Financial Sector Overview
Zimbabwe, once the most advanced country in Sub-Saharan Africa, has experienced a deep crisis that weakened its economy. The agrarian reform initiated in the late 1990s, led to a drop in agricultural production and a decline in productivity, while excessive government deficits have resulted in significant external payments arrears. Between 2000 and 2008, the economy contracted sharply, with an average annual growth rate of -7.29%. The ensuing 2008-2009 hyperinflation crisis led to the abandonment of the Zimbabwean dollar and the introduction of a multi-currency system consisting of the US dollar, the South African Rand and other international currencies as legal tender. Since June 2019, the country has adopted a new currency, the Zimbabwean dollar. Authorities have banned the use of foreign currency in order to revamp the economy. Positive outcomes were, however, recorded between 2010 and 2017, with an average annual growth rate of 7.53%, higher than that for sub-Saharan Africa (3.87%). The Zimbabwean economy is based on the exploitation of mineral resources (gold, diamonds, nickel, copper, iron, platinum, etc.) and agricultural resources (maize, tobacco and cotton). Since 2014, the high perception of the country’s risk has resulted in the loss of correspondence relationships with banks in Zimbabwe.
In spite of the challenges, the competitiveness of Zimbabwean’s economy has improved slightly in the World Economic Forum's global competitiveness rankings. i.e. in 2010, Zimbabwe was ranked at 136th position out of 140 countries, but in 2018, the country was ranked at 128th out of 140. Even though improvement was recorded in 2017, the economy continues to face structural challenges such as high levels of informality, weak domestic demand, high public debt, low investor confidence, and a challenging political environment. The country is also experiencing a liquidity crisis resulting from structural distortions. Although some advancement has been made to improve the business climate, there are still governance inadequacies. The World Bank's Doing Business 2018 report ranks Zimbabwe 155th (out of 190 countries), i.e. Zimbabwe stepped up 2 spots compared to 2010.
Financial Sector Overview
Banking institutions dominate Zimbabwe's financial sector. Total assets held by the country’s 13 commercial banks account for almost 50% of GDP. Nearly 24% of these assets are held by 6 foreign-owned banks that account for 42% of the market. On average, 50% of bank revenue derives from interests, and about 40% from fees and commissions (IMF, 2017). By end of 2018, the country had 5 housing finance institutions, a savings bank, 199 microfinance institutions (MFIs) and 6 deposit-taking MFIs. The non-bank financial sector also included 11 life insurance companies, 21 non-life insurance companies, and 1,100 pension funds under the supervision of the Insurance and Pensions Commission.
Banking Market Structure - The banking sector is dominated by commercial banks which, at end 2017, held 82.51% of assets, 82.90% of deposits and 72.45% of loans. The sector is concentrated around five major banking institutions that accounted for 58.82% of assets, 61.11% of deposits and 57.57% of loans and advances in 2016. Banking sector assets were USD 11.27 billion at end 2017, up 29.1% from 2016. Asset growth with effect from 2014 is partly due to higher financial investments attributed to treasury bills. They increased by 62% between 2016 and 2017, reflecting the government's dependence on the banking sector for its financing needs.
Banking Sector Credit and Deposits Structure - Hyperinflation has exacerbated the banking liquidity crisis and, de facto, penalized credit to the private sector, which has also suffered from the subsequent accumulation of Treasury bills by banks. Bank credit to the private sector, the growth of which steadily declined until 2016, stands at 16.8% of GDP in 2017, or USD 3.7 billion. Bank loans and advances accounted for 33.72% of the sector's assets, down from 2016 (42.27%) due to banks' preference for less risky short-term investments. Commercial banks provide about 3/4 of credits in Zimbabwe. 73.64% of bank loan portfolio was allocated to productive sectors of the economy, with the largest shares going to the manufacturing industry (17.29%), agriculture (15.34%) and real estate (13.16%). However, the banking sector is still limited in meeting the long-term financing needs of specific capital-intensive sectors such as construction and mining. Bank deposits amounted to USD 8.48 billion in 2017, i.e. an increase of 26.47% compared to 2016. They mainly consist of sight deposits (67.95%) and, to a lesser extent, term deposits (19.37%).
Deposit and Lending Rates - The Reserve Bank of Zimbabwe is committed to introducing an affordable credit policy to facilitate the financing of productive sectors of the economy. Initiatives implemented to this end include the limitation since 1 April 2017 of interest rates on mortgages and banking fees on loans at ceilings of 12% and 3% respectively. Average lending rates declined from 11.5% in 2012 to 6.9% in 2017. Credit interest rates dropped from 6.7% in 2015 to 3.2% in 2017.
Financial Soundness of the Banking Sector - The banking sector is well capitalised; capital adequacy ratios and Tier 1 remained in line with regulatory minimum levels of 12% and 8% respectively, higher than levels achieved in 2016. The gradual capital ratio increase since 2014 is due to a combination of factors, including organic capital growth, a cautious lending approach and a preference for marketable securities. All commercial banks comply with the minimum equity requirement (USD 25 million for a target of USD 100 million in 2020). The liquidity ratio stayed at above the regulatory minimum of 30%, due in part to the cautious approach to credit adopted by banks. However, treasury bills held by national banks are no longer liquid and risk-free; they are subjected to discount rates of up to 45%. The sector also faces a shortage of foreign exchange due to structural difficulties in the economy. The ratio of non-performing loans, which has steadily decreased since 2014, stood at 7.08% at end 2017. Gradual improvement in the quality of assets is the outcome of improved credit risk management, use of the credit registry by banks, and the sale of non-performing loans to the Zimbabwe Asset Management Corporation. The agricultural sector has one of the highest proportions of non-productive loans, accounting for 23.36% of total stock. Bank yields demonstrate positivity and are continuously rising since 2014 due to the implementation of revenue-enhancing measures, including digital finance, the intensification of branch networks and cost reduction. The banking system still experiences challenges due to the economic slowdown and a liquidity crisis that have aggravated credit risk and curtailed financial intermediation. In 2017, the financial intermediation ratio was 44.79% compared to 56.64% in 2016.
A National Financial Inclusion Strategy was launched in 2016. The overall objective of this strategy is to improve access to formal and affordable financial services from 69% in 2014 to at least 90% in 2020 and to increase the adult population’s banking rate from 30% to at least 60% over the same period. Financial inclusion has generally been positive between 2014 and 2017. In 2017, 55.3% of the adult population had an account, i.e. an increase of 70.7% compared to 2014. Most banks have implemented low-cost account opening policies targeting low-income groups, combined with customer awareness requirements (targeting the less literate) and minimal account management fees. The number of discounted accounts opened by banks increased from 1.2 million in December 2016 to 3.02 million in December 2017, i.e. a 151.6% rise. The growth of microfinance agencies has also fostered financial inclusion. The central bank's approval of the banking intermediary model has led to the establishment of more than 4,000 access points that have contributed to improving the reach of financial services. Mobile money has significantly contributed to the promotion of financial inclusion. The proportion of adults with a mobile money account went up by 125% to 48.6%, well above the average in sub-Saharan Africa (20.9%). Notwithstanding these improvements, family and friends remain the most popular source of credit. About a third of the population (32% of men and 37% of women) use the informal sector to meet their liquidity needs.
The Microfinance Sector - As of 31st December 2018, the microfinance sector had 205 approved microfinance institutions (MFIs), including 199 credit and 6 deposit-taking MFIs. Microfinance institutions have been negatively affected by the contraction of Zimbabwe's economy. Faced with liquidity constraints and lack of financial support from donors, more than 30 microfinance institutions (MFIs) ceased operations in 2015. The number of MFI agencies was 750 (682 in 2017), while the number of customers was 349,341 at end 2018. The sector's assets reached USD 490.27 million that year, i.e. an increase of 47.1% from 2017. Asset quality has gradually improved. The risk portfolio of MFIs has steadily declined since 2013 to 7.34% in 2017. This improvement is due in part to the actual use of the credit registry system, in compliance with solvency checks on borrowers. Return on assets and capital remained positive, despite decreasing until 2017. They stood at 14.19% and 7.17% respectively at end 2018. The lack of sustainable and adequate financing nevertheless hampers the sector’s depth and continues to pose a significant obstacle to the development of microfinance. In January 2017, the central bank urged MFIs to lower their rates in order to maintain their effective lending rates below 10%.
Digital Finance - In 2017, the country witnessed a relative improvement in the use of electronic means of payment. The volume and value of transactions stood at USD 1 billion and USD 93.9 billion, up 169% and 52% respectively from 2016. The sector had 5 mobile financial service operators. The value of mobile financial services transactions stood at USD 18 billion, or 71.66% of total retail payment transactions, up 210% from 2016. The volume of transactions also increased by 153%, from USD 298.6 million in 2016 to USD 754.7 million in 2017. The number of mobile financial services subscribers reached 4.6 million in 2017, or an increase of 41% from 2016. The majority of banks have taken advantage of the high mobile telephony penetration rate (over 100%) to offer, in partnership with mobile network operators, a diverse range of digital financial services. Online banking subscribers reached 277,674 in 2017, or an increase of 65% from 2016. Despite these significant advances, the limited interoperability of payment systems hampers the development of innovative products.
SME Financing - Micro-, small- and medium-sized enterprises (MSMEs) account for more than 60% of GDP. Significant progress has been made in terms of access to formal financial services by MSMEs. The value of loans to MSMEs increased by 16.24% from 2016 to USD 169.9 million, or 3.94% of total lending by banks and microfinance institutions. In addition, 100,644 MSMEs had a bank account at the end of 2018. A total of USD 90 million in financing facilities were made available to MSMEs through various financing mechanisms. Financing of SMEs remains problematic despite efforts made. According to the World Bank, only 7.8% of companies with 5 to 19 employees have access to a bank loan or a line of credit, against 20.7% for sub-Saharan Africa. This rate is even lower for very small businesses (4%). Bank loans are used by 8.2% of small businesses as working capital and 14.8% of them for financing investments. These rates are respectively 25.4 and 18.1% for medium-sized companies. Several factors explain this low financing - SMEs have unsustainable business models: about 85% of them fail after 3 years (60% in the first year and 25% in the first three years); Corporate governance is also a concern, and most SMEs are not able to provide the collateral required by banks; and lastly, the informal nature of most SMEs contributes to the increasing difficulties they face in accessing finance.
The Risk Capital Market
Total funds under management for the sector amounted to USD 3.9 billion in 2017, with the top 5 institutions holding 86.54% of funds. Securities investment management companies are required to maintain a capital of USD 150,000. The Zimbabwe Stock Exchange (ZSE), the leading capital market institution, has switched to an automated trading system since 6 July 2015. Total assets held amounted to USD 3,353 million at end 2017, or an increase of 21% from 2016. Liquidity and foreign exchange shortages continued to affect stock market performance in 2017. In response to fears, hedging measures were taken by investors. Market capitalisation reached USD 15 billion, or 68.1% of GDP. The assets and reserves of the Depository Company rose sharply by 26.98% compared to 2017.
As of 30 September 2018, the life insurance sector had 11 insurers, 5 composite reinsurers, and 1,690 agents. Non-life insurance consisted of 21 insurers, 2 microinsurance companies, 8 reinsurers, 32 insurance brokers and 35 insurance adjusters. Total life and non-life insurance assets increased 7.30% over one year to USD 476.84 million. Gross premiums for life insurance
were USD 300.69 million, up 13.06% from September 2017. This increase is due to strong growth in the funeral insurance business. Life insurance assets amounted to a total USD 2.80 billion. The asset base of insurance companies is dominated by 2 asset classes, equities and real estate investments, which accounted for 52.32% and 24.33% respectively of total assets in September 2018. Higher stock prices resulted in equity investments that exceeded the 45% required limit on asset class proportions. Total non-life gross premiums stood at USD 198.45 million, or an increase of 16.88% compared to 2017, due to the dynamism of the “motor vehicle” and “fire” branches, accounting respectively for 47.43% and 17.65% of gross premiums. Non-life insurer assets were USD 279.72 million, or 58.66% of total insurance assets. Assets of non-life reinsurance companies stood at USD 167.08 million, representing 35.04% of total assets in the segment. All licensed non-life reinsurers had equity capital exceeding the required minimum of USD 5 million. The insurance penetration rate in Zimbabwe is 3.37%, and the insurance density is USD 36.44 per capita.
As of 30th September 2018, Zimbabwe had 1,100 occupational pension schemes, consisting of 1,051 defined contribution plans and 49 defined benefits plans. Membership stood at 790,562. Total assets in the sector amounted to USD 4.65 billion as at end of September 2018, or an increase of 7.8% from 2017 due to higher contributions and investment income, which amounted respectively to USD 241.3 million and USD 228.6 million. Listed shares and real estate investments amounted to USD 2.86 billion, or 61.50% of total assets. Investments in prescribed assets amounted to USD 434.87 million, bringing the ratio of prescribed assets to 9.35%, with the minimum regulatory requirements set at 10%. Several obstacles persist in the pension fund sector as elaborated next. Excessive administrative expenses made are detrimental to investment. Expenditure (other than benefit payments) on average accounted for 81% of total premiums and contributions, leaving only 19% for investment in the post-dollar period. The legislative and regulatory framework is still weak. This is the case with benefits management and sharing arrangements of for-profit funds, which are not regulated. Arrears of contributions, which compromise the benefits of retirees, remain a major concern. They stand at USD 633.14 million and account for 13.61% of the sector's assets.
 Chengetedzai Depository Company established in March 2015