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Increased lending key to economic recovery

THE average loan-to-deposit ratio for banks in Zimbabwe doubled from 30% between February 2009 and June 2010 as banks increased their lending levels despite liquidity challenges, the Reserve Bank has said.

In his mid-term monetary policy statement presented last week, Reserve Bank governor Gideon Gono said banks’ loan-to-deposit ratios had increased to 60% in June from 30% since the economy was dollarised in February 2009.

A total of US$1, 1 billion was disbursed during the first half of this year.

The levels are remarkably low compared to a regional average of about 74, 1% recorded during the same period.

Analysts said the extent of credit extension during the period under review indicated that lending was still restricted as reflected by the average loan-to-deposit ratio of 60%.

Economic consultant Eric Bloch told businessdigest that increased lending to productive sectors would revive the economy’s performance.

“Engaging in a greater volume of lending will facilitate some lowering of interest rates, as lenders progressively benefit from the economies of scale,” he said.

Kingdom Stock Brokers (KSB) this week said although bank lending has been rising, most loans remain short term (90 days or less) with longer term loans accounting for less than 3% of overall deposits.
“This has negatively affected economic growth as firms have not been able to adequately capitalise, a development that has resulted in the downward revision of the economy’s growth from 7% to 5,4% as capacity utilisation remains low,” KBS
The quest for growth in profit by banks often compromised sound lending practices.
Since the economy was dollarsised, the pendulum swung too far, forcing the Reserve Bank to read the riot act in its previous monetary policy presented in January.
Last week, Reserve Bank of Zimbabwe governor Gideon Gono removed statutory reserve for banks in his mid-term monetary policy review statement in a move meant to ensure improved liquidity and low interest rates so that bank can lend more.
By maintaining statutory reserves in an economy like Zimbabwe, Gono may have locked up funds that would have been used to rejuvenate and expand the economy.
Economist David Mupamhadzi told businessdigest that the lowering of statutory reserves was a move in the right direction, especially given the liquidity challenges that the financial sector was facing.
“Thus, from a policy perspective, the move is commendable and will release some liquidity into the system,” said Mupamhadzi.
Economic consultant Sonny Mabheju, however, said the amounts unlocked by banks will depend on the decisions individual banks will make regarding issues like assessed risk in the market and other factors normally considered when making prudent lending decisions.
“Some banks may deem the risk profile to be too high and other factors in the business environment not yet appropriate for them to significantly change their lending policies,” he said.
As at May 31, the depositor base stood at US$1,8 billion of which 60% of these funds were controlled by four banks — CBZ, Standard Chartered Bank, Stanbic and Barclays.
In the financial year ended December 31 2009, Kingdom Bank was the emblem for an industry being blamed for closing lending taps.
The Lynn Mukonoweshuro-led bank had the most attractive loan-to-deposit ratio of 119%.
MBCA and CBZ were both on second with 67%, Metropolitan bank 61%, NMB 54%, ZB Bank 42%, TN Bank 39%, Stanbic 31%, FBC 22%, Standard Chartered 21% and Barclays 17%.
Banks are unique businesses, not only as guarantors of deposits, but also as suppliers of capital without which an economy cannot function.
This balancing act is reflected in the value of a bank’s lending as a proportion of the money it has in deposits.
While some banking institutions have mobilised relatively large amounts of deposits, in some instances this has not resulted in corresponding levels of loans and advances.
Banks do not have other sources of funds beyond deposits, shareholders’ equity, and borrowing. The ratios help to explain why banks are so nervous about lending in an unstable environment.
However, in the case of listed banks such as Kingdom, NMB, CFX, CBZ and FBC, they have another constituency to answer to –– shareholders.

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