This week on Tuesday June 7, NewsDay turned one year old. Financial Sector Spotlight (FSS) extends hearty congratulations to Alpha Media Holdings, the publishers of the paper.
All roads lead to the Harare Gardens where the 1st Anniversary Bash takes place this Saturday. On a related note, this week’s article also marks the 1st anniversary of FSS.
For the past one year, I have contributed to this column week in, week out and though it sometimes felt like some kind of endurance test to do so, I have thoroughly enjoyed the ride.
We are proud that the column has grown together with the NewsDay and look forward to many more years of fruitful association.
As intimated to you earlier in the year, plans are already afoot to compile a selection of the 50 articles published so far into a commemorative book tentatively titled Financial Sector Spotlight:
Banking Insights from an Economy in Transition. Meanwhile, it’s business as usual. Every financial reporting season, we at TFC Capital take time to review financial results partly to measure bank performance and partly to gauge the mood of the sector in relation to its external operating environment.
The review is the basis of the Top 10 Concerns of the Banking Sector which we publish periodically and expect to evolve into the Financial Sector Confidence Index in due course as we further refine the analysis criteria.
In pursuing this initiative, we are inspired and motivated by the need to develop home-grown performance measurement matrices for the financial services sector.
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Now that almost the entirety of the banking sector has released their financial results, we have occasion to report our findings.
While we previously highlighted the tenure of the multi-currency regime as a concern of the banking sector in the January report, an analysis of the 2010 financial results overwhelmingly cast the adoption of the multi-currency regime as a dominant factor to which current stability is largely attributed.
Dollarisation ushered in stability by putting an end to rapid money supply growth, controlling spiralling price increases and curtailing speculative activities, all of which contributed towards the containment of inflation.
These hygienic factors combined with Treasury’s cash budgeting system and general fiscal prudence to create a liberalised operating environment which ushered in positive economic growth of 8,1%.
On the downside, the multi-currency regime resulted in reduced capacity utilisation in the banking sector as reflected by the reduced number of active accounts.
Some of the issues we highlighted as concerns in January have been displaced from the list according to the latest survey. These include the restitution of statutory reserve funds and Basel Accord implementation.
Others such as the onslaught of mobile banking and inequity in the distribution of deposits were viewed as opportunities and showed up in banks’ strategies for 2011.
An analysis of the financial results for 17 commercial and merchant banks yielded 15 key challenges namely lack of liquidity, lack of a lender of last resort, a non-functional inter-bank market, short-dated deposits, perceived high country risk, shrinking margins, limited foreign direct investment (FDI), high cost of funding, high operating costs, high external government debt, a high level of financial disintermediation, lack of an independent credit rating arrangement, high default risk, lack of tradeable money market instruments such as Treasury Bills and inflationary pressures.
Previously the survey was based mainly on observation of the operating environment and our reading of public sentiment, but this time more systematic criteria has been used and it was informed by the views of multiple banks.
The results are therefore sufficiently representative of the mood in the banking sector. The table below illustrates the concerns, rated according to the number of times they were cited by individual banks.
Predictably, lack of liquidity was considered the biggest threat to growth prospects in the sector. Interestingly, high default risk did not appear to be a major concern for banks in 2010, though it has dramatically evolved into one in 2011, given the Minister of Finance’s recent statement that 34% of banking sector loans are in default.
Under such conditions, a credit bureau to improve transparency in the credit markets becomes a priority but interestingly, Barclays continued to be the lone voice calling for its establishment to be prioritised.
Though the high level of disintermediation did not get notable attention, it was nevertheless cited as a concern and banks have been taking bold steps to deal with it by embarking on various initiatives targeting the unbanked.
Lack of tradeable money market instruments and inflationary pressures were also mentioned but not widely acknowledged as concerns.
Other isolated issues which were cited as impediments to growth included the impact on some banks being on the USA sanctions list; the delays in recapitalisation and shareholder changes which in some cases affected corporate stability. What are your views on these concerns?
Please weigh in with your insights on [email protected].
Omen N Muza is a banker and Managing Director of TFC Capital (Zimbabwe) (Pvt) Ltd. He writes in his personal capacity.
