In Zimbabwe’s banking sector, asset allocation has become a focal point as financial institutions navigate the challenges posed by a persistent currency crisis. A close look at the recent Banking Sector Half-Year Results Review (Equity Axis Research, November 2024) reveals intriguing trends and strategic approaches that are shaping the financial landscape.
Among the key players, Stanbic and Ecobank stand out as the second and third largest banks by asset size, trailing only CBZ. Both banks hold approximately 50% of their assets in cash, a move that speaks volumes about their operational priorities.
Stanbic, a member of Standard Bank — Africa’s largest by asset size—and Ecobank, a subsidiary with an unmatched geographical reach across Africa, leverage their global networks to solidify their position.
These affiliations have made them the preferred banks for exporters, importers, and large corporates, particularly due to their unmatched expertise in processing foreign exchange transactions.
Crown Bank, formerly Standard Chartered, also shows a high proportion of cash on its balance sheet. This is likely linked to its continued service of Standard Chartered’s legacy clients following its acquisition by FBC Holdings.
However, this cash-heavy asset allocation raises questions about efficiency, as cash is a non-interest-earning asset. From a performance perspective, commercial banks should aim to channel more assets into interest-bearing instruments, such as loans, to maximise returns.
Among the local banks, FBC Holdings leads with an impressive 54% of its assets allocated to secured loans, reflecting a prudent yet profitable strategy.
Nedbank follows closely, bolstering its balance sheet with a significant role in financing Zimbabwe’s tobacco industry. Similarly, First Capital Bank (FCB) and Ecobank stand out, with over 40% of their assets dedicated to loans. While Ecobank maintains a conservative strategy with a strong liquidity focus, its minimal exposure to investment property is noteworthy in the current inflationary climate.
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To hedge against inflationary pressures, many banks are turning to investment properties. Metbank, for instance, has taken a bold stance by allocating 66% of its assets to real estate. This move positions the bank in direct competition with building societies, traditionally dominant in this space. Such strategies underscore the sector’s adaptation to Zimbabwe’s inflationary environment, where real estate serves as a reliable store of value.
Despite these adaptive measures, a sec- tor-wide reliance on substantial cash reserves remains evident. This is largely a response to the transient nature of deposits, which necessitates high liquidity for transactional purposes. However, this focus on cash highlights a critical short-fall in product innovation aimed at encouraging savings. Without robust savings products, banks struggle to mobilise stable, long-term deposits that could otherwise support increased lending activities.
The lack of innovative savings instruments limits banks’ ability to drive economic activity, particularly in financing small and medium enterprises (SMEs) and consumer credit. Furthermore, it restricts opportunities for individuals and businesses to grow their savings securely. Addressing this gap is essential for strengthening banks’ capital bases and reducing their dependence on liquid, non-interest-earning assets.
To enhance financial stability and foster economic growth, banks must prioritise product innovation.
Developing fixed deposit accounts, inflation-protected savings, and structured deposit options tailored to client needs could significantly improve deposit stability.
Digital banking solutions and targeted financial literacy campaigns could also play a pivotal role in encouraging a cultural shift toward savings and long-term financial planning.
By embracing innovation and shifting towards a more balanced asset allocation, Zimbabwe’s banking sector can reduce its reliance on cash and strengthen its capacity to support sustainable lending. In turn, this would bolster the economy, enhance monetary policy effectiveness, and create a more resilient financial ecosystem.
Implications to monetary policy
In countries grappling with a currency crisis, such as Zimbabwe, the decision by banks to hold a significant proportion of their assets in cash has far-reaching implications for monetary policy and broader economic stability.
High cash reserves indicate that banks are prioritising liquidity over lending, which restricts the flow of credit in the economy. This limitation in credit availability slows economic growth and hampers investment as businesses struggle to access the funds required for expansion and operations. As a result, the central bank's efforts to stimulate the economy through monetary policy, such as interest rate cuts or other easing measures, become significantly less effective.
One major consequence of such practices is the diminished transmission mechanism of monetary policy. When banks hold excessive cash outside the central bank's reserve system, the intended effects of monetary policy adjustments are weakened. For instance, even if interest rates are reduced, banks that are overly cautious may still hesitate to lend, undermining the expected reduction in borrowing costs and expansion of the money supply. This creates a "liquidity trap," where monetary easing fails to translate into increased economic activity, rendering policy tools ineffective.
Moreover, high cash holdings during a currency crisis exacerbate inflationary risks. Large amounts of liquid cash in circulation are highly responsive to exchange rate shocks. Businesses and individuals may react by hoarding or rapidly converting cash into hard currency, further depreciating the local currency. This behaviour intensifies demand for foreign currency, placing additional pressure on the exchange rate and undermining central bank efforts to stabilise the economy.
The risk-averse stance of banks in holding excessive cash can also erode public confidence in the financial system. Such behaviour may be interpreted as a lack of trust in the stability of the economy or the efficacy of monetary policy. This perception could prompt depositors to withdraw funds or shift to foreign currency holdings, amplifying the trend of dollarisation.
As more money escapes the control of the central bank, the ability to manage the monetary base is further compromised. In addition, the banking sector's high cash reserves may signal a lack of faith in the economy, creating a self-reinforcing cycle of instability and further undermining confidence.
To address these challenges, the Reserve Bank of Zimbabwe (RBZ) may need to implement targeted measures to incentivize lending. Initiatives such as introducing lending schemes tailored to priority sectors, establishing risk-sharing mechanisms, or imposing stricter regulations on cash holdings could encourage banks to channel their assets into productive uses. Simultaneously, the development of financial products that mitigate currency risks—such as inflation-indexed loans or foreign currency-denominated savings instruments—can provide a balance between maintaining liquidity and supporting economic activity.
In conclusion, excessive cash reserves held by banks during a currency crisis impose significant constraints on monetary policy, limiting its ability to control inflation, stabilise the currency, and foster economic growth.
A strategic shift towards measures that encourage lending while addressing liquidity needs is essential to stabilizing the financial system and restoring the effectiveness of monetary policy. By fostering a balanced approach, policymakers can lay the groundwork for sustainable economic recovery and growth.
Equity Axis is a financial media firm offering business intelligence, economic and equity research. The article was first published in its latest weekly newsletter, The Axis.
