THE year 2022 was a mixed bag for the banking sector despite strides having been made in certain areas such as digitisation of the sector.  However, the year faced challenges, such as reduced banking of United States dollars by consumers and the outcry around the decision by the Reserve Bank of Zimbabwe (RBZ) to hike interest rates to 200%.  Our deputy business editor Kudzai Kuwaza (KK) caught up with the Bankers Association of Zimbabwe (BAZ) president Mehluli Mpofu (MM) to discuss the performance of the sector in 2022, the challenges faced and the outlook for 2023 among other issues.

KK: How would you describe the year 2022 for the banking sector?

MM: The year 2022 presented some opportunities as well as challenges for the banking industry. On the macro-economic front, we witnessed some macro-economic stability issues. At the beginning of the year inflation started at 60% and accelerated to 192% towards the end of the second quarter of 2022. This was in part due to local currency depreciation, as well as, exogenous factors, such as the increase in international prices of food and fuel.   

However, it is worth noting that after the intervention of the government through the Presidential measures to restore macro-economic stability, boost confidence in the economy, increase the appeal of the local currency, preserve value for depositors and investors and deal with market indiscipline, there was a progressive decline in monthly inflation. The month-on-month inflation declined from a peak of 30,7% in June 2022 to 1,8% in November 2022, which has seen annual inflation falling from 285% in August 2022 to 255% in November 2022.

Albeit the challenges mentioned above, it is pleasing to note that banks have presented satisfactory performance as measured by the performance indicators presented in the midterm policy review. In terms of intermediation, which is the core business of banks, financial intermediation as measured by loans to deposit ratio, improved from 48% to 54% as of June 30 2022. Foreign currency- denominated loans constituted 66% of total banking sector loans, an increase from 37% reported as of December 31 2021. During this period, the banking sector also continued to support the productive sectors of the economy as  evidenced by loans to the productive sectors constituting 76% of total loans as of June 30 2022.

The banking industry also made significant strides as far as digitisation is concerned, which we believe Covid-19 accelerated. Customers can now bank in the comfort of their homes or offices through enhanced digital transactional platforms introduced by banks, which include USD platforms, WhatsApp Banking and Internet Banking. These digitisation efforts have made it possible to pay bills, such as electricity, municipality, tertiary fees, groceries, airtime, ZIPIT, and RTGS in the comfort of one’s home or office. Some of the challenges faced include increased disintermediation as we saw an increase in cash transactions and limited banking of USD by customers. The suspension of lending during the year, albeit for a short period, created a lot of apprehension for the sector given that lending is core to our business. Like any other business, the banking sector also had to contend with the impact of high inflation and a weakening currency on costs and the broader impact of the environment on our staff and customers.

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KK: You have been engaged in negotiations with the government over the bankability of 99-year leases. What progress has been made on this front?

MM: The 99-year lease has been the subject of discussion with the government. BAZ and its legal committee have participated in discussions on making the 99-year lease bankable and progress has been made. Banks have, in the meantime, continued to lend to the agriculture sector with scope to do more.

KK: There have been concerns over the 200% interest rates, which could lead to an increase in non-performing loans. Do you share the same concerns as BAZ?

MM: As BAZ, we share the concern that current interest rates can lead to non- performing loans. At 200%, the implied monthly interest rate of about 17% is substantially higher than the latest month-on-month inflation rate of about 2%. The interest cost is difficult to pass onto the consumer hence borrowers have to absorb this cost at a time when the demand has significantly slowed down thus creating fertile ground for non-performing loans.

Banks, however, strive to continue to enhance and adopt sound credit risk management systems and internal controls to minimise potential nonperforming loans against the background of a challenging operating environment. Effort is being put into engaging borrowers to explore options, which include reducing Zimbabwe dollar-denominated loans, shifting to other  lending products, such as overdrafts where the interest cost can be minimised as well as borrowing in United States dollars where cash flows permit.

KK:   What was your take on the 2023 national budget?

MM: It was gratifying to note that effort is being put into managing the budget tightly as a way of containing inflation. The downward revision of GDP projections indicated that we are in a difficult environment thus requiring a multi-stakeholder approach to resolving some of the challenges we face as a country. As the banking sector, we were grateful that IMTT on foreign currency transactions was reduced to 2% in line with our recommendation. Our view is there is a need to continue to review this and other measures to promote the use of the banking system when transacting.

KK: What are your expectations from the monetary policy to be presented soon by the RBZ?

MM: We hope that effort will be channelled towards building confidence and macro-economic stability and that the close coordination of fiscal and monetary policies in stabilising the economy will be improved so that the gains achieved so far are not put to waste. We hope the following will also be prioritised;  Reviewing the interest rates as dictated by inflation and the amount of liquidity in the market, further liberalisation of the foreign exchange market to enhance efficiency in the operation of the foreign exchange auction system and the willing-buyer willing-seller foreign exchange mechanism and addressing banking sector-specific issues, which are subject to ongoing engagements with the RBZ.

KK: What is your outlook for 2023?

MM: As we approach 2023, the banking sector is cautiously optimistic that the macro-economic environment will improve. In the past few months, we witnessed some stability in terms of inflation and exchange rate.

We witnessed a declining trend on month-on-month inflation from as high as 30,7% in June 2022 to 1,8% in November 2022. We have also witnessed the near convergence between the official exchange rate and that of the parallel market. We acknowledge however that external development, the rains, availability of electricity and level of confidence in the economy among other issues will play a part in determining the outcome for 2023. As the banking sector, we are committed to continuing to play our intermediation role to support economic growth.