Cash-strapped consumers battling three years of acute illiquidity and low salaries are taking their accounts to indigenous banks which are eating into a market previously dominated by foreign-owned banks due to their liberal lending practices and novel products that are on offer.

FOREIGN-controlled banks, which have courted the ire of government and the Reserve Bank of Zimbabwe (RBZ) for charging punitive interest rates and demanding stringent conditions for loan applications, have been rattled by a significant depositor flight as clients move to indigenous financial institutions which are offering relaxed lending conditions.

Cash-strapped consumers battling three years of acute illiquidity and low salaries are taking their accounts to indigenous banks which are eating into a market previously dominated by foreign-owned banks.

Local operating units of foreign banks include Barclays Bank of Zimbabwe Limited, MBCA Bank, Ecobank, Standard Chartered Bank and Stanbic Bank, a unit of the South African headquartered Standard Bank.

Competition to win depositors has been cutthroat since the end of economic turmoil in 2009.

Apart from dominating the share of deposits and profitability, local banks were slowly toppling or matching traditional market leaders in earnings quality and other key ratios, chipping away their influence, an analysis of banking trends for the first half of 2012 by MMC Capital indicates.

"In the half-year to 30 June 2012, the banking sector appeared to be moving towards a more competitive structure as evidenced by the decrease in deposit and advances concentration," MMC said in a report realised to its clients three weeks ago.

"The banking sector HHI (Herfindahl-Hirschman Index) dropped from 1,234 in HY (half year) 2010 to 1,100 in HY 2011 and to 1,005 in HY 2012 reflecting a reduction in market share concentration. This trend can be attributed firstly to migration by depositors from especially foreign banks that have stringent loan application processes to indigenous banks that are giving loans on flexible terms," said the report.

Out of the five foreign banks, only Ecobank reported a rise in deposit market share during the period, riding on an aggressive deposit mobilisation strategy sweetened by generous company-guaranteed loans to formally employed individuals.

Stanbic Bank, which has been lending aggressively to the mining industry, saw its deposit market share tumble by -1,92 percent to 8,4 percent of total sector deposits during the period, from 10,3 percent during the first half of 2011, while British headquartered Barclays, which reaffirmed its cautious lending regime in March, shed -1,2 percent of the deposits market share to end the first half at five percent.

Standard Chartered slid by -0,85 percent to seven percent, from 7,9 percent while MBCA also suffered a significant decline in the deposit market share.

FBC Bank swept to the top five lenders, dislodging Standard Chartered, which fell to sixth position from number four during the first half of 2011.

Four foreign banks lost their market share of the combined US$5,6 billion asset base reported in the banking sector during the period.

Consumer lending has tracked the rise in deposits in indigenous banks.

Loans to individuals contributed 18 percent of the US$3,3 billion worth of loans and advances channelled into the market during the first half of 2012.

Lending to individuals was second only to the services sector, where banks advanced 18,6 percent of the total loan book ahead of all productive sectors, including the troubled manufacturing sector, which received 16,7 percent of banking sector funding during the period.

The mining and agricultural industries received 5,6 percent and 15,1 percent in loans during the period.

Finance Minister, Tendai Biti, is worried by the trend which suggests that consumer lending is what is keeping frail indigenous banks afloat.

The country's consumers were increasingly drifting into a vicious debt trap.

Biti fears that this trend represents a debit to economic growth because very little is being committed to capital investment in Zimbabwe.

"It is sad for an economy like Zimbabwe that the third head in lending is individual lending," said Biti when he presented the 2013 National Budget two weeks ago.

"We have to create bankable assets to enable banks to lend to key sectors," he added.

Foreign banks have resisted pressure from government to release funding to industries to stimulate economic growth, citing extremely high lending risks in Zimbabwe.

The latest statistics might however, force the foreign banks to have a rethink.

The swing by consumers to upcoming local banks bears testimony to the tremendous pressure these banks could be facing. It is the high levels of non-performing loans spiralling towards the watch list of 10 to 15 percent that might force them to watch developments carefully before considering counter strategies to retain their customers.

In March, Barclays Bank managing director, George Guvamatanga said the bank would not relax its lending policy, despite criticism from domestic market regulators. In fact, the bank is hoping that an additional 9 000 clients would sign up during 2012.

Barclays had 155 000 account holders during the full-year to December, 2011.

Economist, Isaac Kwesu, said in a market saturated by intense competition, consumers are now spoilt for choice.

Account holders failing to meet tough lending and account opening conditions in established banks would naturally move to smaller financial institutions.

Kwesu however, cautions that big banks had traditionally been driven by high net worth customers with a solid credit assessment profile.

These qualities were generally lacking in Zimbabwe, where default rates were high.

"Some banks may be using stringent conditions to screen customers," said Kwesu, a former head of strategy for Premier Finance Group, now Ecobank.

"There are risk profiles that banks look at. Standard Chartered Bank was number one in the 1980s, 1990s and 2000s by dealing with high net worth customers," he said, hinting that foreign banks were unlikely to digress from internationally accepted banking practices.

The MMC report indicates that only Stanbic remained in the top five slots of loans and advances during the first half of 2012, with CBZ Bank topping the list at US$725 million in loans and advances.

Zimbabwe's industries are burning due to lack of funding to revive operations that collapsed during a decade of economic turmoil which ended in 2009.

Companies are winding up, cutting jobs or reviewing operations downwards.

Ailing local banks have no capacity to bankroll at least US$2 billion required to reignite operations in industries.

Three weeks ago, a Confederation of Zimbabwe Industries report gave the picture of an industry in crisis.

It said the manufacturing sector was capitulating to macroeconomic pressures being fuelled by a dysfunctional administration that has failed to tackle several challenges that almost disappeared when the feuding political parties sealed a power-sharing pact in February 2009.

Capacity utilisation plunged from 57,2 percent in 2011 to 44,2 percent this year, hardly surprising in view of the liquidity crunch blighting the productive sectors, which are suffocating due to lack of funding.

Still, the 44,2 percent capacity utilisation is not reflective of the haemorrhage in other critical sub-sectors that are operating way below capacity.

The worst performing is the leather and allied products sub-sector, which is operating at 27,5 percent.

Despite the crisis in industry, Barclays Bank remained the most cautious lender, deploying 29 percent of its deposits to the market while Standard Chartered Bank channelled 44 percent of deposit into the market, with MBCA lending 63 percent of its deposits.

Stanbic topped the foreign banks' share of loans to deposits (LDR) at 79 percent.

In contrast, State-controlled Agribank's LDR ended the period at 158 percent, while Capital Bank, majority controlled by the National Social Security Authority, had channelled 124,8 percent of its deposits into the productive sectors.

FBC Bank and Kingdom Bank advanced 96 percent and 94 percent respectively.

According to the RBZ, as at June 30, 2012, total banking sector deposits including interbank deposits and offshore lines of credit were US$4 billion, representing a 31,8 percent increase from US$3 billion as at December 31, 2011.

As at June 30, 2011, combined deposits in the industry were at US$2,9 billion, translating into a year on year growth of 40 percent as at June 30, 2012.

However, this represented a slowdown from the 56,5 percent reported during the comparative period in 2011.

Fifty percent of total bank deposits were concentrated in the top five banks, the MMC report said.

The top five banks were CBZ, BancABC, Stanbic, CABS and Standard Chartered.

Foreign banks' decision not to actively participate on the lending market is one of three key areas where they have clashed with authorities recently.

The other points of contention were the implementation of empowerment laws and their refusal to purchase central bank Treasury Bills (TBs).

On October 4, 2012 the central bank offered its first TBs since the country switched to multi-currencies in 2009.

That offer of 91-day securities failed with the central bank rejecting all the bids tendered.

The central bank also rejected two subsequent bids that were also shunned by foreign-owned banks.

Now, government has threatened to force the foreign banks to take up the bills, although some say that will be improper.

"Banks are resisting because they are not sure government will be able to repay the T-bills," John Robertson, an independent economist, said in a recent interview.

"There's a lack of credibility on the part of the government and the banks don't have much of a gambling instinct," Robertson added.