Zim financial reforms hammer banks' balance sheets

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Financial sector reforms in Zimbabwe and the pending introduction of new Zim dollar notes are bad news for the country's banking industry, analysts in Zimbabwe have said in a new report, arguing that the reforms can potentially result in a liquidity crisis.

In a report titled Zimbabwe banking sector: Navigating a challenging monetary space, Lloyd Mhlotswa and other analysts at IH Securities warned: "The floating of the ZWL$ resulted in the translation of foreign denominated assets at the interbank rate.

"In cases where the banks have net liabilities denominated in foreign currency (this) resulted in a larger increase in liabilities than assets," said the analysts in the report.

"This (financial reforms) will result in the decline in the capital of the bank ensuing a reduction in the lending capacity of the bank," the report adds.

On June 24, Zimbabwe Finance Minister Mthuli Ncube ended the legal tender status of international currencies such as the rand, US Dollar, Botswana Pula and others.

In the past week, Ncube has been quoted saying the government will introduce new Zim dollar notes soon to replace the bond notes currently in use. However, analysts say banks’ lending capacity will be curtailed by liquidity shortages likely to emanate from the continued floating of the exchange rate and the introduction of the Zim dollar.

Banks in Zimbabwe include subsidiaries of regional and international banks such as Nedbank, Standard Bank, First Capital Bank, Ecobank and Standard Chartered. Local banks include CBZ, FBC and CABS, among others.

Total Zimbabwe banking sector deposits for 2018 amounted to $10.32bn, with foreign currency accounts accounting for 6.53% of this at $673.81m. Zimbabwe is also battling to prop up its exports, which for the full year 2018 period grew by 13.6% to $4.3bn.

In the report, which was released on Friday, IH Securities said that "a balance should be struck by the monetary and fiscal authorities in terms of balancing between stabilising inflation and exchange rate volatility with ensuring adequate supply of liquidity to the productive sectors" of the economy.

"An aggressive decline in liquidity will result in the decline in the supply of credit to the productive sectors that drive the economy, leading to poor economic growth due to lack of adequate working capital and capital expenditure."  

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