Understanding lending policies of local and international banks

Terence Zimwara

The sharp differences between the lending policies of locally owned financial institutions and that of foreign owned banks calls in into question the real objectives and purpose of banks in an economy.

The recent round of results briefing by financial institutions has once again underlined the different approaches that banks have taken in line with their ownership structures.

Locally owned financial institutions led by CBZ holdings, have pursued an aggressive lending policy as evidenced by the respective banks financial results.

CBZ Holdings which, is the biggest bank in the country in terms of deposits mobilized, has been lending quite aggressively since dollarization in 2009. At the time of reporting, CBZ had deposits of $1.33 billion which is the highest by any single bank.

Advances on the other hand were at $1.03 billion for the period under review translating into a high loan deposit ratio of about 77 percent.

According to Dr Mangundya the chief executive officer this was well within CBZ board approved ratio of between 75 and 80 percent.

Dr Mangudya told a recent analyst briefing that their philosophy was that banks should lend and that his organisation would still lend if it made business sense to do so. CBZ’s business model is one guided by the desire to maximse shareholder value and not necessarily to maintain a particular loan to deposit ratio.

However Dr Mangudya believes that financial institutions need to play their part in turning around the economy because real economic growth can only come about if there is lending and that it is the trend elsewhere in the world.

Religiously sticking to set lending criterion, while ignoring the fundamentals on the ground may not get the best results, not only for the banks but for the general economy.

Dr Mangudya cited the example of a local baking company, Lobels which nearly collapsed a few years ago under the weight of heavy debts. CBZ along with other financial institutions agreed to save the bakery from imminent collapse by converting their loans into equity.

Consequently Lobels survived and now it is a major player in the bread making industry with capacity utilization at around 70 percent according to Dr Mangudya.

This would not have been possible if CBZ and other mainly indigenous banks had followed up with the option of liquidating the company.

This then underlines why most locally owned banks seem to have high lending ratios relative to deposits mobilized. The ratios have consistently ranged between 70 and 80 percent.

Foreign banks on the other hand, have been reluctant to lend as evidenced by their loan to deposit ratios that have rarely gone beyond 50 percent.

For instance, Barclays Bank whose major shareholder is Barclays plc reported that its deposits had grown to $248 million while advances were restricted to just over $115 million, roughly a loan to deposit ratio of about 46 percent.

According to Barclays, this was in line with their safe bank model which they had to adhere to meaning they would continue with the rigorous vetting of loan applications to minimize the risk of default.

The scenario with Barclays Bank is almost the same with all other foreign owned financial institutions, they have set limits, presumably set by the parent companies.

One source with a foreign owned bank claimed that his firm had a country limit set for them by the parent company.

“We have a country limit for advances set at $50 million, we cannot lend beyond that amount for one single customer,” said the source.

Consequently when a client wants a loan in access of $50 million, the foreign owned bank is forced to refer the client to a locally owned bank which is nominally more flexible in loan approvals.

A major plus for this model is that loan impairments are kept at very minimum, less than one percent in the case of Barclays.

One executive of a foreign owned bank claimed that they were hidden shocks in the market and it was necessary for them to take steps to pre empt any potential chaos to their institutions.

The so called hidden shocks are related to Zimbabwe’s perceived high country risk.

 A high country risk concerns a foreign investor more than it does to local investor and perhaps that is why only foreign banks have followed a policy of conservative lending as a shield against the perceived high country risk.

The high levels of non performing loans (NPL) is something that has been an Achilles heel for the financial services sector and it is one area which foreign banks use to justify their conservative lending policies.

There is certainly a clear distinction between the levels of NPLs of foreign owned banks and that of locally established banks with the former using this to point to the efficacy of their lending approach.

NPLs are lower in foreign owned banks and in that aspect they are seen as more stable than their local counterparts. However others have countered that this comes at the expense of industry that is starved of critical credit and the net effect is seen in stunted recovery of the economy thus far.

Dr Mangudya however, believes the lack of an interbank lending market and that of lender of last resort makes the entire financial system vulnerable to very minor shocks.

 As such he called on authorities to expedite the resuscitation of the interbank lending market as one way of minimizing risks to the country’s financial system. Once the environment improves, Dr Mangudya believes his group will lend even beyond the 80 percent maximum ratio that his board has set.

In fact there are instances where banks in some countries lend close to 100 percent of deposits mobilized and this is never an issue added the CBZ boss.

In South Africa, Nedbank one of the major financial institutions in that country, reported in its 2013 interim results that its loan deposit ratio peaked to 96.3 percent from 95.7 percent in the previous period.

Nedbank which has its roots in SA is a solid and profitable bank in spite of the high loan deposit ratio mentioned above. There is no doubt that the Zimbabwean economy and that of SA are worlds apart and perhaps that could be reasons why Nedbank is able to lend that aggressively.

Back in Zimbabwe, the government has announced intentions to restart the interbank lending market as well as the lender of last resort function as it attempts to return normalcy to the financial services sector.

It remains to be seen if the government will come through on this but certainly if that happens, it will not immediately change the sharp difference in lending policies between locally owned banks and foreign owned banks.

Zimbabwe ready for savings?

Terence Zimwara

The hyper inflation of the last decade is best remembered for the demise of the Zim dollar and the disappearance of products from shelves among other things.

However, the one serious consequence of hyperinflation, something which continues to inhibit Zimbabwe’s economic recovery- is the disappearance of savings.

In the first two decades since independence, savings were very much a part of life for most of the working class. Products which ranged from savings fixed deposits accounts to life assurance policies were popular with the general working population.

The uptake of these products by the majority of the working population then was an indicator of a functioning and healthy saving culture.

The hyper inflation that characterized the economy between the years 2000 and 2008 when the local currency finally collapsed played a huge part in destroying savings not to mention the culture saving itself.

In fact the dearth of the savings culture started well before 2008 but it became apparent in 2009 when Zimbabwe adopted the so called multiple currency system.

The use of multiple currencies had one major consequence for the economy, the central bank’s inability to perform the lender of last function coupled with the absence of an interbank lending market. It also meant that the central bank lost one of its critical function, that of creating credit and printing of money.

With no foreign direct investment flowing into the economy as a result of the perceived high country risk, suddenly there was no money available for funding medium to long term credit needs of industry.

In fact since 2009, the majority of deposits that have been mobilized by banks have remained transitory or very short term, resulting in the mismatch between what industry needs and what banks can avail.

On one hand, you have very short term funds available for lending at very high interest rates against the credit needs of industry which are not short term by any measure.

The high country risk means that the few lines of credit that the country has managed to mobilise come at a premium which often results in local firms not utilizing such facilities.

It is in this context that one financial institution, CBZ holdings launched a set of ambitious products which it hoped would allow it mobilize medium to long term deposits.

Speaking at a results briefing recently, CBZ chief executive, Dr John Mangudya told analysts that his group’s ‘CBZ cash plus’ product range had registered some success in mobilizing longer tenure deposits.

According Dr Mangudya, at least $20 million had been raised across the entire product range and this was pleasing to CBZ and plans were afoot to embark on further road shows to promote these products.

CBZ believes that there is potential to raise even more funds a reaffirmation of a belief by some economists that the economy is now ripe for a return to savings mobilisation.

However the question has been how to do that given the reluctance by the public to fully embrace the banking system following years of hyperinflation.

Inflation which was the biggest destabilizing factor to savings has since retreated to record lows, currently below one percent according to figures last released by Zimstats.

For its part CBZ said it was promising a return of between four and eight percent interest for individuals that chose to invest in its fixed term products.

Bank fees and charges which, are sometimes blamed for general reluctance by the population to fully  embrace the banking system, are nil in this case and the net effect is an interest earning above the rate of inflation something quite uncommon before dollarization.

However, a few banks if any seem to have followed CBZ’s lead on this, an approach which could potentially become a turning point in efforts to turnaround the economy.

Many economists and analysts have said up to $3 billion was or is needed to kick start recovery of industry which is in dire need of capital for re tooling and new technologies.

Ironically, a similar figure is thought to be circulating outside the banking system with Zimbabwe Economic Policy Analysis and Research Unit (ZEPARU), an economic think tank conservatively placing the figure at $2.5 billion back in 2011.

Banks will have to find creative ways of attracting that money and one way is offering interest rates that would entice people to keep their money with banks as opposed to the ‘under the pillow’ banking  system that currently prevails.

In absence of foreign direct investment and a central bank not fully functioning, this may be the only realistic chance that the country has to mobilize funds for true economic recovery.

Authorities need to encourage more financial institutions to take this root by even offering incentives to banks that take heed of this.

Of course confidence in banking hit an all time low in 2008 when Zimdollar account balances disappeared and foreign currency accounts were raided by the central bank.

The government has promised to deal with the issue by compensating all claims against the central bank. Expeditiously resolving this matter will go a long way in restoring confidence in the financial services sector a key factor in all attempts to mobilize savings.

Once mobilized, savings act as a pool of funds that local companies can tap into to fund their medium to long term credit needs.

More importantly, medium to long credit raised this way will have significantly lower interest rates compared to internationally sourced lines of credit which must incorporate a country risk premium.

It remains to be seen if other financial institutions will follow up with this approach and if indeed the government comes to the party by honouring its pledges to help restore confidence in the financial system.