dollar, which is officially quoted at 173.2685 (this week rate) against the US dollar, has continued to slide both on the auction and the black market. It has lost 59,45 percent in the year to date on the auction market and 98,27 percent on the black market where it is trading between 330 and 420 to the greenback.
The moratorium on bank lending has been met by negative sentiments as economists and bankers are in tandem saying lending is the sole biggest source of income and lifeblood for banks.
BancABC, a local financial institution, said the move was detrimental, adding; “The Government is using a blunt approach to try and address a long-standing currency conundrum. Banning lending activities will threaten the survival of banks as this will wipe out 20-50 percent of their incomes.”
Diversified banks make money in a variety of different ways; however, at the core, banks are considered lenders.
Banks generally make money by borrowing from depositors and compensating them with a certain interest rate. The banks will lend the money out to borrowers, charging the borrowers a higher interest rate and profiting off the interest rate spread.
Additionally, banks usually diversify their business mixes and generate money through alternative financial services, including investment banking and wealth management.
Interest income is the primary way that most commercial banks make money. As mentioned earlier, it is completed by taking money from depositors who do not need their money now. In return for depositing their money, depositors are compensated with a certain interest rate and security for their funds.
Then, the bank can lend out the deposited funds to borrowers who need the money at the moment. The lenders need to repay the borrowed funds at a higher interest rate than what is paid to depositors. The bank is able to profit from the interest rate spread, which is the difference between interest paid and interest received.
The Reserve Bank of Zimbabwe has reiterated that the move is temporary but has not given a timeline on the ban on lending.
“We know this is a painful, but necessary, measure. It was necessary because of the increase in inflation. Some entities were now using funds from banks to purchase foreign currency,” RBZ governor John Mangudya told the national broadcaster.
“It’s a temporary, necessary measure to ensure that there is sanity in terms of taming inflation.”
Banks benefit by paying depositors a low interest rate and being able to charge lenders a higher interest rate. However, banks need to manage credit risk, which the lenders may potentially default on loans.
In general, banks benefit from an economic environment where interest rates are increasing.
It is because banks can lock in fixed-term deposits, paying a lower interest rate while still being able to profit by charging lenders a higher interest rate.
Economist Tinevimbo Shava said; “The situation is dire for banks, this is their cash cow that you have stifled, and we expect them to make profits. The economy also needs to be oiled by banks and this is something we have just stopped abruptly.”
Besides interest on loans, banks do also invest in various government and rated securities, and earn interest and dividends from these investments. However, the local environment has not been conducive for such instruments and even if they were attractive, the income is not able to sustain operations.
The other solution for banks is to temper their bank charges which are fees for performing services like syndication of loans, accepting bills of exchange, and providing safety vaults for their customers.
Banks will also look to increase volumes in their foreign exchange dealings in which they act as brokers for the same, earning an income from these operations. Lastly the banks can earn commission income by distributing insurance and mutual fund products to their customer base.
“As much as banks have alternative sources of income, the truth is that banks cannot survive on such paltry income as it only accounts for around 35-40 percent of total income in heavily diversified banks,” Shava concluded.
Tafara Mapisaunga a banker said; “The current economic meltdown could have been avoided had the authorities implemented an agreed roadmap on exchange rate management. To be honest, the current overvalued local currency at the auction is creating a fertile ground for arbitrage and generating inflated demand for foreign currency.”
Mapisaunga said they were being blamed for doing their main function as banks because businesses rely on borrowing for short-term financing and operational needs and all we do is provide that.
“Lending is required for so many business needs such as to import raw materials, pay salaries, working capital requirements and machinery. Without these functions, we might be staring at shortages in the economy. Companies are now battling to get hold of their cash, with some cancelling dividend payments to fund operations,” Mapisaunga concluded.
