Banking sector credit risk falls, says RBZ

Business Reporter

THE Reserve Bank of Zimbabwe (RBZ) says the banking sector recorded significant improvements in the credit risk landscape, as reflected by the decrease in the ratio of non-performing loans (NPLs) to total loans.

Latest official figures from the apex bank indicate that the aggregate NPL to total loans ratio has improved to 2,02 percent as at June 30 2024, a decrease from 2,17 percent reported on March 31, 2024.

This trend reflects broader recovery and stability within the financial institutions, with current NPL ratios remaining comfortably below the global benchmark of 5 percent.

Historically, the country’s financial landscape has been characterised by turbulence, primarily due to exceedingly high levels of NPLs. Several Zimbabwean banks have in the past faced dire consequences after recording elevated NPL ratios, which contributed to significant financial instability and, in multiple instances, the failure of financial institutions.

A notable example of a bank affected by this crisis is Interfin Bank, which was placed under curatorship in 2012 after grappling with unsustainably high NPL ratios.

Ultimately, the bank was liquidated.

Trust Bank Corporation was similarly affected in 2014 and eventually lost its banking licence due to severe liquidity challenges and a huge volume of defaulted loans, which rendered it incapable of maintaining viability.

Another case is that of Royal Bank, which closed its doors in 2012 after failing to comply with regulatory capital requirements amid escalating loan defaults.

Allied Bank also met its demise in 2015, primarily due to liquidity struggles and an inability to satisfy necessary capitalisation obligations.

Genesis Investment Bank, on the other hand, succumbed to the pressures of a high NPL ratio, coupled with insufficient capital resources, in 2012.

Following challenges faced by banks during the 2003/2004 banking sector crisis, the central bank recognised the urgent need to address systemic vulnerabilities linked to poor credit risk management and inadequate capital buffers.

In response to the escalating NPL ratios, which had soared to a staggering 20,45 percent across the banking sector at that time, the RBZ intervened with proactive measures, including the establishment of the Zimbabwe Asset Management Company (ZAMCO) in 2014 to acquire NPLs from commercial banks.

ZAMCO chief executive Dr Cosmas Kanhai told this publication last week that his company was in the process of winding up operations after repaying the US$1,2 billion it received from the RBZ to acquire all NPLs.

“You would recall that when ZAMCO was formed, it was mandated to acquire NPLs in the banking sector and this mandate was supposed to run up to 2025 and we managed to clear all NPLs well ahead of the stipulated 2025,” he said.

As it stands, the RBZ’s actions appear to have fostered a more resilient banking sector, one that has learned from past challenges and is now equipped to navigate the complexities of credit risk more effectively.

“Credit risk in the banking sector remained low and marginally improved, as reflected in the aggregate non-performing loans to total loans ratio of 2,02 percent as at 30 June 2024, compared to 2,17 percent reported as at 31 March 2024. The reported banking sector NPL ratio was within the bank’s risk appetite and internationally acceptable threshold of five percent.

“The banking sector continued to maintain acceptable credit risk management systems, which contributed to the low aggregate non-performing loans to total loans ratio,” said RBZ in the banking sector report for the quarter ended June 30, 2024.

As of June 30, 2024, RBZ reported that the total amount of loans and advances within the banking sector reached an impressive ZiG27,45 billion.

Notably, foreign currency-denominated loans constituted a significant portion of this figure, accounting for approximately 88.88 percent of the sector’s overall lending portfolio.

This highlights the growing reliance on foreign currency financing within the Zimbabwean banking landscape, emphasising the importance of international currencies in supporting local economic activities and financial stability.

During the period under review, banking institutions continued to play their financial intermediary role with considerable funding to the productive sectors of the economy to support economic growth

“NPL ratios have recently stabilised within safe levels, well below the global threshold of 5 percent, largely due to lessons learned from past financial challenges.

“Zimbabwe’s banking sector, having endured a turbulent history with high NPL levels, has been reshaped by these experiences — some of which led to the failure of several banks,” said Equity Axis.