Challenges for local banks: AfDB

HARARE - Indigenous banks could fail to mobiles resources and meet Reserve Bank of Zimbabwe (RBZ)’s new $100 million minimum capital by June 2014 as a result of their poor performance and macroeconomic instability, the African Development Bank (AfDB) says.

“The factors that are likely to militate against raising new capital by banks include poor bank performance, weak investor confidence and uncertainty surrounding the indigenisation policy and poor corporate governance, which can make investors reluctant to inject new capital,” said AfDB in its August Zimbabwe Monthly Economic Review.

AfDB added about half of the indigenous banks, which made loses in the full year to June 2013, may also find it difficult to boost their retained earnings.

The regional bank said while the RBZ increased minimum capital requirements and proposed mergers and acquisitions on account of the dynamic financial landscape, increased competition and economic uncertainties which require banks to be adequately capitalised could result in locally owned banks facing challenges.

“This has challenges that include increased market concentration, which may promote uncompetitive behaviour among the fewer resultant banks, difficulty in reconciling different organisational cultures and laying-off of employees,” said AfDB.

Soon after announcement of the new capital requirements, observers argued the development may result in balance sheet shrinkages as banks struggle to raise fresh capital at short notice, which could worsen the current credit crunch.

At the end of July this year, Royal Bank surrendered its banking licence to the RBZ after it failed to meet the minimum capital threshold of $12,5 million-before the review-for commercial banks.

This, AfDB, said could also worsen depositors’ confidence in the banking industry and adversely affects efforts towards savings mobilisation.

“This may also lead to repatriation of deposits from small and weaker banks to bigger and stable banks.”

According to RBZ statistics, total deposits amounted to $3,59 billion as at the end of June 2012.  The deposits were 54,37 percent made up of demand deposits.

Short-term deposits and long-term deposits were 34,82 percent and 11,81 percent respectively.

“Among other factors that militate against the mobilisation of long-term deposits are low real deposit rates, weak depositor confidence in the financial sector, high bank charges and lower levels of income,” AfDB said.

To address bank charges and interest rates anomalies, Finance minister Tendai Biti recently said his department, together with the central bank will soon peg interest rates on loans at below seven percent.

In his state of the economy address on Thursday, Biti said he was concerned with the high level of interest rates on loans which he says are above 15 percent compared to global rates which are below five percent on the United States dollar.

“The governor of the RBZ (Gideon Gono) and myself are not going to watch people exploit this economy and I can assure you within the course of the next few days we are going to come up with corrective measures that ensure that banks stick to normal banking practices where returns are less than seven percent and not exploitative returns that we are seeing,” he said.

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