29 August 2014

Zimbabwe: Monetary Policy to Strengthen Financial Sector

THE Reserve Bank of Zimbabwe (RBZ) Governor, Dr John Mangudya has announced new measures aimed at maintaining the stability of the financial sector and improve the overall liquidity situation in the country. The financial sector has been fragile in the multi-currency regime owing to multiple factors that include lack of lender of last resort, an unstable deposit base, under-capitalisation, poor corporate governance and high non-performing loans. The 2014 mid-term monetary policy statement (MPS) is an attempt by the governor to provide solutions to these myriad challenges facing the country and the banking sector in particular. The monetary policy contains bold policy advice to the government and is a game changer for the banking sector. The theme of the MPS is Back to Basics.

Key MPS highlights

The governor introduced three-tier minimum capital requirements for banks namely Tier I (minimum of US$100 million by 2020), Tier II (US$25m) and Tier III (US$7,5m). The Tier I houses large commercial indigenous and foreign banks, Tier II will have commercial banks, merchant banks, development banks, finance and discount houses whilst Tier III will house deposit taking micro-finance institutions. Banking institutions are required to submit revised capital plans for December 2020 based on their chosen strategic group by December 31 2014.

The central bank made a resolution to establish a national special purpose vehicle called the Zimbabwe Asset Management Company to address the toxic assets bedevilling the banking sector. Cabinet has approved the establishment of a National Special Purpose Vehicle (SPV) to acquire NPLs from Banks in order to clean up and strengthen banks' balance sheets and provide them with the liquidity to fund valuable projects for the economy to rebound and to mitigate loss of confidence. Non-performing loans (NPLs) are threatening the viability and stability of the banking sector. As of June 2014, NPLs are estimated to have stood at 18,5 percent of total loans from 15,9 percent as at December 31 2013.

To help improve the liquidity situation, the Afreximbank guaranteed interbank market facility of US$100 million is expected to be operational between end of August and mid-September 2014. This will not create new money but allow solvent banks to borrow or lend on the back of the AFTRADES. By unlocking the interbank market, deficit banks could be afforded access to deposits in surplus banks thus allowing more circulation of money in the economy. Measures to encourage long term savings are also required to enable the banking sector to create long term assets.

As part of efforts to prevent money laundering, the cash export limit per person was reviewed downward with immediate effect to US$5 000 from US$10 000. The central bank also reviewed Nostro Account Balances threshold from 30 percent of FCA balances excluding domestic FCAs to five percent of total FCA balances. To prevent spurious bank charges, the central bank in consultation with the BAZ has formed a forum which will meet on a quarterly basis to review bank charges, interest rates and credit reference system among several moral suasion aspects that affects the banking sector.

Banking sector developments

As at June 30 2014, a total of 14 out of 19 operating banking institutions (excluding POSB) were in compliance with the prescribed minimum capital requirements. Total banking sector deposits increased by 4,86 percent from US$4,73 billion as at December 31 2013 to US$4,96 billion as at June 30 2014, while loans and advances marginally increased from US$3,70 billion to US$3,81 billion, during the same period. The level of non-performing loans has risen from 15,9 percent as at December 31 2013 to 18,5 percent as at June 30 2014. The monetary policy also support the continued use of the multi-currency regime as speculation over the re-introduction of the Zimbabwe dollar has created panic among depositors.

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