The Sunday Mail
Business Editor’s Brief
OF late there has been a worrying vibe – maybe justifiable – which, if left unchecked, might ultimately lead to a credit freeze on the local financial markets.
Banks are becoming increasingly wary of borrowers as loan defaults continue rising. Recently, Barclays Bank Zimbabwe indicated that the lender, which is set to access US$100 million in lines of credit this month, might be forced to overlook individuals and other small enterprises in order to avoid rising defaults.
The Infrastructure Development Bank of Zimbabwe, presently administering the US$200 000 Meikles Horticulture Outgrower scheme, has similarly decided to tighten the criteria of vetting potential beneficiaries.
Under the new dispensation, borrowers should provide surety guarantees from guarantors in formal employment. Unsurprisingly, many borrowers have been spooked by these conditions that are now a sector-wide phenomenon.
But there are real fears that if banks continue on the same path this might trigger a credit freeze in a market that is already poisoned by a biting liquidity crunch. Equally, there are fears that if the practice becomes entrenched, this will create a vicious circle of cash shortages, low consumer spending and declining profits – the hallmarks of a deep-seated deflationary environment.
Clearly, the economy doesn’t need such “sanctions” from the banking sector; if anything, financial institutions are expected to deepen their intermediary role in order to facilitate the transition of the local economy from stability to growth. Yes, there currently exists a serious problem where loan beneficiaries are defaulting and this needs to be dealt with in a better way.
As at December 2013, non-performing loans stood at 15,9 percent (US$592 million) of the total loans and advances of the banking sector, way above the 5 percent international benchmark.
It will be folly to accuse ordinary borrowers of being the main culprits that are absconding from paying their obligations as bankers themselves have also been helping themselves to huge loans that they are struggling to repay.
Statistics from the RBZ show that NPLs within insider loans stood at 67 percent (US$117 million) of the US$175 million that was loaned out to related parties by the end of last year. So, the answer doesn’t lie in tightening the screws, especially on those that need the money the most.
Granted, non-performing loans cause disintermediation of bank-system lending through the erosion of bank profitability, economic stagnation and declining confidence in the financial system, but what the country needs at the moment are angel investors and angel bankers that are willing to loosen their purse strings to sponsor projects that can spur the local economy.
Many of the successful companies that have come out of America today, especially from Silicon Valley in Northern California, owe their success to angel investors who put their money on the line on start-ups that were being driven by people who did not have a penny to their name.
Budding local entrepreneurs desperately need financial support from financial institutions, and banks must not hold back.
There are more practicable, rational and moderate ways of balancing the need to create credit and also minimise loan defaults. Surely, there is no need to squash a mosquito using a sledgehammer. The Bankers’ Association of Zimbabwe, the Reserve Bank of Zimbabwe and Government need to expeditiously set the platform for the establishment of a National Credit Reference Bureau.
Though mulled more than four years ago, there hasn’t been any meaningful progress in bringing it to life.
In essence, such a bureau will be able to address the challenges of information asymmetry on borrowers that are multi-banked, ensuring that banks can easily extend credit to individuals and companies whose credit history is auditable.
It is encouraging to note that the International Finance Corporation, an arm of the World Bank, has indicated that it is ready to lend a hand in establishing the institution.
Admittedly, this is not a small task as such a project will inevitably entail amending the Banking Act.
By creating an information ecosystem which not only involves banks but retailers as well, credit bureaux can help institutions foster a powerful default predictive power. Therefore, all stakeholders that are charged with the formation of this key institution need to ensure that it is given the priority it deserves.
There are a lot of examples where credit bureaux have helped curb bad debts and create credit.
Brazil, Argentina and Kenya stand out. Kenya, which has 42 operational commercial banks, had for long been affected by the scourge of non-performing loans, especially from the mid-1980s.
However, researchers managed to establish that there was a significant decline in non-performing loans after the introduction of CRBs in 2010, 2011 and 2012. Between 2007 and 2009 the ratio of NPLs stood at 15 percent and dropped to 11 percent in 2010.
By 2012 the ratio was measured at 11,5 percent.
