ZIMBABWE’S banking sector has taken significant steps to bolster its defences against non-performing loans (NPLs), using more robust underwriting and risk management strategies, according to an industry official this week.
These measures are aimed at ensuring long-term stability and fostering a healthier financial environment within the sector.
As of June 30, 2024, the country’s NPL ratio stood at 2,02%, a marked improvement compared to previous years, according to the Reserve Bank of Zimbabwe (RBZ).
This comes after banks adopted a more cautious approach to lending, a shift from the 2014 crisis when NPLs surged to 20,14%, threatening the sector’s viability.
“Zimbabwe’s NPLs ratio stood at 2,17% in March 2024, which remained favourable considering the international benchmark of 5%,” Bankers Association of Zimbabwe (BAZ) president Lawrence Nyazema told the Zimbabwe Independent.
“Banks continue to strengthen their underwriting in order to minimise the incidences of non-performing loans.”
An NPL refers to a loan that is in default due to the borrower’s failure to make repayments.
Banks are legally required to report their NPL ratios as a measure of credit risk and loan quality.
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A high ratio indicates a greater risk of loss for the bank, while a low ratio reflects a healthier loan portfolio with lower risks.
When compared to regional counterparts, Zimbabwe’s NPL ratio remains one of the lowest.
South Africa recorded an NPL ratio of 5,5% in June 2024, Zambia stood at 3,7% in March, while Kenya’s NPL ratio reached 16,1% in April. Botswana had a ratio of 3,7% in February 2024, according to BAZ data.
However, analysts caution that Zimbabwe’s low NPL ratio should not be viewed as an indication of a thriving economy or a highly robust financial sector.
“While the low NPL ratio in Zimbabwe’s banking sector is encouraging, it is important not to misinterpret it as a sign of a thriving economy or a robust financial services industry,” United Kingdom-based economist Chenayimoyo Mutambasere said.
“The low NPL figure is partly a result of limited access to finance, which is often available only to a select group of corporate elites or individuals with secured assets suitable for underwriting.
“This approach has inadvertently excluded SMEs, start-ups and young people who are not yet on the property ladder from accessing necessary financial resources.”
Mutambasere recommended the implementation of a comprehensive Know Your Customer (KYC) framework to allow banks to assess the creditworthiness of a broader range of potential borrowers.
She said through leveraging stress testing and affordability assessments, banks can responsibly extend credit to a wider market, and promote inclusivity.
“Ultimately, the NPL ratio should reflect a balanced economy where access to finance is equitable and widespread, rather than a limited, exclusive environment. The goal should be to create a financial ecosystem that supports growth and economic participation across all sectors,” Mutambasere said.
Economist Vince Musewe also stressed the importance of managing NPLs to prevent systemic risk.
“Despite the challenges our banking sector remains well managed as they understand the risks,” Musewe said. “Although this stifles economic development due to limited business finance, we at least have a viable banking sector.”
The banking sector continues to face a range of challenges that have constrained lending. Among the most pressing issues is the lack of a lender-of-last-resort function for United States dollar-indexed transactions, coupled with a liquidity crisis in the market.
These economic difficulties have forced banks to adopt a more risk-averse stance, wary of extending credit amid prolonged market volatilities.
This caution, however, comes at a time when businesses urgently need funding to recover from ongoing economic turmoil.
As a result, Zimbabwe’s loan-to-deposit ratio has lagged behind other regional countries like Malawi and Botswana.
According to BAZ statistics, Zimbabwe's loan-to-deposit ratio stood at 57,7% in June 2024, compared to Malawi’s 59,7% and Botswana’s 73,3%.
Nyazema said banks were required to maintain a prudential liquidity ratio of 30%, which effectively reduces the funds available for lending.
Other regulatory requirements include a 15% statutory reserve ratio on Zimbabwean dollar demand deposits, and 5% on savings and time deposits.
For foreign currency deposits, the statutory reserve ratios are set at 20% for demand deposits and 5% for time and savings deposits.
Despite these hurdles, Zimbabwe’s banking sector remains committed to fortifying its foundations while seeking new ways to foster growth, support businesses, and ensure long-term stability in the face of continued economic uncertainty.
