Zimbabwe: Currency Changes Choke Banks

ZIMBABWE’S banking sector is skating on thin ice due to a illiquidity crunch that has drastically reduced the financial institutions’ capacity to lend following the reintroduction of a local currency, a report has revealed.

According to the report by brokerage research firm IH securities titled, The Zimbabwe Banking sector: Navigating a challenging monetary space, released on Friday, the currency reforms created a mismatch between foreign currency-denominated assets and liabilities on some banks’ balance sheets.

The distortions have stifled the financial institutions’ lending capacity, the report says.

"The floating of the Zimbabwe dollar resulted in the translation of foreign currency denominated assets at the interbank rate," reads part of the report.

"In cases where the banks have net liabilities denominated in foreign currency, [this] resulted in a larger increase in liabilities than assets.

"This will result in the decline in the capital of the bank ensuing a reduction in the lending capacity of the bank.

"As shown in the proforma 31 December 2018 balance sheets, Agribank and Ecobank would have been insolvent, further increasing liquidity risk within the banking sector."

In June, the government made the real time gross settlement (RTGS) and bond notes the country’s sole legal tender, ending a decade of dollarisation.

The move was seen as another step towards the relaunching of the Zimbabwe dollar.

IH said in order for financial institutions to resume lending and improve funded income under the new dispensation, the banking sector would need to increase capital requirements.

It warned that the minimum capital requirement for commercial banks, which was set at US$100 million to be achieved by 2020, had effectively been reduced to US$10 million after the adoption of the mono currency regime."The implication is that the real value of capital is now US$10 million, which in our view, will cause most banks to re-assess risk and their lending capacity and further strain liquidity," it added."Another point to note is that the assumption of the US$1,2 billion of legacy debt at a 1:1 by the central bank will result in the physical mopping-up of $1,2 billion from the banking sector, also effectively straining liquidity."IH said the indication that the Reserve Bank of Zimbabwe (RBZ) had no plans to increase the minimum capital requirements from $100 million after the promulgation of the local currency at a time when only four banks had reached core capital over and above the 2020 targeted prescribed minimum capital requirements of $100 million, spelt disaster.The firm forecasts softening […]

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