Zimbabwe: Non-Performing Loans Up Amid High Credit Risk

NON-PERFORMING loans (NPLs) rose in the full-year to December 2018 (FY18), as credit risk increased in the economy from 7,08% in December to 8,25% in the prior financial year, the central bank has said.

In his Monetary Policy Statement last week, Reserve Bank of Zimbabwe (RBZ) chief John Mangudya said credit risk had increased in the period under review owing to forward-looking credit risk management tools adopted in line with international best practice.

"Credit risk in the banking sector portfolio increased during the period under review as reflected by the ratio of non-performing loans (NPLs) to total loans of 8,25% % as at December 31, 2018, from 7,08% as at December 31, 2017," he said.

"The increase in NPLs is largely a reflection of forward-looking credit risk management tools adopted by banks in line with the IFRS 9 [International Financial Reporting Standards] accounting standards, resulting in improvement of the banks' risks controls and provisions coverage."

Zimbabwe faced a severe credit crisis when it adopted the use of the United States currency in 2009 after hyperinflation eroded the value of its currency.

As both companies and individuals defaulted on loans, the central bank was forced to intervene through the creation of a company that assumed bad loans. The intervention helped lower the default rate from above 20% at its peak to current levels.

Banks' loans-to-deposit ratio decreased from 44,81% to 40,1% in the same period owing to low lending levels. Mangudya says the position reflects that there is scope for banking institutions to increase lending to various sectors of the economy to aid the country's economic revival.

However, interest rates have remained static at 18% despite rising inflation at 53%. Total loans and advances increased by 11,05%, from US$3,80 billion as at December 31, 2017 to US$4,22 billion as at December 31, 2018. "The increase is largely attributable to lending to the agricultural sector, which increased from 14,7% to 16,39% and other segments, including state-owned enterprises, from 12,1% to 20,1%," Mangudya said in his statement.

Total banking sector deposits amounted to US$10,32 billion as at December 31, 2018, up from US$8,48 billion as at December 31, 2017, but 64,94% of total deposits. In terms of capital, the banking sector remained adequately capitalised, with average tier 1 and capital adequacy ratios of 23,84% and 30,27%, respectively. The banking sector aggregate core capital increased by 15,32%, from US$1,37 billion as at December 31, 2017 to US$1,58 billion as at December 31, 2018, largely due to organic capital growth.

Earnings performance

"All banking institutions, with the exception of one, reported profits for the year ended December 31, 2018, with a 61,06% increase in aggregate profits from $241,94 million in 2017 to $389,85 million in 2018," he added.

Deposit-taking micro banks

On deposit-taking microfinance institutions, Mangudya said the capital levels for the sub-sector grew from US$39,20 million in 2017 to US$63,78 million as at December 31, 2018.

He said one institution's capital levels was in breach of the minimum prescribed capital requirement of US$5 million, but indicated that shareholders' efforts were underway to regularise the capital position of the institution. The RBZ urged players in the deposit-taking microfinance sub-sector to continue to raise capitalisation levels in order to create capacity to underwrite significant business across economic sectors.

Total loans, deposits

Total loans and deposits increased from US$62,02 million and US$6,41 million as at December 31, 2017 to $84,40 million and $23,85 million as at December 31, 2018, respectively. The growth in the loans has largely been financed by deposits, lines of credit and shareholder loans.


"Profitability in the sector remained subdued during the year. The earnings performance was largely weighed down by start-up costs in the newly established deposit-taking micro-finance institutions. New entities typically need two to three years to build their portfolios in order to attain sustainable critical mass and break-even," Mangudya said.

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