The fragile banking sector in Zimbabwe hasbeen warned by economist of the pitfalls of landing huge scarce amounts to individuals as opposed to critical sectors such as construction, transport andcommunication.

They claim that chances of defaulting in re-payments are high.

Figures from the Reserve Bank of Zimbabwe (RBZ) show that in the six months ended June 30,individuals got US$58 million or 5,9percent of the total banking sector loans and advances.

The figure surpass US$23 million, US$18million and US$14 million that was allocated to transport, construction and communication respectively.

Market watchers contend that the “structural weakness” in such aninter-mediatory structure by banks presents a real probability of impairmentlosses, especially in the wake of the low disposable incomes in the economy andgenerally weak economic performance.

According to MMC Capital, the absence of a credit bureau — that essentially functions as a central repository of credit and collection records, paymenthistory and legal information on consumers and businesses — makes financialinstitutions particularly vulnerable to defaults.

“Loans to individuals constituting 5,9 percent of the total banking sector loans and advances are statistically significant and precarious for a fragile economy with low incomes like Zimbabwe.

“This figure surprisingly outpaces loans to key sectors such as construction(1,6 percent), communication (1,3 percent) and transportation (2,1 percent).

In the absence of a national credit bureau, as is the case with Zimbabwe,chances that individual bank loans may be secured against the same pledgedassets for other borrowings from other sectors such as retailing (for example,furniture and clothing shops) is very high.

“This situation will expose the banking sector to credit risk as theprobability of default and impairment of such loans cannot be ruled out,” said MMC Capital in a recent research note.

However, it is believed that the “skewed” distribution of loans and advances,which punishes some of the key sectors of the economy, is mainly because mostof the US$1,8 billion in deposits that are held by financial institutions aremainly transitory or short-term deposits.

Under the current, macro-economic environment it is increasingly difficult forbanks to extend credit to sectors such as mining and construction that have along incubation period because this will inevitably result in a mismatch between the financial institutions’ assets and liabilities, resulting ininterest rate risk and also liquidity risk.

Finance Minister Tendai Biti said recently emphasis on construction was important for the country as it is easy to “construct ourselves out of a crisis”.

Investment in the construction sector mainly has a multiplier effect on theeconomy as it naturally leads to demand from other sub-sectors and industriessuch as timber, steel and other ancillary services.

Declining investment in the country’s infrastructure sector, which has beenworsened by the hyper-inflationary environment over the past decade, has madeurgent investment in the sector imperative.

Said Biti: “Since the 1970s, thiscountry has seen a serious marginal decline in Public Sector InvestmentProjects (PSIP). The net effect of this disinvestment has been a collapse ofroad and railway infrastructure, an erratic power sector that is not able toprovide more than 50 percent of the national demand.

“Our outdated ICT places Zimbabwe behind regional standards in the area of fibre-opticnetwork and new generation ICTs.”

Due to the liquidity challenges obtaining in the economy, banks have heightened their risk management practices.

Generally, the proportion of loans extended to industries by banks as a fraction of deposits held by these financial institutions — referred to as the loans to deposit ratio — still remains lower than international best practice at 61,6 percent in the first half of the year.

A percent more than 70 percent is considered ideal.

RBZ recently made interventions that were ostensibly meant to create more credit in the financial system for banks to on-lend. Under the new measures,the statutory reserve requirement was abolished, whilst the asset liquidity requirements were increased to 20 percent from 10 percent. Analysts estimatethat the new measures will create an additional US$500 million for the market.