Financial Stability Report 30 June 2014
Purpose of the Report
The Financial Stability Report focuses on an analysis of the current status and potential risks
of the financial system and an overall assessment of its stability. The main purpose of the
publication is to strengthen financial system stability and promote the mitigation of systemic
risks, by stimulating market participants' evaluation of the wide range of risk factors in the
financial sector in the context of the ever changing domestic, regional and global
environment. This report is also prepared as part of the Multidisciplinary Financial Stability
Committee’s mandate to facilitate periodic assessment of the state of financial stability in the
country. This is the maiden Financial Stability Report, prepared as at 30 June 2014. The
report shall continue to be published yearly.

Financial Stability Report 30 June 2014
TABLE OF CONTENTS
CHAPTER 1: ESSENCE OF FINANCIAL STABILITY & ROLE OF FINANCIAL

CHAPTER 2: MACROECONOMIC ENVIRONMENT AND POTENTIAL RISK

CHAPTER 4: MEASURES TO ENHANCE FINANCIAL STABILITY AND OUTLOOK


Financial Stability Report 30 June 2014
List of Tables

Financial Stability Report 30 June 2014
List of Figures

Financial Stability Report 30 June 2014
FOREWORD
1.
Financial stability is an important economic policy objective in many jurisdictions. The
global financial and economic crisis of 2007 - 2009 has drawn increased attention on
the need for rigorous on-going financial stability assessments.
2.
In this regard and consistent with our mandate to promote financial stability and
transparency to markets, the Reserve Bank, in collaboration with other financial sector
regulators, is publishing this inaugural Financial Stability Report.
3.
The Financial Stability Report (FSR) highlights risks faced by the financial sector in
Zimbabwe, traces the sources and channels of financial distress, notes the pressures
arising from constraints which may arise in the economy, and discusses the way
forward from a policy perspective.
4.
There are several complex interactions and interdependences among the different
elements of the financial system and the real economy.
5.
FSR provides an assessment of risks to financial stability by focusing on a small
number of key indicators which could enable policy makers and financial system
participants to: (a) better monitor the degree of financial stability, (b) anticipate the
sources and causes of financial stress to the system and (c) communicate more
effectively the impact of such conditions.
6.
The current report is set in a global environment where the international financial
system is showing strong signs of convergence to stability. In most developed
economies such as the USA and the EU, banking institutions have returned to
profitability after surviving shocks from the global financial and economic crises.
7.
For Sub-Saharan Africa, central banks are closely monitoring developments regarding
the planned gradual exit from quantitative easing by the Federal Reserve as it has the
potential to reverse capital flows to the region with ramification on liquidity.
8.
Further, the reversal in capital flows is likely to be exacerbated by the anticipated
balance sheet consolidations by some corporate companies in developed countries that
benefited from quantitative easing.
9.
Risks to financial stability in Zimbabwe remain high owing to structural rigidities in
the economy. On its part, the Reserve Bank has played a pivotal role in boosting the

Financial Stability Report 30 June 2014
resilience of individual banking institutions and the banking system by increasing the
sector’s capitalization requirements and credit risk provisioning levels.
10. The Bank has also put in place various frameworks to facilitate early identification of
vulnerabilities in the financial system and prompt remedial and corrective action.
11. The Reserve Bank has also announced plans to resume the Lender of Last Resort
Facility and to resolve the sticky issue of non-availability of acceptable collateral to
access the fund through the use of treasury bills.
12. Meanwhile, the Deposit Protection Corporation, the Insurance and Pensions
Commission and the Securities and Exchange Commission have also instituted a wide
spectrum measures to promote the stability of the financial sector.
13. It is in this vein that it is envisaged that the implementation of such measures will lead
to greater stability in the financial system in Zimbabwe.

Financial Stability Report 30 June 2014
CHAPTER 1: ESSENCE OF FINANCIAL STABILITY & ROLE OF
FINANCIAL SECTOR REGULATORS

1.1. Essence of Financial Stability
1.1.1. A strong financial system plays a critical role in enabling growth and reducing
vulnerability to crises. This mitigates the likelihood of disruptions in the financial
intermediation process that are severe enough to significantly impair the allocation
of savings to profitable investment opportunities.
1.1.2. Financial stability is an essential requirement not only for monetary stability, but also
for healthy development of the economy.
1.1.3. Financial stability refers to a condition in which the financial system – which
comprises financial institutions, financial markets and market infrastructures –
is capable of facilitating real economic activities smoothly and unraveling
financial imbalances arising from shocks.
1.1.4. Meanwhile, financial instability entails heavy costs for an economy since the
volatility of price variables in the financial markets increases economic risks and
financial institutions or corporations may even go bankrupt. In addition, economic
development can be limited and the efficiency of resource allocation is reduced.
1.1.5. Over the last five years, the Zimbabwean economy has experienced economic growth
as well as periods of economic slowdown. Against this backdrop, the government
and financial sector regulators place significant emphasis on financial stability when
implementing their policies.
1.2. Role of Financial Sector Regulators in Promoting Financial Stability
1.2.1. Empirical results confirm that strong linkages exist between financial stability and
economic growth. In particular, the financial crises experienced all over the world
demonstrate beyond doubt that a sound financial system is essential for economic
prosperity as well as social welfare and national security.
1.2.2. In Zimbabwe, following the introduction of the multicurrency system, there has been
a renewed emphasis on financial sector stability as one of the pre-requisites for the
promotion and achievement of economic growth and development.

Financial Stability Report 30 June 2014
1.2.3. This regulatory emphasis comes at a time when a number of banks are already faced
with financial challenges caused by macroeconomic difficulties and other institution
specific challenges.
1.2.4. Problems in the financial sector have had profound effects on other sectors of the
economy as banks occupy a pivotal role in the economic process of the country.
1.2.5. Given this, the Reserve Bank has sharpened its approaches and techniques for
identifying and monitoring potential risk factors in the financial sector, to prevent
them from causing financial system unrest.
1.2.6. In view of the multifaceted and multi-dimensional nature of financial stability, a
Multidisciplinary Financial Stability Committee was established in 2012
incorporating all financial sector regulatory agencies. The committee is a forum for
promoting financial stability, exchanging of ideas and making policy
recommendations on financial sector stability.
1.3 Key financial stability segments and variables
1.3.1 The financial sector regulators use a number of quantitative measures to assess
financial stability including the set of Financial Soundness Indicators developed by
the IMF in 2006 and other monitoring variables which focus on market pressures,
external vulnerability and banking system vulnerability. The focus of the financial
stability assessment is outlined in Box 1.
Box 1: Financial stability segments
a) The real sector is described by GDP growth, the fiscal position of the government and
inflation. GDP growth reflects the ability of the economy to create wealth and its risk of
overheating. The fiscal position of the government mirrors its ability to find financing for its
expenses above its revenue (and the associated vulnerability of the country to the unavailability
of financing). Inflation may indicate structural problems in the economy.
b) The corporate sector’s riskiness is assessed by its leverage and expense ratios, its net foreign
exchange exposure to equity and the number of applications for protection against creditors.
c) The household sector’s health can be gauged through its net assets (assets minus liabilities)
and net disposable income (earnings minus consumption minus debt service and principal
payments). Net assets and net disposable earnings can measure households’ ability to weather
(unexpected) downturns.
d) The conditions in the external sector are reflected by real exchange rates, foreign exchange
reserves, the current account, capital flows and maturity/currency mismatches. These variables

Financial Stability Report 30 June 2014
can be reflective of sudden changes in the direction of capital inflows, of loss of export
competitiveness, and of the sustainability of the foreign financing of domestic debt.
e) The financial sector is characterised by monetary aggregates, real interest rates, risk measures
for the banking sector, banks’ capital and liquidity ratios, the quality of their loan book,
standalone credit ratings and the concentration/systemic focus of their lending activities. These
proxies can be reflective of conditions in the banking or financial sector and, if a crisis occurs,
they can gauge the cost of such a crisis to the real economy.
f) Variables relevant to describe conditions on financial markets include equity indices, corporate
spreads, liquidity premia and volatility. High levels of risk spreads can indicate a loss of
investors’ risk appetite and possibly financing problems for the rest of the economy. Liquidity
disruptions may be a materialisation of the market’s ability to efficiently allocate surplus funds
to investment opportunities within the economy.
1.3.2 The regulators use several sectoral variables individually and in combination to
analyze the stability of financial institutions, markets and the overall financial system.
1.4 Overview of Factors Affecting Financial Sector Stability in Zimbabwe
1.4.1 Notwithstanding significant progress made in stabilizing the economy through
adoption of the multicurrency system the following factors have presented challenges
to financial stability:
a) Dollarization has imposed financial constraints on the government and
economic agents - as monetization of deficits is not possible;
b) Low consumer confidence in the financial sector thereby affecting attainment
of critical mass in the sector.
c) The loss of monetary policy autonomy has meant limited counter-cyclical
monetary policy; and
d) There is limited Reserve Bank capacity to provide liquidity assurance through
the lender of last resort function.

Financial Stability Report 30 June 2014
CHAPTER 2: MACROECONOMIC ENVIRONMENT AND
POTENTIAL RISK FACTORS
2.1 Introduction
2.1.1 Sources of shocks and their transmission mechanisms have become diversified and
complex, influenced by the strengthening of linkages between domestic and global
financial markets, and between financial markets and financial institutions.
2.1.2 The country registered positive growth rates of 5.4% (2009), 11.4% (2010), 11.9%
(2011) and 10.6% (2012). The growth rate is, however, estimated to have slowed
down to 4.5% in 2013 and is projected to maintain positive growth rates in the outlook
period. Inflation which is a major threat to financial stability has also hovered well
below 5% which is lower than the regional average.
2.1.3 Of particular concern, however, is the country’s current account deficit of about $3.43
billion as at 31 December 2013, representing 25.4% of GDP. Export performance
deteriorated over the year by 3%, owing to the decline in mineral and manufacturing
exports. In addition, the country continues to absorb a disproportionately high level
of imports mainly comprising of finished goods.
2.1.4 The major consumer of Zimbabwean exports is South Africa which consumes about
55.9%, followed by Mozambique and China.
2.1.5 The prolonged but receding Euro zone debt crisis has had the effect of reducing
demand for commodities owing to fiscal consolidations currently being undertaken
by most EU governments. This will weaken profitability of exporting firms resulting
in their constrained capacity to repay borrowings from the financial sector.
2.1.6 In some cases, this has propagated to households, as firms undertook their own
balance sheet consolidations to ensure survival which may include employee
retrenchments.
2.1.7 The retrenchment, if widespread, can result in increased defaults in banking
institutions’ retail portfolios and insurance companies’ policies and rentals.

Financial Stability Report 30 June 2014
2.1.8 Threats arising from the global economy are therefore significant.
2.1.9 The absence of robust credit reference services has heightened the possibility of an
unsustainable household debt. Banking institutions have tried to mitigate this by
restricting consumer loans to individuals who receive their salaries through them.
2.1.10 The absence of an active money market has led investors to scramble for the safe
assets on the properties market. This has seen a sustainable increase in property prices
and rentals since the advent of the multicurrency system. The attractive returns
currently obtainable on the properties market coupled with depressed new properties
developments has presented scope for a property bubble. The bubble, is however,
currently being countered by the liquidity challenges facing the economy.
2.2 Global Macroeconomic Developments
2.2.1 The global financial system moved toward a path of greater financial stability in 2013
and the first half of 2014, amid gradual strengthening of economic recovery in some
advanced economies. However, economic activity in emerging market economies
slowed leading to a slight moderation in overall global economic growth.
2.2.2 Against this background, the global economy is estimated to have moderated from a
growth of 3.2% in 2012, to 2.9% in 2013, on account of shocks that hit the
international economy. First, was the ratcheting up of financial stress in the Euro area.
Second, domestic demand in many economies in Asia and Latin America (notably
Brazil, China, and India) slowed owing to weaker external demand from Europe but
also due to domestic factors.
2.2.3 The U.S. economy remained at the center of global events. Private demand remained
strong but fiscal consolidation weighed down on economic activity. As such, the US
economy grew by 1.6% in 2013, largely reflecting a prolonged budget sequester.
However, market and liquidity risks remained elevated amid the expectations of
reduced monetary accommodation as this prompted further global market
adjustments and exposed the global economy to systemic financial vulnerabilities.

Financial Stability Report 30 June 2014
2.2.4 The euro area contracted by 0.4% in 2013, compared to a contraction of 0.6 % in
2012. The euro area continued to face lingering challenges emanating from the
unfinished business of restoring financial stability and credit transmission as well as
reducing the corporate debt overhang.
2.2.5 Emerging market economies, however, are estimated to have grown by 4.5% in 2013,
down from 4.9% in 2012, as a result of tighter global financial conditions. Bond
markets were more sensitive to changes in accommodative monetary policies in
advanced economies because foreign investors crowded into local markets.
Moreover, the emerging market fundamentals weakened in recent years, after a
protracted interval of credit expansion and rising corporate leverage.
2.2.6 Growth in the Middle East and North Africa is estimated at 2.2% in 2013, largely on
account of lower oil production.
2.2.7 The IMF projected a growth of 3.2% in 2014, driven largely by the advanced
economies. The impulse to global growth is expected to come mainly from the United
States, where activity will move into higher gear as fiscal consolidation eases and
monetary conditions stay supportive.
2.2.8 Table 1 below shows the International Monetary Fund (IMF) Global GDP Growth
rates for the period 2011 to 2014.

Financial Stability Report 30 June 2014
Table 1: Global GDP Growth rates (%)

(Estimate)

(Projection)
Global growth

Advanced Economies

United States

Euro zone

United Kingdom

Japan

Emerging and
Developing Economies

China

India

Russia

Brazil

Sub-Saharan Africa

South Africa

World Trade Volume

Source: World Economic Outlook, April 2014
2.3 Regional Economic Developments
2.3.1 Sub-Saharan Africa is estimated to have maintained a 4.9% growth rate in 2013, on
the back of continued strong domestic demand in most of the region. Growing trade
ties with Asia are envisaged to play a major role in the region’s recovery, primarily
through commodity markets. Growth was particularly strong in oil exporting and
low income countries. However, tightening capacity constraints, falling commodity
prices, less policy support, and slowing credit weighed down on economic activity
2.3.2 Angola benefited from a recovery in oil production. High oil prices underpinned
strong growth in Nigeria, notwithstanding temporary downdrafts from security
problems in the north and oil theft. In Ethiopia, declining coffee prices and supply
bottlenecks slowed growth slightly from a very high level. However, South Africa’s
growth slowed further, in large part due to tense industrial relations, anemic private
investment, and weaker consumption growth, the latter affected by slowing
disposable income growth and weakening consumer confidence.
2.3.3 Estimated growth rates for sub-Saharan Africa are indicated in table 2.

Financial Stability Report 30 June 2014
Table 2: Growth Rates for Sub-Saharan Countries (%)

(Estimate)

(Projection)
Sub-Saharan Africa

Oil Exporters

Middle-Income Countries

Low-Income Countries

Source: World Economic Outlook, April 2014

2.3.4 Spillovers from sluggish external demand, reversal of capital flows, and declines in
commodity prices are, however, expected to pose downside risks to growth prospects
in many countries in the region.
2.3.5 Further, the region remains vulnerable to downturns in the growth projectile of
developed countries and to external shocks such as sharp increase in food and fuel
prices. These price shocks are likely to lead to higher inflation and deteriorating
current account deficits in a number of fuel importing countries.

2.4 Domestic Economic Developments
2.4.1 The Zimbabwean economy has been on an upward growth trajectory since the
adoption of the multiple currency regime in 2009, registering growth rates of 5.4%
in 2009, 11.4% in 2010, 11.9% in 2011 and 10.6% in 2012. The growth rate is,
however, estimated to have slowed down to 4.5% in 2013.

Financial Stability Report 30 June 2014
Figure 1: Real GDP Growth Rate (%)

Source: ZIMSTAT, Ministry of Finance and Reserve Bank
* Estimate ** Projected
2.4.2 Economic performance remains fragile, on account of the various challenges the
economy is facing, notably supply side bottlenecks, liquidity shortages, lack of long
term financing, competition from cheap imports, and the slow pace of recovery in the
advanced economies.
2.4.3 Furthermore, the slow recovery in global economic activity continued to weigh down
the economic growth prospects in emerging and developing economies, through trade
and financial channels, with negative spillover effects on commodity dependent
countries like Zimbabwe.
2.4.4 The economy is projected to further decelerate to a growth rate of 3.1% in 2014. As
such the economy is vulnerable to adverse developments with respect to default
conditions in light of the projected slowdown in economic growth. The favourable
economic policies announced in the new economic blue print, ZimAsset are,
however, expected to encourage these sectoral investments.
2.4.5 The possibility of a poor rainy season as well as the expected softening of
international commodity mineral prices may pose downside risks to the agriculture
and mining sectors, with adverse impact on the whole economy.


2013*
2014**
Real GDP Growth Rate (%)
Real GDP Growth Rate (%)

Financial Stability Report 30 June 2014
2.4.6 Risks to the attainment of the 2014 economic growth rates emanate from the
following:

budget pressures, particularly from employment costs and lack of fiscal space;

low Foreign Direct Investment.

slow progress on the debt resolution and the re-engagement process; and

slow recovery in the global economy.
Default Conditions...
2.4.7 The sluggish rate of economic growth combined with company closures and low
disposable incomes will affect aggregate demand in the economy and resultantly
constrain the ability of borrowers to meet their loan obligations.
2.4.8 Furthermore, the weak performance of the economy will undoubtedly have an impact
on employment levels as companies are likely to streamline operations and lay off
workers in the process. The impact of such a development is anticipated to heighten
credit risk in the banking sector in view of the level of concentration of loans to
individuals at 25% as at 30 June 2014.
2.4.9 Improvement of default conditions in the financial sector is also dependent on the
improvement of liquidity conditions in the economy, general improvement in
disposable incomes and an increase in aggregate demand for locally produced goods.
In the absence of significant FDI inflows and offshore credit lines, liquidity
conditions are likely to remain largely constrained.
2.4.10 The envisaged recapitalisation of the central bank is a key component to the
improvement of liquidity conditions as it will enable the central bank to fulfill its
lender of last resort function, thereby easing liquidity bottlenecks in the financial
system.
2.4.11 An improvement in default conditions will therefore require a multi-pronged
approach which will address macro and microeconomic challenges that are giving
rise to heightened default conditions.

Financial Stability Report 30 June 2014
a) External Sector Developments
Balance of Payments Developments
2.4.12 The country’s external sector position continued to be under considerable pressure
owing to supply gaps in the economy which have seen the economy relying heavily
on imported products, against subdued export performance.
2.4.13 The situation has been compounded by continued industrial capacity underutilization,
cost of production, and closure of some companies due to loss of competitiveness.
2.4.14 Moreover, weakening international commodity prices, coupled with the slow-down
in domestic economic activity, on account of tight liquidity conditions, continue to
hamstring export growth.

Merchandise Trade Developments
2.4.15 The recurrent mismatch between exports and imports has continued to weigh heavily
on the trade and current accounts of the balance of payments.
2.4.16 Imports declined by 11.3% from US$7.56 billion in 2011 to US$6.71 billion in 2012,
reflecting weak aggregate demand in the economy and a slow-down in economic
activity. The major declines were recorded in the importation of motor vehicles,
chemicals, crude materials and machinery.
Figure 2: Merchandise Trade (2008-2013)

Source: Reserve Bank and ZIMSTAT

Exports f.o.b
Imports f.o.b

Financial Stability Report 30 June 2014
2.4.17 Despite the retreat in merchandise trade in 2012, export and imports deteriorated
marginally to US$3.8 billion and US$6.8 billion in 2013. Nonetheless, export
performance remains outweighed by the import bill on account of persistent capacity
gaps that has occasioned import dependence in the economy
Current Account Developments
2.4.18 In concomitance with merchandise trade developments, the current account deficit is
estimated to have widened from US$3.04 billion in 2012 to US$3.43 billion in 2013.
Resultantly, the current account deficit of 24.4% and 25.4% of GDP for 2012 and
2013, respectively remains high by international standards. Within the auspices of
SADC regional integration agenda, the country is expected to achieve a current
account deficit of less than 9% of GDP.
2.4.19 On the other hand, the capital account registered a surplus of US$1.72 billion in 2012
and is estimated to have further increased to US$2.72 billion in 2013. The capital
account surplus, however, continued to be driven mainly by debt creating short term
and long term capital flows whilst foreign direct and portfolio investments have
remained subdued.

Reflecting developments on both the current and capital account, the overall balance
of payments position improved from a deficit of US$435.3 million in 2012 to a deficit
of US$348.4 million in 2013.

Figure 3: Balance of Payments (US$M)
Source: Reserve Bank and ZIMSTAT


US$ Millions
Current Account
Capital Account
Overall Balance

Financial Stability Report 30 June 2014

2.4.20 The weak external sector position, coupled with lack of balance of payments support
will further worsen the liquidity situation obtaining in the economy. This will in turn
constrain credit creation to the productive sectors of the economy, thus further
curtailing economic growth in 2014.
2.4.21 Against the background of a difficult external position, the country’s external debt
stock stood at US$7.8 billion on account of the capitalization of interest charges by
the country’s creditors and additional offshore credit lines secured by the private
sector.
2.4.22 Overall, the economy is estimated to have grown by 3.4% in 2013, largely driven by
mining (6.5%), electricity and water (4.2%), transport and communication (3.4%),
distribution, hotels and restaurants (3.4%), finance and insurance (2.6%), and
manufacturing (1.5%).
b) Inflation Developments
2.4.23 The country’s headline inflation generally followed a downward trend in 2013, easing
from 3.02% in February 2013, to 0.54% in November 2013. Annual average inflation
for 2014 is projected at -0.05%.
Figure 4: Inflation Developments


-2
-1

15-Jan
Apr-11
Jul-11
Oct-11
Jan-12
Apr-12
Jul-12
Oct-12
Jan-13
Apr-13
Jul-13
Oct-13
(%)
Source: ZIMSTAT, June 2014
Annual Inflation Profile (%)

Financial Stability Report 30 June 2014
2.4.24 The combined effect of stable international oil and food prices, the depreciation of
the South African rand against the US dollar and the tight liquidity led to the
deceleration in inflation in 2013. The bulk of the country’s imports of finished goods
come from South Africa.
2.4.25 In the outlook period, inflation is expected to remain subdued, underpinned by
anticipated stable international oil prices as well as a weakening South African rand.
c) Public Sector Developments
Government Revenue
2.4.26 Total government revenue increased to US$3.74 billion in 2013, from US$3.45
billion in 2012, largely benefiting from improved compliance with regards to tax
payments.
2.4.27 Tax revenue, which generally accounts for around 90% of total government revenue,
increased from US$3.28 billion in 2012, to US$3.41 billion in 2013, spurred by
strong performance in Value Added Tax (VAT), income tax and excise duty. Non tax
revenue collections increased to US$326.9 million in 2013, from US$172.9 million
in 2012, benefiting from renewal of operating licences by telecommunication
companies.
2.4.28 In 2014, total revenue is projected at US$4.12 billion, driven by increases in both tax
revenue (US$3.824 billion) and non-tax revenue (US$296 million).
Government Expenditure
2.4.29 Total government expenditure is projected at US$4.12 billion in 2014, up from the
US$3.99 billion in 2013. Current expenditures are, however, expected to decline to
US$3.36 billion in 2014, from US$3.52 billion in 2013. In line with cash budgeting,
capital expenditure remains subdued as it generally reflects residual revenues after
paying for current expenditure outlays.

Financial Stability Report 30 June 2014
2.4.30 The economy’s budget balance worsened to a deficit of 1.8% of GDP in 2013, from
a deficit of 1.3% in 2012. The deficit is expected to be financed from domestic
sources as well as accumulation of domestic arrears.
d) Household Sector Developments
2.4.31 Unemployment level is estimated to have increased from about 10.7% in 2011 to
about 11% in 2012. In 2013, unemployment is to remain close to 11%. Household
spending patterns and ability to borrow and repay loans have been adversely affected
by the tight liquidity conditions prevailing in the economy.
2.4.32 The Zimbabwe Vulnerability Assessment Committee predicted that 16.9% of the
population will be food insecure in 2013, thus unable to access sufficient food
particularly during the peak hunger period stretching from January to March 2014.
This compares unfavourably with 2012 consumption year, in which about 11.5% of
the population was food insecure.
2.4.33 The increase in food insecurity levels is attributed to the unfavourable weather
conditions, the high cost of agricultural inputs and the rising food prices as agents
predict another poor agricultural season.
2.4.34 Household indebtedness has reduced disposable incomes of most households, a
development which has negatively affected aggregate demand hence economic
activity.

Financial Stability Report 30 June 2014
CHAPTER 3: FINANCIAL SECTOR PERFORMANCE AND
RESILIENCE
3.1
Introduction
3.1.1 The banking system remains generally stable except a few institutions of low
systemic importance that are facing isolated challenges. However, the increasing
level of non-performing loans continues to threaten the solvency, profitability and
liquidity of the banking sector. Bank lending is growing at a decreasing pace. Credit
growth has been funded largely through retail deposit growth over recent times.
3.1.2 The general insurance sector continues to be largely stable and to demonstrate ability
to cover claims in the ordinary course of business.
3.1.3 Payment and settlement systems have continued to operate satisfactorily, with key
systems processing payments effectively, and exhibiting a high degree of availability.
3.1.4 Banking institutions continued to command the largest portion of total financial
sector assets in the country, followed by the insurance sector.

3.2
Banking Sector
3.2.1 The Zimbabwean banking system comprised 14 operating commercial banks, 4
building societies, a merchant bank and a savings bank as at 30 June 2014. The market
share of commercial banks in terms of assets stood at 82.42% as at 30 June 2014.
Building societies, on the other hand follow a mortgage finance business model, with
a market share of 14.88% as at 30 June 2014. The savings bank is owned by the
government and its market share amounted to 1.46% as at 30 June 2014.
Solvency Conditions...
3.2.2 The banking sector’s average capital adequacy ratio decreased from 19.33% as at 31
December 2013 to 18.56% as at 30 June 2014, which is marginally above the
minimum regulatory requirement of 12%. The sector recorded an average leverage
ratio of 4.1%, which was below the minimum threshold of 6%.
3.2.3 The core capital ratio for the sector has also been on a downward trajectory
decreasing from 26.08% in December 2009 to 15.65% at the end of June 2014. The
decline in tier 1 ratio is largely due to an increase in risk taking activities such as

Financial Stability Report 30 June 2014
lending and prudential filters on capital elements that were instituted as well as losses
posted by some banking institutions.
3.2.4 A third of the operating banking institutions had capital positions below the
prescribed minimum requirements largely due to persistent losses and high levels of
provisions to cover rising NPLs.
3.2.5 Banking institutions with marginal capitalization are more susceptible to the liquidity
challenges as they lack sufficient buffer to absorb exogenous and endogenous shocks.
Table 3 shows the trend in banking sector capital since 2009.
Table 3: Capital Ratios, December 2009 – June 2014
Capital Adequacy
Dec-09
Dec-10
Dec-11
Dec-12
Dec-13
Jun-14
Regulatory capital to risk-weighted assets

Percentage of banks greater or equal to 12
percent

Percentage of banks below 12 and above 6
percent minimum

Percentage of banks below 6 percent
minimum

Capital to assets


3.2.6 The decrease in banking sector CAR is largely attributed to increases in risk weighted
assets as banking sector loan portfolios continued on the upward trend over the last
few years.
3.2.7 Meanwhile the total risk weighted assets (RWA) for the sector have been increasing
steadily over the years mainly driven by lending activities. The trend in RWA has,
however, been punctuated by a marginal decrease as banking institutions were forced
to curtail their lending activities due to the liquidity challenges experienced in the last
quarter of 2013.
3.2.8 While credit related RWA account for the bulk of RWA, some $945.76 million worth
of RWA stem from operational risk. Market risk RWA are low due to lower activities
on banks’ trading books.

Financial Stability Report 30 June 2014
3.2.9 The capital ratios and RWA are calculated according to the Basel I capital rules for
credit risk, while Basel II rules are used for market and credit risks. The banking
sector is in the monitoring phase of Basel II implementation and the Reserve Bank is
assessing the stability of banks’ Basel II systems to ensure a smooth transition into
the revised capital framework.
Earnings Conditions...
3.2.10 The banking sector’s retained earnings have swung upwards from $4.90 million as at
30 June 2013 to $26.56 million for the half year ended 30 June 2014.
3.2.11 However, out of the twenty operating banking institutions eight banking institutions
recorded losses amounting to $32 million for the first half year ended 30 June 2014
reflecting the significant build up in loan loss provisions and write offs as well as
high operating expenses such as staff benefits and occupancy costs against the
background of subdued revenues.
3.2.12 Return on equity increased from 0.30 % to 2.72% over the same period, while Return
on assets (ROA) was 0.49%, up from 0.12% in June 2013. The structural
profitability1of banks, representing their capacity to create long term sustainable
profits declined marginally to 2.93%, compared to 3.03% in June 2013.
3.2.13 The contribution of non-interest income to total income has remained relatively stable
around 32% over the past 18 months as depicted in the table below:
Table 4: Composition of bank profits ($ millions)

Dec 2009
Dec 2010
Dec 2011
Dec 2012
Dec 2013
Jun 2014
Interest income

Fee income


Provisions

Net income


1 (interest income + fee income - operating expenses ) / total assets

Financial Stability Report 30 June 2014

Bank liquidity and funding conditions...
3.2.14 The total banking sector deposits have been on an upward trend, growing from
$705.76 million as at 30 June 2009 to $4.96 billion in June 2014. The growth partially
reflects the increase in economic activity as well as the sluggish performance of the
stock market leading to strong inflows of deposits.
3.2.15 The banking sector has largely mobilized short-term deposits, which are transitory
and volatile in nature reflecting low confidence and disposable incomes. Short term
deposits constituted 86.29% of the deposits in the banking sector as at 30 June 2014.
Figure 5: Banking Sector Deposits: 2009 - 2014


3.2.16 The tenure of deposits makes it difficult for banks to refinance long-term assets and
exposes banks to liquidity risk.
3.2.17 The short-term lending phenomenon has created asset quality vulnerabilities due to
mismatches between short-term funding and the credit requirements of medium to
long-term projects. An illiquid market has also increased the cost of credit and
heightens default probabilities among borrowers.


Total Deposits ($M)
Time Deposits ($M)
Demand Deposits ($M)

Financial Stability Report 30 June 2014
3.2.18 The country’s macroeconomic liquidity challenges also emanate from the high
external debt, absence of an operational lender of last resort, high current account
deficit which is draining liquidity from the local economy and perceived country risk
which is impeding banking institutions’ ability to secure offshore funding under
favourable terms.
3.2.19 The interest spread between deposit rates and lending rates has remained wide at
4.38% as at 30 June 2014 mainly reflecting the illiquidity in the market, as indicated
in the figure below.
Figure 6: Average Spread between Lending and Deposit Rates

3.2.20 Further, the currently obtaining interest rate regime has in part contributed to the high
production costs of local products and at times resulting in local firms defaulting on
loans as they fail to break even (interest rate risk induced default).
Impact of Interest Rate Environment...
3.2.21 Interest rate risk is generally low mainly due to the current structure of banks’
balance sheets that are heavily influenced by subdued market activity and limited
tradable securities. This has resulted in the sector’s exposure to interest rate risk
mainly emanating from the banking book with major repricing assets being loans and
advances.

Jan-11
Mar-11
May-11
Jul-11
Sep-11
Nov-11
Jan-12
Mar-12
May-12
Jul-12
Sep-12
Nov-12
Jan-13
Mar-13
May-13
Jul-13
Sep-13
Nov-13
Jan-14
Mar-14
May-14
Source: Reserve Bank

Financial Stability Report 30 June 2014
3.2.22 A review of quarterly stress testing results highlighted that banking institutions are
effectively monitoring their exposure to interest rate risk in the banking book and
have various limits on repricing gaps with respect to capital.
3.2.23 The sector had a liability sensitive book as at 30 June 2014. If there is a parallel shift
in the yield curve by 300 basis points the sector would lose $24.06 million
representing 2.48% of the sector’s total capital as at 30 June 2014.
3.2.24 However, the interest rate environment is expected to remain unchanged over the
short-term.

Loans and Credit risk
3.2.25 The banking sector has witnessed significant deterioration in asset quality as the nonperforming loans to total loans ratio increased from 15.92% as at 31 December 2013
to 18.49% as at 30 June 2014.
3.2.26 The growth in credit over the last five years resulted in a build-up of credit risk as
evidenced by corresponding growth in risk weighted assets.
3.2.27 The banking sector has faced heightened exposure to default risk over the last three
years, as reflected by the ratio of non-performing loans to total loans which rose from
7.55% as at December 2011 to 18.49% as at 30 June 2014.
3.2.28 Despite the relative briskness of deposit inflows, banks have adopted conservative
lending approach owing to concerns about the increasing credit risk of borrowers
with the slowdown in the real economy and the buildup in household debt.

Financial Stability Report 30 June 2014
Figure 7: Non-Performing Loans Dec 2009 – June 2014

Dec 09
Dec 10
Dec 11
Dec 12
Dec 13
June 14

3.2.29 The deteriorating credit quality can be attributed to key macroeconomic and
microeconomic factors in the operating environment as detailed in the diagram
below:
Figure 8: Factors affecting credit quality

3.2.30 There is generally a mismatch on the credit market between tenure of available credit
and the product cycle of most firms. Such mismatches coupled with high interest rates
have potential to destabilize corporate balance sheets resulting in an increase in
NPLs.
Factors
affecting
credit
quality
Low capacity
utilisation in
industry
Limited FDI
and offshore
credit
Depressed
aggregate
demand
Tight domestic
liquidity
Volatile and
transitory
deposits
Corporate
governance
and risk
management
weaknesses
Nonfunctional
LOR

Financial Stability Report 30 June 2014
3.2.31 Going forward, the banking sector will benefit from the establishment of a robust
credit reference system which is expected to promote effective credit risk
management.
Figure 9: Total Banking Sector Loans Dec 2009 – June 2014

3.2.32 The banking sector reported total loans and advances amounting to $3.81 billion as
at 30 June 2014, as indicated in Figure 7 below. The top five banks had loans
amounting to $2.15 billion or 56.5% of total banking sector loans and advances.
3.2.33 There has been a notable stagnation in the loans and advances growth rate since
December 2012 reflecting a combination of subdued economic activities and cautious
lending approach taken by some banks against the background of deteriorating credit
quality and possible adjustments to balance sheet structures in light of the need to
meet the Reserve Bank’s revised capital requirements.


Jun-14
Figures in (billions)

Financial Stability Report 30 June 2014
Figure 10: Sectoral Distribution of Credit as at 30 June 2014


3.2.34 The major beneficiaries of domestic credit are corporate entities. Lending to
corporations and state enterprises was 75.30% of the banking sector loans while
lending to individuals and household sector, which is predominantly consumptive,
was 24.7%.
3.2.35 Meanwhile, financing of other productive sectors such as mining, construction and
transport has been adversely affected by the absence of long term asset and leasing
finance from banking institutions, given the transitory nature of deposits.
3.3 Capital Market
3.3.1 The Zimbabwe Stock Exchange (ZSE) had 67 listed companies as at 30 June 2014.
Activity on the bourse, however, remained largely subdued due to illiquidity in the
economy.
3.3.2 For the period 2009 to 2011 the bourse had three new listings, one initial public
offering and two reverse listings.
Agriculture
15.60%
Construction
3.80%
Communication
7.10%
Manufacturing
13.70%
Financial Firms
2.00%
Mining
4.20%
Services
17.60%
Transport
2.80%
Individuals
24.70%
Distribution
8.50%

Financial Stability Report 30 June 2014
3.3.3 Market capitalisation rose from $3.8 billion at the end of 2009 and peaked at $6
billion in July 2013, before retreating to $4.9 billion as at 30 June 2014.
3.3.4 The downward trend is reflective of low investor confidence in the economy and
general liquidity challenges.
3.3.5 The global financial conditions have recently become tighter following the US
Federal Reserve tapering exercise of its bond purchase on expectations of full
recovery of the US economy. This has prompted a slowdown and in certain instances
a reversal of private portfolio investments into emerging markets. Europe’s regional
debt restructuring exercise of its corporate sector remains incomplete. Some
emerging markets (Brazil, Indonesia, India and Turkey) and some parts of the African
region (including Zimbabwe) have also suffered from a debt burdened corporate
sector hence the need for tighter asset quality reviews. The global economy therefore
remains fragile.
3.3.6 The country’s weak macroeconomic environment makes it costly for companies to
source capital on the international market given higher inherent sovereign risk
attached to the country by foreign investors. The persistent liquidity crunch is
threatening most players’ viability hence the recent experience of delistings and
suspensions, unsuccessful capital raising exercises and increased non compliancy to
set rules and regulations.
3.3.7 Meanwhile, globalization is changing the operating and regulatory environment with
strong demands for modern market infrastructure, diversified investment products,
more liquid markets and sustainable business practices in order for a market to remain
competitive.
3.4 Market Turnover
3.4.1 In line with the performance recovery in the second quarter of 2014, there was
improvement in trading activity on the stock market. Market turnover volume
increased by 22.9% to 837,523,059 shares in the quarter up to June 2014, from
681,599,364 shares in the previous quarter. In addition, market turnover value also

Financial Stability Report 30 June 2014
increased by 3% from $112.5 million in the first quarter to US$115.9 million as at 30
June 2014. Despite a decline in foreign purchases in the second quarter of 2014,
foreign investor participation in the bourse remained strong, contributing about 60%
of trade value, against a background of Government’s intention to review the
Indigenization Policy. During the quarter under review, net foreign purchases were
US$3.1 million, compared to US$29.5 million the previous quarter.
3.4.2 The industrial and mining indices for the period to 30 June 2014 are indicated in
Figure 11 below.
Figure 11: ZSE Index Trend


Regulatory Initiatives in the Capital Market
3.4.3 The Securities and Exchange Commission has facilitated a review of the ZSE Listings
Rules in line with the changing operating and regulatory environment for purposes
of harmonization and alignment with best practice.
3.4.4 The Commission maintains its regulatory cooperation with peer regulators both
locally and beyond borders for information sharing purposes. Memorandum of
Understanding have been signed with the Public Accountants and Auditors Board,

19-Feb-09
15-May-09
8-Aug-09
1-Nov-09
25-Jan-10
20-Apr-10
14-Jul-10
7-Oct-10
31-Dec-10
26-Mar-11
19-Jun-11
12-Sep-11
6-Dec-11
29-Feb-12
24-May-12
17-Aug-12
10-Nov-12
3-Feb-13
29-Apr-13
23-Jul-13
16-Oct-13
9-Jan-14
4-Apr-14
28-Jun-14
Industrial Index
Mining Index

Financial Stability Report 30 June 2014
Reserve Bank of Zimbabwe, Insurance and Pensions Commission and Committee of
Insurance, Securities and Non-Banking Financial Authorities.
Measures to enhance Capital Market stability
3.4.5 The capital market is going through technological transformation through the
automation of the ZSE trading platform and the establishment of a dematerialized
environment. The upgrading of market infrastructure is aimed at reducing transaction
costs, increasing transparency and improving efficiency.
3.4.6 The Government and the ZSE signed a Memorandum of Understanding (MoU) in
July 2014 on the demutualisation of the exchange as part of efforts towards
strengthening the ZSE’s institutional framework.
3.4.7 The Insurance and Pensions Commission (IPEC) thrives to attain membership to
international standards setting bodies for alignment with best practice and
cooperation with peer regulators for information sharing purposes.
3.4.8 Overall, there is need to build a consistent policy framework coupled with a robust
regulatory framework while putting in place the ideal infrastructure which will
catapult the capital markets in light of a competitive global economy.
3.5 Insurance Sector
3.5.1 The architecture of the insurance industry is as shown below:
Table 5: Number of Registered Regulated Entities
Type of Institution
Number of Registered Entities
Dec 2012
Dec 2013
Jun 2014
Life

Funeral

Non- Life

Life Reinsurance

Non-Life Reinsurance

Insurance Brokers

Reinsurance Brokers

Total

Financial Stability Report 30 June 2014
3.5.2 The total assets of the insurance and pensions industry were $4.3 billion as at 30 June
2014 representing 36.63% of real GDP.
3.5.3 The insurance subsector at 30 June 2014 had a total asset base of $1,935 billion as
depicted in the table below.
Table 6: Insurance Industry Assets per Class of Business
Assets
Dec-12 ($000)
Dec-13 ($000)
Jun-14 ($000)
Growth
Dec 12 - Jun 14
Life including funeral
business

Non- Life

Life Reinsurance

Non-Life Reinsurance

Total

3.5.4 As at 30 June 2014 life companies including funeral companies accounted for 84%
of the industry’s total assets. One institution controls 73.20% of the life assurers’
assets and 61.33% of the insurance industry asset base.
3.5.5 The gross premium written by the insurance sector grew by 20.63% from $418
million and to $503 million, between Dec 2012 and Dec 2013, mainly due to a huge
uptake of funeral insurance through both funeral and life companies.
3.5.6 Direct non-life insurers reinsure half of their business as compared to life assurers,
where spread of risk through reinsurance arrangements is low at 2%. The level of
reinsurance for the two broad classes of insurance business is shown in the graph
below.

Financial Stability Report 30 June 2014

Figure 12: Percentage of Business Reinsured by Life and Non-life Companies

Capitalisation
3.5.7 Life assurance companies (11) had a total capital base of $244.4 million as at 30 June
2014. The largest assurance company had $134.06 million, constituting 54.85% of
the subsector’s capital. The top five companies commanded a market share of the
95.5% of the entire capital base. Only one institution had a capital base below the $2
million capital requirement.
3.5.8 The funeral assurance companies (9) reported a total capital position of $20.5
million. Only four companies had capital positions above the required minimum of
$1.5 million, while the combined shortfall for companies with capital deficits was
$3.56 million.
3.5.9 The only two life reassurance companies in the market had a total capitalization of
$6.7 million, with one of them reporting a capital deficit against the minimum
requirement of $1.5 million.
3.5.10 The aggregate capital for the 24 non-life insurance companies was $70 million as at
30 June 2014. Eight of the institutions reported capital positions which were below
the minimum capital requirement of $1.5 million, with a combined shortfall of $3.67
million. The top two non-life insurers held $23.76 million or 33.9% of the total
industry capital while the top five held $35.49 million or 50.68%.
3.5.11 The total capital position for the nine non-life re-insurance institutions in the sector
was $66.75 million as at 30 June 2014. One institution had capital below the required

Dec- 12
Dec-13
Jun-14
Life
Non-Life

Financial Stability Report 30 June 2014
threshold of $1.5 million. The largest institution held 41% of the industry’s capital
base while the top five hold 89.3%.
3.5.12 The table below summarises the subsector’s capital position:
Table 7: Capital Positions as at 30 June 2014
Institutions
Total number
Total Capital ($ m)
No. with capital deficit
Life assurance

244.4

Funeral Assurance

20.5

Life reassurance

6.7

Non-life insurance

Non-life reassurance

66.75

Pensions Industry
3.5.13 As at 30 June 2014 the pension industry had a total of 1437 pension funds with an
estimated membership of 760,000. The pension funds comprise of a mixture of selfadministered and insured funds.
3.5.14 The total assets of the pension industry were $2.74 billion as at 31 December 2013,
representing an increase of 7.94% from $2.54 billion as at 31 December 2012.
3.5.15 During the same period, contributions increased by 3.43% from $410,765 to
$424,847 though part of these are in arrears.
3.5.16 The current legal framework for the insurance and pension and provident funds is
considered to be outdated and has constrained timely correction of identified
practices that are detrimental to the healthy functioning of the sector.
3.5.17 IPEC has noted instances of weak corporate governance practices in owner managed
insurance entities particularly in respect of conflict of interest and related party
transactions which compromise the safety of the sector going forward.
3.5.18 Another challenge in the sector relates to high costs against depressed investment
returns. This has sometimes led to the utilization of contributions to cover operational
expenses.

Liquidity Constraints...
3.5.19 The asset structure of the pensions industry as shown in the diagram below is skewed

Financial Stability Report 30 June 2014
towards properties, equities and other assets, which are estimated at 88% of total
assets. The asset portfolio is reflective of the general liquidity challenges prevailing
in the economy.
Figure 13: Asset Structure of the Insurance and Pensions Industry as at 31 Dec 2013


3.5.20 The industry’s asset structure reflects the legacy of conversion to the multi-currency
regime that eroded all assets, which were in the money market. In addition, there are
limited investment options in relation to investment instruments available in the
market.
3.5.21 The low compliance level on prescribed assets depicted by a prescribed asset ratio of
1.54% against a required ratio of 10% is mostly a reflection of non-availability of
such paper on the market. In 2014, three financial bonds targeting the agricultural
sector and SMEs have been issued with an approved prescribed asset status.
3.5.22 The industry players through the Ministry of Finance have established the Insurance
and Pensions Housing Fund to initially raise $45 million in prescribed assets for the
purpose of providing housing units to low income earners.

Low Pension Pay-outs...
3.5.23 The low pensions are a legacy of the hyperinflationary period prior to 2009 and the
approach in which pension values were determined on conversion from the use of the
Zimbabwean dollar to USD.
Property 38.14%
Equities 27.67%
Cash and Money
Market 8.59%
Prescribed Assets
1.54%
Contribution &
Debtors 4.97%
Other Assets 19.09%

Financial Stability Report 30 June 2014

Premium and Pension Contribution Arrears ...
3.5.24 As at 31 December 2013, premium and contribution debtors amounted to $229
million.
3.5.25 Whilst the insurance and pensions industry’s premium and contribution debtors to
total assets ratio was 4.97%, the arrears position for some entities constituted a
significant portion of their balance sheets, some as high as 50%. On average,
premium debtors to total assets is 24%. High premium and contribution debtor ratios
adversely affect entities' ability to settle claims or pay out pension benefits timely.
3.5.26 Contribution arrears are more pronounced for public enterprises’ pension funds and
on the other hand non-life players have higher premium arrears than life entities.
3.5.27 Arrears have generally arisen where employers deduct pension contributions from
employees’ salaries and fail to remit the same to the pension fund in terms of the law
citing viability challenges under current economic challenges.
3.5.28 The retention of these debtors on the books of the insurer technically overstates the
capitalisation of an insurance entity.
Major Regulatory Developments
3.5.29 The Insurance and Pension Commission increased the minimum capital requirements
in a bid to improve the capacity of underwriters to underwrite more business in 2013.
The revised minimum capital requirements are shown in the table below:
Table 8: Minimum Capital Requirements
Class of Business
Minimum Capital Requirements
Old
New effective 30
June
Non-life Insurers
$300,000
$1.5 million
Non-life Reinsurers
$400,000
$1.5 million
Life Assurance Companies
$500,000
$2 million
Life Reassurance Companies
$500,000
$2 million
Funeral Assurers
$400,000
$1.5 million

Financial Stability Report 30 June 2014
3.5.30 IPEC has designed and circulated investment guidelines for life companies and selfadministered funds which sets minimum and maximum limits for prescribed assets,
properties, quoted and unquoted shares, money market and cash and other
investments. The objective is to ensure improvement in regulated entities’ asset
portfolios in line with the nature of their business. The guidelines also put a cap on
related entity investments.
3.5.31 IPEC also issued a directive requiring registration of all practicing actuaries with the
Actuarial Society of Zimbabwe. The initiative seeks to promote good order and
ensure observance of best practices, in particular the upholding of professional codes
of conduct of actuaries.
3.5.32 In addition, guidance was issued on the calculation of capital and other related issues
for short term insurers and reinsurers in order to improve the quality of assets that are
held as capital in terms of permanence and function of capital to act as a buffer against
losses. All assets which are not available to meet obligations are regarded as unqualifying assets and need to be deducted from an insurer’s capital for the purpose of
calculating regulatory capital.
3.5.33 During the period under review there were a number of changes in the composition
of the insurance sector. The Commission registered one non-life insurer, one life
assurer, four brokers and one pension fund administrator.
3.5.34 The Commission also de-registered four non-life insurance companies due to
solvency challenges that manifested in failure to meet claims. These entities were
initially suspended and when recapitalisation efforts failed, the Commission resolved
to cancel the licences of these insurers.
3.5.35 Meanwhile three insurers remain suspended due to viability and insolvency
challenges.

Micro-insurance Regulation
3.5.36 The Commission is also developing a micro-insurance regulatory framework which
will be finalised after a planned survey in the third quarter of 2014.

Financial Stability Report 30 June 2014

3.6 Financial Infrastructure
3.6.1 The country’s key payment systems have continued to operate effectively over the
past year. The Reserve Bank is mandated to promote the smooth operation of
payment systems mainly through oversight.
3.6.2 The Reserve Bank administered Real Time Gross Settlement system which enables
prompt settlement of interbank transactions remains highly reliable and exhibit safety
and soundness. A total of 21 financial institutions were participating in the payments
systems as at 30 June 2014. The table below provides a summary of the participants
in various payment streams up to 30 June 2014.
Table 9: Financial Market Infrastructure Participants
System
Participants
RTGS/CSD/SWIFT

Cheque Clearing House

Zimswitch

Visa

MasterCard

3.6.3 The RTGS system functioned smoothly during the year processing 83% of the total
value of both large-value and retail payment streams in the country. The volume of
transactions processed in 2013 rose slightly by 4% compared to the previous year,
reaching 2.3 million valued at $42 billion. Transactions worth $19.88 million were
processed during the first half of 2014.

Financial Stability Report 30 June 2014


Figure 14: RTGS System Values for 2009 to 2013

3.6.4 However, RTGS delays have been experienced at some banks facing liquidity
challenges.
3.6.5 Notably, the complexity and importance of the financial market infrastructures for
payment handling has greatly increased over the last few years.
3.6.6 The value of electronic transactions executed grew by 8% to $53 billion in 2013, up
from $45.1 billion recorded in 2012.
3.6.7 The figures below shows the growth in availability of payments access points and
access devices over the last few quarters.


Values in US$Billions

Financial Stability Report 30 June 2014
Figure 15: Growth in Payment System Access Points


Figure 16: Payment Systems Access Devices

Quarter ending June

Quarter ending
September 2013
Quarter ending
December 2013
Quarter ending March

Quarter ending June

Thousands
POS POPULATION
ATM Population
Mobile Banking Agents


Quarter ending June

Quarter ending
September 2013
Quarter ending
December 2013
Quarter ending
March 2014
Quarter ending June

Active Mobile & Dr Card Users in Millions
Internet, Cr & Prepaid Cards in Thousands
Mobile
Dr Cards
Internet

Financial Stability Report 30 June 2014

3.6.8 The Reserve Bank has allowed both banks and non-banks to work together in the
provision of financial services in line with the National Payment Systems (NPS) Act.
3.6.9 The phenomenal adoption of mobile telephones has opened up new opportunities for
mobile banking as a way to reach out the unbanked communities. The mobile phone
penetration rate that grew significantly from below 10% in 2006 to above 100% in
June 2014.
3.6.10 Leveraging on this technology, all the banks have partnered with Mobile Network
Operators (MNOs), to offer mobile banking services.
3.6.11 The increase in mobile payment transactions is attributable to mobile network
operators and other relevant stakeholders who are promoting the use of mobile
phones as a channel for payment systems, as part of the nation’s financial inclusion
drive.
Measures to enhance financial infrastructure soundness...
3.6.12 Cognisant of the fact that payment systems efficiency must be augmented with
payment systems soundness in order to promote overall stability, the Reserve Bank
enforces minimum requirements which are informed by international best practices.
3.6.13 Payment systems providers and participants are required to implement the Principles
of Financial Market Infrastructures and conduct self-assessments in order to identify
gaps or areas of improvement within their establishments and ascertain appropriate
measures to ensure compliance.
3.6.14 In addition, the Bank collaborates with other regulators and various arms of the
Government in the process of evaluating payment systems initiatives to reduce
unnecessary risks in the national payment system.
3.6.15 The average collateral lodged for the local cards and cheque payment streams
increased by 1% from $7.2 million in March 2012 to US$5.89 million in 2013.
3.6.16 The collateral lodged with the Bank was considered to be adequate to cover potential
settlement risk in the card and cheque clearing streams.

Financial Stability Report 30 June 2014
CHAPTER 4: MEASURES TO ENHANCE FINANCIAL STABILITY
AND OUTLOOK

4.1
Introduction
4.1.1 The financial sector regulatory agencies are pursuing a number of measures to
enhance supervisory processes and promote financial sector stability as outlined here
under.
4.2
Multi-Disciplinary Financial Stability Committee
4.2.1 The broad mandate of a Multidisciplinary Financial Stability Committee is to
promote financial stability through macro-prudential oversight of the financial sector
by promoting coordination and information exchange among authorities responsible
for financial sector regulation and undertaking joint strategic reviews as well as
managing contingency planning for cross-sector crisis management;
4.2.2 The institutional structures of the Multidisciplinary Financial Stability Committee
include, two Sub-Committees – a Technical Committee for Financial Stability
Assessment; and a Committee on Supervisory & Regulatory Cooperation.
4.2.3 The financial sector supervisory agencies namely Securities Commission, Insurance
and Pension Commission and the Reserve Bank signed a Memorandum of
Understanding which covers the supervision of financial conglomerates that have
subsidiaries falling under the three supervisory authorities and the sharing of
information among regulators.
4.2.4 This is expected to enhance the maintenance of a robust and prudentially managed
financial services sector as it allows for timely sharing of information across the
authorities’ jurisdictions.

4.3
Systemic Crisis Framework
4.3.1 The Reserve Bank has developed a framework for Contingency Planning and
Systemic Crisis Management which outlines a set of policies, actions and processes
necessary for the prevention, management and containment of banking systemic
distress and crisis.

Financial Stability Report 30 June 2014
4.3.2 The key components of contingency planning and systemic crisis management
include, sound institutional arrangements with explicit inter-agency coordination
mechanisms and powers that allow for the early intervention into a problem bank to
prevent its failure. The framework takes cognizance of crisis prevention policies in
the areas of regulation, supervision and financial stability monitoring as the second
line of defence, failing which public authorities may intervene as the third line of
defence to mitigate the risk of economy-wide effects.
4.3.3 The framework has been distributed to other financial sector regulators for
contributions and comments pending finalisation.

4.4
Minimum Capital Requirements
4.4.1 The minimum capital requirements have been revised to promote flexibility in the
financial sector, with both large and small institutions that are strong and profitable.
4.4.2 In the banking sector, the revision which is in line with the Banking Act, will result
in three tiers of banks, each with a different minimum capital requirement and a
different set of allowed activities. The banks’ recapitalization plans for December
2020, with interim targets, are to be submitted to the RBZ by end-December 2014.
4.4.3 Further, the Reserve Bank has embarked on a gradual approach to Basel II
implementation that allows for a smooth transition to the new approaches.
4.4.4 The Insurance and Pension Commission also increased the minimum capital
requirements in a bid to improve the capacity of underwriters to assume more risk in
as highlighted in Chapter 3.
4.5
Proposed Amendments to Banking and Insurance Laws
4.5.1 The Reserve Bank has proposed improvement to the legal and regulatory framework,
which would incorporate separate insolvency regimes for dealing with failed banking
institutions.
4.5.2 The proposed amendments cover the areas of corporate governance and compliance;
troubled bank resolution; and prompt corrective action programme.

Financial Stability Report 30 June 2014
4.5.3 The Insurance and Pensions Commission is also currently reviewing the Insurance
Act, the Pensions and Provident Funds Act as well as the Insurance and Pensions
Commission Act.
4.5.4 The legislation is being amended to among other things, incorporate the core
principles of insurance and pension funds regulation developed by international
standard setting bodies namely, the International Association of Insurance
Supervisors (IAIS) and the International Organisation of Pension Supervisors
(IOPS). The new legislation will, inter alia provide for Medical aid societies to be
regulated by IPEC and the establishment of a policyholder protection fund.
4.6
Resolution of Non-Preforming Loans
4.6.1 The Reserve Bank plans to tackle the deteriorating quality of assets in the banking
system. Given the impact of high level of non-performing loans (NPLs) on financial
stability and economic growth, the Reserve Bank will develop a framework to
address the problem.
4.6.2 The Zimbabwe Asset Management Corporation (ZAMCO), a special-purpose vehicle
(SPV), has been established to acquire, restructure, and dispose of the NPLs while
minimizing the impact on the budget. The authorities plan to develop the key features
required to underpin a successful asset purchase strategy for ZAMCO over the next
12 months
4.7
Establishment of a Credit Reference System
4.7.1 ZAMCO’s operations will be complemented by the establishment of a central credit
registry system to address informational asymmetries in the sector.
4.7.2 The establishment of a credit reference system will enable the warehousing of
valuable credit information on individuals’ and corporate entities’ borrowing history
and their repayment patterns and promote effective credit risk management by the
banking institutions.

Financial Stability Report 30 June 2014
4.8
Financial Stability Outlook
4.8.1 Overall, the financial system has generally maintained stability, although
macroprudential conditions have worsened due mostly to economic slowdown, and
growing current account deficit.
4.8.2 The outlook for financial stability in Zimbabwe stands at a delicate balance due to
fragilities in both domestic and global economic recovery. Global economic recovery
continues to be threatened by fragilities in some advanced and emerging economies.
4.8.3 On the domestic arena, the economy remains vulnerable to global economic
fragilities as well as adverse developments in the mining and agriculture sector.
4.8.4 In the medium term, financial system stability is expected to improve on account of
an operational lender of last resort facility, recapitalisation of the Reserve Bank,
creation of a credit reference bureau, clean up of non-performing loans and the
positive rebuild of confidence in the financial services sector.
4.8.5 The banking sector continues to grapple with underlying vulnerabilities manifesting
through limited credit creation, high lending rates, rising non-performing loans, and
structural liquidity challenges.
4.8.6 The capital market will continue to reflect the state of the economy in the short term
hence investors are likely to maintain a cautious investment stance awaiting the
recovery of the economy. In the medium term, the success of capital markets depends
on how the prevailing macroeconomic challenges are managed. Significant
opportunities are set to arise with economic recovery.
4.8.7 IPEC is poised to enhance its regulatory and supervisory framework in line with
international best practices.
4.8.8 Insurance tends to be elastic to income levels hence the performance of the sector
will also depend on the performance of the economy. Equally the pensions industry’s

Financial Stability Report 30 June 2014
fortunes in terms of contributions will follow the direction which the economy will
take.
4.8.9 It is therefore expected that insurance business will be flat or marginally improve on
account of compulsory third party motor insurance and the uptake of funeral business
as people hedge against the risk associated with death.

4.9
Conclusion
4.9.1 The Financial Stability Report reflects the collective assessment of the
Multidisciplinary Financial Stability Committee on risks to financial stability. The
Report promotes awareness about the vulnerabilities in the financial system and seeks
to inform about the resilience of the financial institutions and to encourage debate on
issues relating to development and regulation of the financial sector.
4.9.2 The forgoing chapters have highlighted that while the financial system remains
relatively stable there a number of threats to financial system stability for the next 12
months which include:
a) Rising non-performing corporate debt;
b) High household debt;
c) Liquidity and funding risk;
d) Commodity price increase/decrease on the international markets
e) Low growth in international trade
4.9.3 Nonetheless, the policies and programmes being put in place by the Government and
regulatory authorities have provided impetus to the positive outlook.

Financial Stability Report 30 June 2014
Appendix A: Financial Stability Indicators: Dec 2009 – June 2014

Dec-09
Dec-10
Dec-11
Dec-12
Dec-13
Jun-14
Capital Adequacy


Capital and Reserves
384.56 m
465.21 m
568.42 m
828.17 m
939.19 m
891.87 m
Regulatory capital to RWA

Percentage of banks greater or equal to 10
percent

Percentage of banks below 10 and above 6
percent minimum

Percentage of banks below 6 percent
minimum

Capital to assets

Asset quality (%)


Foreign exchange loans to total loans

Past-due loans to gross loans

Nonperforming loans

Watch-listed loans

Provisions as percent of past-due loans

Earnings and profitability


Net Income after tax
9.49 m
34.34m
86.01 m
69.23 m
4.46 m
26.56 m
Net profit (before tax and extraordinary
items)/net income

Return on assets

Return on equity

Expenses/ income

Liquidity


Liquid assets/total assets

Liquid assets/short-term liabilities

Loans/deposits

Liquid assets/total deposits

Foreign exchange liabilities/total liabilities

Excess Reserves to Broad Money

Sensitivity to market risk


Net foreign exchange assets (liabilities) to
shareholders' funds

Interest rates


Lending rate minus demand deposit rate

Commercial banks fixed deposits (12
months)

Commercial banks lending rate (weighted
average)

Saving deposit rate


Financial Stability Report 30 June 2014
Appendix B: Real Sector


REAL SECTOR

2013 est
2014 proj
Real GDP at Market prices (US$' m)

Nominal GDP at Market (US$' m)

GDP at Market Prices % changes

Selected Sectoral GDP growth rates %


Agriculture, Hunting and Fishing

Mining and quarrying

Manufacturing

Finance and Insurance

Distribution and Tourism


PRICES


Consumer Price Inflation (end period) %

Consumer price inflation (period avg) %


Financial Stability Report 30 June 2014
Appendix C: External Sector
EXTERNAL SECTOR

2013 est
2014 proj
Export growth (%)

Import growth (%)

Current a/c balance (US$M)

Current a/c balance (% of GDP)

Capital a/c balance (US$M)

Direct Investment (net) (US$M)

Portfolio Investment (net) (US$M)


96.3
Total External Debt (US$M)

Debt Service ratio (%)

Gross Offical Reserves (US$M) - at

Import cover (months) at 100%

Total External Payments Arrears
(US$M)


Financial Stability Report 30 June 2014
Appendix D: Monetary Sector
MONETARY SECTOR

2013 est
2014 proj
Broad Money M3 (US$ '000)


Domestic Credit (US$ '000)

Credit to Private Sector (US$ '000)

Credit to Parastatals (US$ '000)

Credit to Government (US$ '000)


Long Term Deposits (US$ '000)

Savings (US$ '000)

Short Term Deposits (US$ '000)

Demand Deposits (US$ '000)


Nominal Minimum Lending Rate
(%)
1.23
1.26

6.0
6.0
Nominal Maximum Lending Rate
(%)
72*
58*

35.0
35.0
Individual Average Weighted 30days Lending Rate (%)


15.08
14.03
14.33
Coporate Average Weighted 30days Lending Rate (%)


10.00
9.35
9.90
* penalty rates

Financial Stability Report 30 June 2014
Appendix E: Public Finances


Government Accounts (US$ m)

2013 est

proj
Revenue excluding grants

Revenue including grants

Capital expenditure and net lending

Recurrent Expenditure

Total expenditure and net lending

Balance excluding grants

Balance including grants


(% of GDP)

2013 est

proj
Revenue excluding grants

Revenue including grants

Capital expenditure and net lending

Total expenditure and net lending

Deficit excluding grants

Deficit including grants


Financial Stability Report 30 June 2014
Appendix F: Stock Market Indices
STOCK MARKET INDICES

June 2014
Industrial Index (Points)
152.0
151.3

152.4
201.04
187.44
Mining Index (Points)
185.5
200.4

65.1

Grand Market Capitalisation
(US$m)

4,959