Opening the floodgates of lending

HOWDY folks! There has been an inverse relationship between the levels of bank deposits and loans over the past few years. As deposits have been steadily rising, loans and advances have ironically been on the decline.

Loans and advances are at their lowest since December 2014, declining from US$4,06 billion in March 2015 to US$3,591 billion in March 2017.

Bank deposits are, however, at their highest since January 2011.

They increased from US$4,4 billion in December 2011 to US$6,55 billion in March 2017, representing a 49 percent increase.

One of the reasons why deposits have sort of flattened is because loans have taken a dip.

You see, loans also create deposits.

Money that is loaned to you is deposited into your account and becomes a deposit. The decline in loans, therefore, has also resulted in deposits increasing at a decreasing rate.

In light of the above, one will still be justified to ask why banks are hitting the brakes on lending when deposits are growing. However, what should be understood most is that the biggest constraint to lending is the basic business architecture of banking itself.

Banks do not really lend for charity as we sometimes wish them to.

They, rather, lend to make a profit and they only lend where they have an assured level of certainty that the money will be paid back in full and profitably.

If lending is too risky and the envisaged profits are too low, then banks will consider investing their money in other safer projects.

Remember, the money they use belongs to depositors and other creditors, and they have to make sure kuti havaisungirire pagumbo reingwe.

While Treasury believes that the decline in lending is largely attributable to prudential and cautious lending by banks as well as acquisition of non-performing loans by the Zimbabwe Asset Management Company, we can further get a glimpse of why banks are not lending by dissecting the metabolism of banks’ most favourite customer when it comes to lending.

Last year, the distribution of loans and advances continued to be skewed towards individuals, with salary-backed loans accounting for 29 percent, followed by agriculture and distribution at 16.7 percent and 15,4 percent, respectively.

This means 67 percent of loans and advances go to these three groups, which shows a significant level of lending concentration.

But banks’ favourite client is an individual who earns a regular salary.

Banks mainly concentrate their lending to salary-backed loans because they have a higher probability of repayment.

Most banks actually get their money before it is even deposited into the employee’s account.

Money that is borrowed by civil servants, for instance, can be deducted by the Salary Service Bureau before being deposited into their accounts.

To increase the probability of repayment, only those in permanent employment are usually considered for salary-based loans and the average net pay usually considered is US$500.

But why are banks not lending to other sectors such as the informal sector? Is it because informal players do not have money?

Have you forgotten that report which established that not less than US$7 billion flows in the informal sector, and that figure is probably much higher now?

I believe there is a missing link there, which the Credit Reference Bureau has come to address.

In his latest Annual Budget Review, Finance and Economic Development Minister Patrick Chinamasa said operationalisation of a credit reference system is expected to improve information sharing, thereby reducing credit risk and, hence, the level of non-performing loans.

The Credit Registry, which went live at the beginning of January 2017, had captured at least 60 percent of the total banking sector loan records as at March 31, 2017.

The system will allow lenders and those who sell their products and services on credit to access good customers.

Customers with a good credit background will obtain credit on better terms.

As alluded to above, banks are concentrating their lending on a small enclave of the population, mainly composed of secured loans which allow them to sell collateral when worse comes to worst, and civil servants because they know they can easily get the money through the SSB.

Banks hitherto didn’t know about the characteristics of other clients to enable them to come up with packages that suit such categories.

Now, they are able to widen that important understanding, and it will enhance lending confidence in the financial sector.

I also think that the establishment of the Credit Bureau will change the architecture of lending and skew it towards the “unusual suspects” in the new normal.

Once the system starts working to the satisfaction of lenders, I see unsecured personal loans increasing, as banks use someone’s credit history as “collateral” when lending.

Again, I see lending to the informal sector increasing; because at the moment, most requirements for loans applications are compatible with a highly formalised economy, which we are not.

In Zimbabwe, only five percent of the working population is employed in the formal economy, with the remaining percentage in the informal sector.

So, where can they be expected to get the payslips or HR approvals from?

After this, more credible clients from the informal sector will certainly start accessing loans.

The Bureau, if run efficiently, will also ease banks’ financial risks as they will now be able to first check whether the client is solvent or not before providing them with loans, which decreases the probability of bad debts.

But it is also very important to have an aggressive real time management of data, and the system has to always be online, with all players connected all the time. Otherwise, it will be of no use. This comes as Government is also putting measures in place to reduce its domestic borrowing, which is likely to redirect resources to lending to productive sectors.

In the Annual Budget Review, Minister Chinamasa highlighted that failure to contain the budget deficit and borrowing requirements has serious economic and financial implications, especially when support to development expenditures to stimulate production is insignificant.

The issue was also raised by the International Monetary Fund in its latest report on Zimbabwe.

The IMF actually called on Zimbabwe to implement measures that foster fiscal consolidation and avoid more domestic borrowing as it was crowding out the private sector.

Government should continue working on more measures that reduce risk and raise confidence in the financial sector, to open the floodgates of lending.

Later folks!

But why are banks not lending to other sectors such as the informal sector? Is it because informal players do not have money?