THE Bankers Association of Zimbabwe (BAZ) says banks’ profit margins will continue to be under pressure from inflation after the central bank governor John Mangudya did not liberalise interest rates in his monetary policy statement (MPS) last week. This is premium content. Subscribe to read article.
Lending rates are currently capped at 12 percent, which analysts say when contrasted against an inflation rate of 56 percent, implies negative real returns.
Some constituencies in the business community were expecting that the MPS would bring reforms in this regard, but Mangudya was silent on the matter.
“It is common cause that inflationary conditions invariably result in realignment of costs across different facets of bank operations. Such realignment might include deployment of digital banking systems to improve efficiencies. Bank margins will certainly come under pressure in the short term,” Webster Rusere, the BAZ president, told The Financial Gazette this week.
Rusere was however optimistic that inflation would start to go down soon.
“However, the direction of interest rates in the medium term generally depends on expectations for future inflation. Our view at the moment is that inflation should quickly subside as fiscal deficits and the resultant expansionary effects on money supply, which were the key drivers of inflation, are being decisively addressed.
“The consensus view at the moment is that if fiscal deficits have largely been contained, it also follows that inflationary pressures are also likely to dissipate in the very near future,” he said.
Analysts at local advisory firm, IH securities, indicated that the near-term outlook for the local banking sector was gloomy.
“We are bearish about performance in the banking sector going forward, particularly given the dislocation between interest rates and both current and expected inflation.
“The current economic situation in Zimbabwe, where the capped interest rates are below the prevailing and increasing inflation rate, threaten real returns in the sector,” IH Securities said in a note published recently.
Banks have been grumbling about the interest rate situation since last year.
“What we have is an interest rate that is controlled on the loan side and an interest rate that is going up on the deposits sides and therefore the margins will get squeezed,” Benson Ndachena, NMBZ Holdings’ chief finance officer, said at a business event last year.
“Hopefully, if things were liberalised then we would have a situation where interest rates would fluctuate on both sides but at the moment we are faced with a scenario where loan side rates are controlled and the deposit side rates are creeping up,” Ndachena said.
Meanwhile, CBZ Holdings, which has a commercial banking unit, last year said it was shifting its focus from lending activities in response to the interest margin squeeze.
“With our margins being squeezed, it was important for us to focus on non-funded income, and we have done very well in that respect.
“Our revenue growth over the first six months of the year 2018 was driven by non-funded income to minimise the pressure on interest income,” Colin Chimutsa, the CBZ chief financial officer, said last year.
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Pressure on banks’ margins remains
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