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Bank lending on the decline: What will drive economic recovery?

By Perry Munzwembiri

Since the turn of the new millennium, Zimbabwe’s economy has been on a downward trajectory, characterised by hyperinflation, chronic unemployment and soaring national debt levels.

RBZ Acting Governor Charity Dhliwayo Minister of Finance and Economic Development Patrick Chinamasa and his Deputy Samuel Udenge
RBZ Acting Governor Charity Dhliwayo Minister of Finance and Economic Development Patrick Chinamasa and his Deputy Samuel Udenge

The introduction of the multi-currency system reversed this negative trend and the economy appeared to stabilise somewhat.

However, recent economic events give evidence of an economy that has plateaued. The question begs however; what role if any can banks play in aiding the Zimbabwe’s economic recovery?

In modern financial markets, banks play an intermediary role between businesses, individuals as well as households. This intermediary role implies that banks bring together borrowers and savers in markets. Savers with surplus funds deposit their money with banks, and earn interest for doing so.

On the other hand, individuals and businesses can either borrow for consumption or investment purposes respectively from the banks. It is through this process of accepting deposits and lending them out that banks play a crucial role in an economy.

A Closer Look at Home

Production in local industries has remained hamstrung, and this has had significant knock on effects as with no production, there is no employment, no revenue growth; ultimately leading to low disposable incomes.

The economic environment presently prevailing provides space for the banking sector to step in with funding and aid economic recovery nevertheless.

Only to the extent that the banking sector fully plays its intermediary role and lends out money for productive purposes, can it contribute to the economy`s recovery. Statistics reveal however, that credit to the private sector actually declined in January to 3, 56 Billion from 3, 65 in December 2013.

This is hardly surprising given the liquidity challenges, the suppressed deposit base we witness locally and the need for banks to raise capital. Without the much needed credit creation by the banking sector, the economy cannot be stimulated into the recovery mode it badly needs.

Faced with shortage of bank funding, historically economies have recovered from economic crises either through increased public sector spending, consumer spending and private sector spending, to spur economic activity.

However the Zimbabwean situation shows us that all these types of spending have been greatly constrained and the economy has stagnated, as witnessed by the economy entering into deflation last month. This, underscoring the need for an efficient banking sector if the economy is to recover.

The overall health of the banking sector or lack thereof however has somewhat been symptomatic of the well-being of the economy on the whole. Since 2003, there has been on average, one bank crisis every year, and this reflects the overall dysfunctional economic system in the country.

A fully fledged banking sector that is able to perform its roles of credit creation, providing efficient payment platforms and a channel for transmission of economic and monetary policy is thus critical for our economy`s recovery prospects.

Why are banks not lending?

Lending by the banking sector has been declining, and the logical question to ask would be why banks are not lending money out when the market needs it the most? The temptation would be to go ‘gung ho’ and lay the blame solely on the banks, as some authorities have eagerly done.

This however, is only one side of the story.

Banks have actually shown a willingness to lend despite the subdued economic environment in the country, as witnessed by steadily increasing Loan-Deposit-Ratios since 2009.

As at 31 December 2013, the banking sector loan-to-deposit ratio in Zimbabwe stood at 78, 29% against sub-Saharan Africa`s average (excluding South Africa) which stood at around 75.51% in 2013. Clearly, the intention from banks to lend money out has been displayed.

It would appear then, that the decline in lending has had more to do with the demand-side than the supply-side. With high incidences of non-performing loans estimated to be around 15.92%, naturally, banks would be more cautious about whom they lend money to.

Entities and individuals who borrowed money post the dollarisation have struggled to repay those loans and the credit default rates have been high.

On the other hand, the persistent liquidity challenges, transitory nature of deposits and the need for banks to recapitalise so they can comply with the regulatory capital requirements have also contributed to banks withholding cash.

A Cue from the Developed Markets

Commenting on depressed lending by UK banks in the aftermaths of the Global Financial Crisis, Andrew Smith, Chief Economist at KPMG said, “Economies can grow for a period without lending growth, but it is very difficult to believe they can go on growing without it.”

Whoever may be to blame for the reduction in domestic credit from banks, it is clear however that if the country is to progress economically, funding from banks will be critical. Not just any type of lending however, but lending to the productive sectors of the economy.

Since the inception of the Global Financial Crisis in 2008, the UK government has given over £1 Trillion in support to the UK banking sector. This financial support is more than half of the UK`s entire annual economic output.

The UK government insists that this is because banks provide access to money for individuals and businesses to invest and grow the economy. Subsequently, as more money is available to be lent out, the economy grows as economic production is adequately funded.

Bank Lending Key to Economic Recovery

The banking sector is a vital cog in the country`s economic recovery drive. Functional and adequately funded banking institutions are thus essential, for creating credit in the market, providing mechanisms to transmit economic policy and provide channels for payments in an economy.

That Zimbabwe has a vibrant banking system that is effectively regulated and conforms to International best practice cannot be overemphasised. On our path to economic recovery, increased productive lending from banks will stimulate growth and subsequently, economic recovery.

It is difficult therefore to see what will drive Zimbabwe`s economic recovery in an environment where banks are reducing their lending.