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Credit crunch threatens loan growth

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Zimbabwe’s banking sector client loan growth will remain slow, contracting by a projected 4% year-on-year by end of 2017 due to the credit crunch, an international research firm has said.

BY FIDELITY MHLANGA

According to BMI, a subsidiary of Fitch Group, government debt was crowding out private sector finance and potentially exposing the banking sector to default as Zimbabwean banks were buying Treasury Bills (TBs) at a faster rate than retail lending.

The research foresees client loan growth reaching 2% year-on-year by end of 2018.

“Across the banking sector, TB purchases rose by around a third while loans and advances to other areas of the economy stagnated. As a result of the credit crunch, we believe client loan growth will remain slow, reaching 2% year-on-year by year end 2018, after contracting by a projected 4% by year-end 2017,” BMI said.

According to the mid-year monetary policy statement, loan to deposit ratio decreased to 52,1% by June 30 from 63% registered in the same period last year.

The amount of TBs being held by Zimbabwean institutions, mostly banks, rose by over 20% in the first half of the year to $2,5 billion, of which over a third was used to finance government expenditure.

“TBs are also being used heavily to fund growing government deficits, thereby exacerbating the country’s credit crunch. Banks are, meanwhile, hiking charges for electronic transfers, which are largely responsible for profit growth. The unsustainable growth and high risks in the banking sector contain the potential for a systemic crisis,” BMI said.

The research firm said electronic transfer and transaction fees were on the increase for making payments, rather than hard cash, which allow banks to make profits, “we do not believe it is sufficient to offset its substantial exposure to sovereign risk over the coming quarters.”

BMI said the country’s micro-finance

institutions (MFIs), which represent around 6% of the total loan book in the financial sector, were faced with potentially significant non-performing loans as the liquidity crisis hits the ability of companies and individuals to repay their debts as borrowers have low disposable incomes and MFI operational costs are relatively high.

“At-risk loans were 12,4% at end-Q117 (first quarter 2017), up from 8,3% at end-2016, which was against the overall trend in the banking sector and threatens to climb with inflation. With around 100 MFIs in Zimbabwe, consolidation and capital injections are necessary to maintain and grow services in under banked rural areas,” BMI said.

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