Zim currency woes pile asset quality pressures on banks

FITCH Solutions warns that Zimbabwe’s persistent currency volatility poses a significant threat to banks’ asset quality in 2024.
The risk stems from the inflationary impact on borrowers’ ability to service their debts, potentially leading to an increase in non-performing loans (NPLs).
“Currency weakness directly impacts a large portion of the loan book, as foreign currency loans comprise roughly two-thirds of total lending,” noted head of Sub-Saharan Africa Country Risk for Business Monitor International, Jane Morley.
“This dynamic fuelled unprecedented loan growth in 2023, but it comes at the cost of higher NPL risks.
“We expect asset quality to weaken further over the coming quarters as economic conditions remain poor and rising prices in local-currency terms continue to erode borrowers’ ability to service their debt,” she told The Financial Gazette recently.
She added that as a result, banks will grow more cautious in lending to riskier private-sector borrowers.
Meanwhile, the Zimbabwean banking sector anticipates a brighter 2024, buoyed by the relative stability witnessed in inflation and currency rates during the latter half of 2023, according to the Bankers Association of Zimbabwe (BAZ).
BAZ chief executive Fanwell Mutogo expressed optimism for the coming year, citing the 2023 positive trends in inflation and exchange rate management.
However, he acknowledged potential challenges arising from unforeseen economic disruptions and regulatory shifts.
“While we’re hopeful for a more stable macroeconomic environment, global events, policy changes, and overall economic conditions could still impact the banking industry’s prospects,” Mutogo told this publication recently.
Despite this challenge, he pointed to the significant growth in foreign currency deposits, which rose from around US$300 million in 2018 to US$16 billion by September 2023.
“This upward trend is encouraging,” Mutogo said, “and assuming the current environment persists, we expect it to continue.”
The Reserve Bank of Zimbabwe (RBZ) echoed this sentiment in its latest banking sector report, projecting continued resilience within the industry.
“Banking institutions must continuously adapt and build financial and operational resilience,” the report stated.
The sector posted an aggregate profit of $4,67 trillion for the nine months ending September 30, 2023, compared to $341,28 billion in the same period of 2022.
“This growth,” the RBZ noted, “was primarily driven by non-interest income, particularly translation gains on foreign currency assets and investment properties, as well as fees and commissions.”
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