HARARE (Zimbabwe Investor) - The previous week was abuzz with news reports that the two leading banks had extended their loan tenure periods; a situation that would supposedly pave the way for more banks to release more funds to the productive sector.

Yet shortly after this announcement, The Confederation of Zimbabwe Industries (CZI) pointed out that the extended loan tenure of six months by some banks was still too short for businesses operating in Zimbabwe. This scenario provides a tentative glimpse of the high systemic risk that continues to haunt Zimbabwe’s ailing financial sector.

CBZ and FBC banks became the first banks to extend their loan tenure periods to 180 days from the current 90 day lending period pervading across the market. This extension, according to CBZ Managing Director Dr. John Mangudya would allow companies to complete their business cycles by producing and selling before paying back. The loans will accrue interest of anything between 20% and 25% depending on the amount loaned out.

Industry Courting Banks for Leverage

In consideration of the long turnover cycle of a substantial number of companies in the industrial sector, it would be imperative to note that the short term facilities that are granted by banks are insufficient for industrial capital needs. Presently, industries are emerging, albeit slowly out of a protracted economic crisis borne out of a decade long political impasse in Zimbabwe. Compounding the challenges are liquidity constraints and a dilapidated infrastructure that requires replacing and repairing in order for industries to resume operations at full, or in the least, normal capacity.

The CZI contends that the trend that has been set by the two banks needs urgent improvement as the lines of credit being offered are too short and expensive for industrial needs. The capital challenges that industries are facing will continue to result in sustained low capacity utilization with consequent low productivity.

Realistically, the 180 day loan tenure period clearly makes it difficult for companies to borrow prudently, finance production, sell commodities and repay the loan in time notwithstanding punitive interest rates and the competition posed by imports among other extending factors.

The Other Side

Despite all the hullabaloo about confidence returning in the financial sector with latest reports indicating the bank deposits rose to US$1.2 billion as at December 2009, it is an incontrovertible attestation that confidence is still to visit the sector. There are several holders of large amounts of foreign currency in Zimbabwe who are very uninterested in placing their cash into formal channels owing to fear of scrutiny and perceived reprisal by financial authorities.

Another potential source of a big deposit base is the civil service, the majority of who are earning salaries ways below the poverty datum line. This in effect renders their funds a no-go area as they are transitory in nature. There is basically a great decrease in savings owing to low disposable incomes as well as low interest rates of between 0% and 3% which do not encourage one to keep their money in a bank as opportunity cost is unattractively low. These deposits are transitory in nature and cannot be utilized by banks to create long term credit that industry desperately needs.

The Risk Factor

Lenders will always want to lend for the shortest of periods while borrowers want to borrow over long periods. For a country coming out the turmoil of the last 10 years, default risk is still a big factor to lenders such that they will prefer partying with their money for the shortest period of time. The financing of long term projects with short term borrowing was one of the key failures of the late Rodger Boka’s United Merchant Bank in the 1990s.  

There is need for the implementation of prudent bank practices in Zimbabwe which can withstand international scrutiny. Only then will the industry provide potential investors with the assurance that it is safe to use for transactions.