SUNDAY TIMES - Zimbabwe's banks rake in huge profits as cash crunch worsens
Sunday Times Business By RAY NDLOVU, 2017-04-16 00:00:00.0

Zimbabwe's banks rake in huge profits as cash crunch worsens

Image: Gallo Images/iStock

All of Zimbabwe's banks - except for one state-owned entity - have reported millions of dollars in profits in the last financial year, ironically at a time when the country's cash crisis has deepened.

For more than a year, Zimbabwe has been battling an acute shortage of US dollars, with depositors the hardest hit.

Most are unable to access their funds due to strict withdrawal limits of $50 (about R670) a day and the cancellation of the use of international bank cards outside Zimbabwe.

These measures were adopted by the banks as they were unable to cope with the high demand for cash from depositors, low-running nostro account balances and a payment list determined by the central bank.

The payment list from the central bank is a schedule that outlines the priority to which the scarce US dollar would be allocated for the payment of critical goods and services to foreign suppliers.

But in light of the profits earned by banks, an uncomfortable spotlight has been cast on their operations.

In the latest full-year financial results ended December, the Reserve Bank of Zimbabwe said the profitability of banks had increased by 42% to $181.06-million from $127.47-million earned in the year ended December 2015. The increase, according to the RBZ, translated to improved average return on assets and return on equity from 2.07% and 11.03%, to 2.26% and 12.64%, respectively.

The largest profit earner was CABS, a unit of Old Mutual, that made a $39.2-million profit in the full year ended December 2016, a 38% increase from the year before.

Zimbabwe has 19 banks - 13 commercial banks, five building societies and one savings bank.

The profits made by the banking sector are rare good news for business, given the economic meltdown faced by most companies.

RBZ governor John Mangudya said the increase in profitability was largely driven by lower loan loss provisions in line with improving asset quality, lower interest expenses, and continued realignment of cost structures at most institutions.

"Interest income continued to be the major income driver, constituting 58.4% of total income of $1.05-billion for the period ended December 31 2016, while salaries and employment benefits dominated total costs for banking institutions as they accounted for 42.53% of total banking sector costs," he said.

Bankers attributed the companies' fine form in the last financial year to a cocktail of innovations they had adopted to survive in the harsh macroeconomic environment.

This included the adoption of several cost-cutting measures and the switch to electronic payments, a relatively new phenomenon in Zimbabwe, where there remains a high affinity for cash.

CABS chairman Leonard Tsumba said its noninterest income had increased due to "higher transaction volumes" in response to the banks' investment in digital channels.

Economic analysts, however, have dismissed these reasons as window-dressing by banks and pointed out that the super profits come from an increase in noninterest income, such as bank charges and service fees that sparked a public outcry last year.

Former minister of finance Tendai Biti said this week that Zimbabwe's banks were running a Ponzi scheme and no real value to the economy was being created.

"The business of banks is to make money from money and not from bank charges.

"Those financial statements: if one looks closely at them, one can see that the bulk of income comes from noninterest earnings and these contribute a disproportionate amount to what is the core business," he said.

Vince Musewe, an independent economist in Harare, said most banks had taken advantage of the volatile environment and were doing short-term deals.

"That's a natural response of banks in a volatile environment because you can't make long-term deals.

"Most of these probably are trading deals and not production deals, so they are in effect fuelling short-term nonproductive activities to survive," Musewe said.

Economist Eddie Cross said the stability of the banks was concerning.

"They are very fragile and loaded with bad debt and treasury bills. If we are not careful, another string of failures could occur," he said.

Scores of Zimbabwe's banks have collapsed in the past. These have included the Kingdom Bank, Genesis, Interfin and the Zimbabwe Allied Bank Group.

Industry and manufacturing players are fuming over the super profits raked in by the banks.

The manufacturing sector has had a prickly relationship with banks largely because of high interest rates of 18% on loans.

Effective this month, the RBZ has instructed banks to lower interest rates from 18% to 12%.

Denford Mutashu, the president of the Confederation of Zimbabwe Retailers, said banks had to fund productive sectors of the economy rather than offer largely consumptive short-term loans.

"This has created a debt cycle and a lot of people are trapped in it. The talk of high country risk by banks is imaginary, a smokescreen to deflect attention from profiteering," Mutashu said.

Meanwhile, nearly five months after bond notes were introduced by the RBZ and hailed as a solution to end a year-long cash crunch in Zimbabwe, the bond notes have vanished from the formal banking system.

Instead, they have resurfaced on the black market, where they trade less than their decreed 1:1 value to the US dollar.

Monetary authorities are livid at the disappearance of the bond notes, amid signs that a parallel exchange rate, fuelled by the black market, is emerging.

Mangudya said "indiscipline of the highest order" was taking place.

Finance Minister Patrick Chinamasa has blamedretail and fuel operators for the vanishing bond notes, suggesting they were not banking their fulltakings.

He has threatened to invoke the Bank Use Promotion Act, which forces the banking of surplus cash by businesses.