FINANCIAL STABILITY REPORT

June 2019
FINANCIAL STABILITY REPORT AS AT 30 JUNE 2019

Purpose of the Report
The Financial Stability Report focuses on 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 report is prepared as at 30 June 2019 and is published
half yearly. Some selected developments up to the time of finalisation of this report that have an
impact on financial stability were incorporated.

FINANCIAL STABILITY REPORT AS AT 30 JUNE 2019

Contents


FINANCIAL STABILITY REPORT AS AT 30 JUNE 2019

List of Tables


FINANCIAL STABILITY REPORT AS AT 30 JUNE 2019

List of Figures
Figure 24: Boruta algorithm clustering banks based on non-performing loans (RBZ, 2019). .... 23


FINANCIAL STABILITY REPORT AS AT 30 JUNE 2019

Abbreviations
AML


Anti-Money Laundering
CFT


Combating the financing of terrorism
CAR


Capital Adequacy Ratios
DPC


Deposit Protection Corporation
D-SIB


Domestic Systemically Important Bank
DTMFI

Deposit-taking Microfinance Institutions
EMDE

Emerging Markets and Developing Economies
FATF


Financial Action Task Force
FMIs


Financial Market Infrastructures
FSI


Financial Soundness Indicators
FSR


Financial Stability Report
GDP


Real Gross Domestic Product
IASB


International Accounting Standards Board
IFRS


International Financial Reporting Standard
IMF


International Monetary Fund
IPEC


Insurance and Pensions Commission
MFSC

Multidisciplinary Financial Stability Committee
PMFI


Principles for Financial Market Infrastructures
RBZ


Reserve Bank of Zimbabwe
RTGS


Real Time Gross Settlement
SECZ


Securities and Exchange Commission of Zimbabwe
SIRESS

SADC Integrated Regional Electronic Settlement System
SWIFT

Society for Worldwide Interbank Financial Telecommunication


FINANCIAL STABILITY REPORT AS AT 30 JUNE 2019

Foreword
The local financial sector continues to exhibit resilience amid growing global and domestic uncertainty.
This resilience is attributed to strong safety nets that include strong capital base and adherence to
strong corporate governance principles. On the Global front, the sector has been exposed to
weakening global growth largely due to vulnerabilities arising from, among others, the US-China trade
tensions, climate shocks, as well as uncertainties over geopolitical developments such as the
finalisation of the Brexit.
The global economic challenges have recently been exacerbated by the outbreak of the coronavirus
(COVID-19) pandemic which has put the global economy and financial systems under tremendous
stress due to the global lockdown meant to minimised the transmission of the virus. In order to
minimise the adverse impact of vulnerabilities that might arise in households, corporations, and the
financial sector due to the shutdown, various policy measures have been promulgated by central
banks, supervisors and fiscal authorities. The measures include monetary policy easing and relaxation
of some supervisory rules to enable banks to avail requisite liquidity and also to absorb emerging nonperforming loans, and cash stimulus to individuals, concessionary loans to SMEs and tax incentives to
corporations. The full effects of the pandemic will, however, be clearer after the second half of 2020,
and further regulatory action may need to be taken to safeguard financial stability.
In sub-Saharan Africa, growth was underpinned by non-resource-intensive countries during the period
leading to 30 June 2019. The volatility of commodity prices weighed down growth in Nigeria and
Angola whilst South Africa was affected by power supply constraints. Growth outlook for sub-Saharan
Africa, however, seems favourable especially for well-diversified economies. However, this growth will
be significantly dampened in 2020, by the devastating effects of the COVID-19 global pandemic.
In the domestic economy, vulnerabilities have risen from climate shocks which caused a devastating
drought in most parts of the country, whilst other areas were severely affected by a devastating
cyclone. Consequently, output from agriculture was adversely affected and will negatively impact
economic growth. On the other hand, inflationary pressures resurfaced underpinned by the exchange
rate pass through effect. In the outlook, the COVID-19 crisis has the potential to adversely affect local
growth in 2020 as a large portion of the economy temporarily stagnated due to the mandatory
mitigatory international lockdown, with all critical sectors such as services, agriculture, mining,
manufacturing and tourism significantly affected.
The Reserve Bank in conjunction with other financial sector regulators, promotes financial sector
stability through the establishment of relevant policy instruments, and putting in place various
financial safety nets, to minimise the impact of systemic risk on the financial system.
FINANCIAL STABILITY REPORT AS AT 30 JUNE 2019

Going forward the Bank and other financial sector regulators will continue to develop tools for
identifying potential threats to financial stability and to implement policies aimed at promoting the
safety and soundness of the financial sector as a whole. In light of this, local financial sector regulators
will continue to play an active role at regional platforms such as COMESA and SADC which have
strategic thrusts to enhance financial stability and integration in the region and also at an international
level in respect of adoption of best practice.
In the outlook period, the Zimbabwean financial system is expected to remain resilient to various
systemic shocks in light of turnaround strategies being implemented to enhance macroeconomic
stability. In order to minimise the adverse impact of the COVID-19 pandemic and its aftershocks on
financial sector stability, relevant policy measures will continue to be rolled out balancing short-tomedium term resilience and post crisis long term recovery objectives.


FINANCIAL STABILITY REPORT AS AT 30 JUNE 2019

EXECUTIVE SUMMARY
Since the beginning of 2019, the global
economy has weakened largely due to USChina trade tensions and tightening financial
conditions. This has led to the projected global
economic growth being revised downwards to
2.9% for 2019. Stronger growth of 3.9% for
2019 is, however, expected in Emerging
Markets and Developing Economies (EMDEs).
The advent of the COVID-19 pandemic and its
negative impact on the global economy will
significantly put financial stability at risk. To
mitigate against this, regulatory authorities are
responding
to
the
fast-moving
and
extraordinary situation by providing guidance
on the appropriate responses to cope with the
shock arising from the pandemic. This
guidance
includes
adoption
of
loan
restructuring strategies, clear communication
of losses, and usage of Government support
facilities, where available. These measures are
expected to minimise the adverse impact of
the global pandemic on financial stability in
2020, 2021 and succeeding years.
Sub-Saharan Africa growth is estimated to
increase by 3.2% in 2019 but is however
uncertain for 2020 due to the devastating
impact of COVID-19 global pandemic. The
growth
outlook
for
sub-Saharan
Africa
compares favourably in relation to other
economic regions facing macroeconomic
challenges as well as trade tensions.
Similarly, the local economy is estimated to
contract by 6.5% in 2019 with an uncertain
projection for 2020 due to the negative impact
of the COVID-19 global pandemic. During the
period under review, the country adopted a
local currency, ending nine years of using the
multicurrency system. This policy change has
given prominence to foreign currency risk
management practices in the banking sector.
The local currency, however, depreciated from
ZW$2.5/US$ to ZW$6.62/US$ by the end of
June 2019. The sharp depreciation generated
inflationary pressures which resulted in the
month-on-month inflation rising from 10.75%
in January 2019 to 39.25% in June 2019.
Despite
the
challenging
economic
environment in the period under review, the
outlook points to a largely stable banking
sector. To maintain their resilience, banks will
need to continue reinforcing their risk
management processes, including putting in
place the necessary contingency measures to
curb against various emerging risks, among
others, credit, strategic, market, liquidity and
operational. To assist with economy wide
growth, there is a need for banks to focus
more on their traditional intermediation
roles, especially savings mobilization and
lending.
While there are pockets of vulnerabilities
arising from aspects related to the current
operating environment, the insurance and
pensions industry is projected to remain
mostly stable in the outlook period. The
sector needs to develop dynamic strategies to
target the generation of adequate premium
income streams which generate real returns
while maintaining long-term solvency targets.
The capital market is projected to continue
performing well as investors seek real returns
in the medium to long term.
The financial payments infrastructure is
anticipated to maintain resilience and is
expected to cater for growing volumes of
transactions during the outlook period.
Risks to Financial Stability...
The financial sector faces a myriad of risks,
some of which may have an impact on the level
FINANCIAL STABILITY REPORT AS AT 30 JUNE 2019

of stability of the system in the second half of
2019 through to the end of 2020.
Trade tensions pose significant risks to trade
performance with implications on export
earnings and foreign currency generation.
Given
the
foreign
currency
shortages
prevailing in the country, this may impair
financial institutions’ ability to settle foreign
currency obligations, including servicing of
external lines of credit, among others.
These developments may be transmitted to
affect performance of banking institutions,
particularly profitability and capital positions.
In
addition,
the
projected
economic
contraction of 6.5% may impair households
and corporates’ ability to service loans as well
as their insurance and pensions premiums,
thereby affecting the stability of the financial
sector.
Climate shocks, arising from global warming
which has altered weather patterns around
the globe, are poising new risks to financial
stability.
The
destruction
of
critical
infrastructure such as bridges and road
networks by heavy rains and cyclones affected
the operations of financial and non-financial
institutions. On the other hand, the recurrence
of drought in the region affected hydroelectricity generation as well as agriculture
output, and the down-stream industries
including the financial services sector.
Increases in incidents of cyber-crime have
become a major risk to payment systems and
these include rising cases of account hacking
and card cloning. The cyber resilience of the
financial sector can be a decisive factor in the
overall resilience of the financial system and
the broader economy. This has led to
intensified surveillance and monitoring of
cyber threats in order to identify them in a
timely manner and ultimately enhancing
financial system stability.

While stress tests results show a few pockets
of vulnerabilities under credit, market and
liquidity risks, the level of financial safety nets)
that financial regulators have put in place are
deemed adequate to insulate the system
against potential systemic risk.

In the outlook period, the high inflationary
environment and exchange rate volatility pose
risks to financial stability. This risk will be
mitigated by various safety nets instituted by
the authorities.
Figure 1: Financial Stability Cobweb

The overall risk outlook to financial stability is
presented in Figure 1 above. The cobweb flags
that, in the outlook period, vulnerabilities to
the
domestic
and
external
economic
environments are posing higher risks to
financial stability.


Domestic
Economy
External
Economy
Banking
Sector
National
Payments
System
Non Bank
Financial
Sector
Jun-19
Jun-18
FINANCIAL STABILITY REPORT AS AT 30 JUNE 2019

1. MACROECONOMIC ENVIRONMENT
Global Economic Growth
The global economy is estimated to grow by
3.3% in 2020, up from an expected growth of
2.9% in 2019 as depicted in Figure 2. This
expected improvement is largely due to
growth in EMDE, which will offset a projected
slowdown in advanced economies. However,
trade tensions between the USA and China
pose a significant risk to the projected global
growth. Global growth may also be affected by
stabilisation
efforts,
such
as
fiscal
consolidation, in EMDE and the adverse impact
of the COVID-19 global pandemic.
The negative impact of COVID-19 on global
financial stability will be unprecedented as
lockdowns to limit the spread of the virus have
led to a dramatic decline in economic activity.
The ultimate impact of the crisis on the global
economy, as well as the timing of a recovery, is
highly uncertain. In light of that, the 2020
outlook has shifted from forecast growth of
more than 3 percent globally to a sharp
contraction of negative 3 percent as per the
IMF projections as at April 2020.

Central banks, Supervisors and Country
authorities have come up with various policy
recommendations to ensure the survival of the
financial and real sectors during the period of
low economic activity. The measures are to
ensure the availability of liquidity and credit to
various sectors in the economy under the
current stressed environment, and also to
reduce the likelihood and impact of nonperforming loans arising from individuals and
corporations. This is through encouraging
banks to consider loan repayment holidays and
also the provision of targeted fiscal measures
that include payment moratoriums and
guaranteed credit.

Post crisis policies by authorities, will be aimed
at fostering recovery, and rebuilding the
resilience of the financial sector.

Figure 2: Global Economic Growth (%)

Source: World Economic Outlook (October, 2019)
Sub-Saharan Africa Economic Outlook
Across sub-Saharan Africa, growth is estimated
at 3.2% in 2019 and projected to be 3.6% in
2020 as illustrated in Figure 3. With commodity
prices negatively affected by international
trade tensions, this growth is mainly driven by
non-resource-intensive countries. The growth
outlook for sub-Saharan Africa compares
favourably against other economic blocks,
which are also facing macroeconomic strain
arising from trade tensions.

Sub-Saharan financial markets have been
mixed, with those facing rising inflation
increasing interest rates, whilst those needing
to boost growth, reducing interest rates.

Global
Advanced
EMDEs
Sub-Saharan
FINANCIAL STABILITY REPORT AS AT 30 JUNE 2019

Figure 3: Sub-Saharan African Growth (%)

Source: World Economic Outlook (October, 2019)

Domestic Economic Outlook
GDP Growth
The Zimbabwean economy is estimated to
contract
by
6.5%
in
2019,
which
is
comparatively lower than estimates for the
sub-region as shown in Figure 4. Economic
growth is, however, projected to be dampened
2020 underpinned by the negative impact of
the COVID-19 pandemic.

During the first half of 2019, Zimbabwe
adopted a local currency which saw the
Zimbabwe dollar being the main transacting
currency in the country. The new currency
experienced
notable
depreciation,
exacerbating an inflationary environment
which negatively affected the real sector,
households and financial institutions (see
Figure 5).

In
this
regard,
the
domestic
financial
conditions were tightened, with the Reserve
Bank raising interest rates in June 2019, from
15% to 50%. Interest rates were subsequently
reduced to 35% in the post review period.

Month-on-month inflation rose from 10.75% in
January 2019 to 39.25% by June 2019 largely
due to the exchange rate pass-through effect.
The stabilisation of the local currency
exchange rate, if achieved, is anticipated to
result in a decline in monthly inflation levels by
end of 2020.

The anticipated economic contraction in 2019
is expected to affect financial sector stability.
In particular, loan servicing capabilities may be
adversely affected, driving up non-performing
loans (NPLS) and consequently affecting
banking sector stability.

Figure 4: Zimbabwe GDP Growth (%)

Source: ZIMSTAT-MOFAD (2019)
Figure 5: Zimbabwe Monthly Inflation (%)

Source: ZIMSTAT (2019)
-1

2014 2015 2016 2017 2018 2019
Est

Proj
Sub-Saharan
Advanced economies
Emerging and Developing Asia
Emerging and Developing Europe
Latin America and the Caribbean
Middle East and Central Asia


2014 2015 2016 2017 2018 2019
Est

Proj
Zimbabwe
Botswana
South Africa

FINANCIAL STABILITY REPORT AS AT 30 JUNE 2019

Figure 6: Exchange Rate Developments
(ZW/USD)

Source: RBZ (2019)
Current Account Balance
The current account balance is envisaged to
close 2019 at a deficit of US$110.2 million as
depicted in Figure 7 reflecting heightened
foreign
currency
shortages
which
are
constraining
importation
of
goods
and
services.
Going into 2020, moderating food imports, on
the back of recovering export performance;
stable secondary income flows; and positive
expenditure switching effects of the liberalised
foreign exchange regime are envisaged to
narrow the current account deficit to US$85.7
million.
Private Sector Credit
Credit to the private sector, which has
remained largely subdued, grew on an annual
basis, by 31.12%, from $3.91 billion in June
2018 to $5.13 billion in June 2019 as depicted
in Figure 8. The growth was in line with the
general inflationary pressures experienced
during the period.
Fiscal Developments
The first half of 2019 has seen the Government
recording surpluses due to fiscal consolidation
as depicted in Figure 9. Revenue collections to
year end are projected at ZW$21 billion, whilst
expenditures are estimated to reach ZW$26.2
billion, resulting in a deficit of ZW$5.2 billion or
4% of GDP.
In the outlook period, Government has
indicated that it shall be addressing the issue
of external arrears with the view of reducing
them to enable the country to access more
external credit facilities.

Figure 7: Current Account Balance (US$
Millions)

Source: ZIMSTAT- RBZ (2019)
Figure 8: Annual Private Sector Credit
Growth (%)

Source: RBZ (2019)
Figure 9: Fiscal Developments ($Millions)

Source: MOFAD (2019)

25-Feb
25-Mar
25-Apr
25-May
25-Jun
25-Jul
25-Aug
25-Sep


Est

Proj


Revenue
Expenditure
Surplus
FINANCIAL STABILITY REPORT AS AT 30 JUNE 2019

MACROECONOMIC ENVIRONMENT HEATMAP
Economic activity is exposed to high risk from various adverse shocks arising from climate change,
energy shortages, high inflation and adverse agricultural yields. However, various initiatives under the
Transitional Stabilisation Program (TSP) and current Monetary Policy thrusts, are expected to make
significant contribution to economic turnaround and reducing the risk outlook to medium. A Heat map
indicating this position is shown below.
Table 1: Macroeconomic Environment Heat Map

2019est
2020prj
Economic Activity


Sovereign Risk


Inflation Rate


Exchange Rate


Global Economic Activity


Less Risk
Very Low
Low
Moderate
High
Very High
Extreme
More Risk

Sovereign risk is currently moderate largely due to legacy debt arrears with, among others,
multilateral financial institutions. In line with Government initiatives which include, an arrears
clearance plan, current re-engagement strategy and relevant policies being implemented to facilitate
bi and multilateral cooperation, are expected to enhance the country risk profile in the medium term.
Inflation risk outlook is high given developments on the exchange rate-inflation nexus. Management
of money supply growth is critical in containing inflation as well as stabilisation of exchange rate to
contain pass through effects.
The exchange rate is basically driven by the supply and demand for foreign currency. The demand is
pushed by both genuine importers of various goods and services, and also by speculators exhibiting
rent seeking behaviour. The exchange rate risk in the outlook period is high in light of, among other
things, the inflation risk outlook and the acute shortage of foreign currency. It is, therefore, important
to continue with the pursuit of initiatives to ensure equilibrium is attained in the foreign currency
markets.
Risk in global economic activity is projected to be very high, given the combined effects of climate,
geopolitical developments such as tensions between US and China, Brexit and more recently the
devastating effects of the COVID-19 global pandemic.


FINANCIAL STABILITY REPORT AS AT 30 JUNE 2019

2. BANKING SECTOR STABILITY
Bank Soundness
The banking sector continues to be resilient
despite the vulnerabilities arising from the
macroeconomic environment.
The
Bank
Soundness
Index
(BSI),
(for
methodology see Box 1 on ) shows that
the level of risk has been stable with a
downward trend (improving risks) as shown in
Figure 10 and 11. The sector continues to be
resilient with major components of bank risk
including capitalisation, asset quality, liquidity
and sensitivity to market risk being on average
acceptable.
Detailed
analysis
of
these
components is outlined below.
Capital
The overall banking sector capitalisation trend
is shown in Figure 12. The banking sector is
resilient to various stress shocks applied to
credit, interest rate and foreign exchange risks
due to adequate capitalisation. The net capital
base of the banking sector stood at US$1.61
billion as at June 2018 and ZW$3.19 billion in
June 2019. The net capital position of the
banking sector is expected to remain stable in
the outlook period.
All banking institutions had capital adequacy
ratios that were above the regulatory minimum
of 12% with a sectorial Capital Adequacy Ratio
(CAR) of 29.2% as at June 2019. Further, all
banking institutions had adequate capital
buffers to absorb moderate shocks.
In order to ensure the sector continues to
meaningfully contribute to economic growth
and development, banking institutions are
expected
to
proactively
reinforce
their
economic capital levels as part of resilience
capability management.


Figure 10: BSI Index 30 June 2019


Note that, for the BSI, a downward trend
shows improvement in risk levels.
Figure 11: BSI Sub-Indices 30 June 2019


Source: RBZ, 2019


Earnings Performance
The banking sector remained profitable during
the first half of 2019. Aggregate profits stood at
US$176.09 million for the period ended June
2018 and ZW$938.89 million in the period
ended June 2019. The major component of
income shifted from interest income to noninterest income as depicted in Figure 13,
particularly, foreign exchange gains. There is a

Dec-13
Mar-14
Jun-14
Sep-14
Dec-14
Mar-15
Jun-15
Sep-15
Dec-15
Mar-16
Jun-16
Sep-16
Dec-16
Mar-17
Jun-17
Sep-17
Dec-17
Mar-18
Jun-18
Sep-18
Dec-18
Mar-19
Jun-19

Mar-13
Sep-13
Mar-14
Sep-14
Mar-15
Sep-15
Mar-16
Sep-16
Mar-17
Sep-17
Mar-18
Sep-18
Mar-19
Sub-Indices
Capital Adequacy
Asset quality
Earnings and profitability
Liquidity
FINANCIAL STABILITY REPORT AS AT 30 JUNE 2019

major switch away from intermediated interest
income towards non-interest income.
Banking sector expenses were dominated by
administration and information communication
technology costs.
Profitability of the banking sector is likely to be
affected by the projected slowdown in
economic growth of -6.5% in 2019. However,
banking institutions could mitigate income
generation risk through income diversification
strategies.
Figure 12: Banking Sector Net Capital Base ($
Millions) and CAR (%)

Source: RBZ (2019)
Figure 13: Banking Sector Income Components

Source: RBZ (2019)
Credit Risk
Despite the challenging economic environment,
asset quality improved in the first half of 2019.
The non-performing loans (NPLs) ratio declined
from 6.92% in December 2018 to 3.96% in June
2019 as shown in Figure 14. The improvement
was largely attributed to banks’ improved credit
risk management practices and general loan
book growth.
The greater share of NPLs has mainly been from
households and the agricultural sector as
depicted in
Figure 15. An improved rainfall season would
likely ensure better yields in the outlook period,
increasing the debt-servicing capacity of
borrowers in the agricultural sector, thereby
reducing corresponding NPLs. However, if the
rainfall season is below normal, there is a risk of
the NPLs marginally rising in the Agricultural,
Manufacturing and Distribution sectors.
Credit risk stress tests further provided
evidence of resilience of the banking sector, at
the
aggregate
level,
to
asset
quality
deterioration, largely due to high levels of
capital buffers. A minor credit shock in the form
of an increase in NPLs (see Figure 16), would
resulted in only two (2) out of the nineteen (19)
banks becoming undercapitalized. However, a
major credit shock would result in ten (10)
banks being resilient.
The results of a shock that assumes a default by
a bank’s largest borrower (see Figure 17), show
that a total of five (5) banks, accounting of
40.87% of total banking sector assets, may fail
to maintain their CARs above 12%.
Stress Test Results
The Bank has also developed a stress test that
seeks to assess the impact of adverse
developments in various sectors of the
economy. The stress test scenario assumes that
the sectors that are projected to have


Mar/14
Nov/14
Jul/15
Mar/16
Nov/16
Jul/17
Mar/18
Nov/18
Capital $ Millions
CAR (%)
Capital
CAR
-


$ MILLIONS
Total Non-interest income(%)
Total Interest income ($)
FINANCIAL STABILITY REPORT AS AT 30 JUNE 2019

contractions in 2019, will generate NPLs
equivalent to the sectors’ projected percentage
decline. The results of the stress see Figure 18
test show that six banks (6), are vulnerable to
major sectoral shock arising from the estimated
adverse sectoral developments.
Figure 14: Trend in NPL Ratio

Source: RBZ (2019

Figure 15: Sectoral Trend in NPL Ratio

Source: RBZ (2019


Figure 16: Credit Stress Test: Increase in NPLs

Source: RBZ (2019

Figure 17: Default of largest borrowers

Source: RBZ (2019


Figure 18: Sectoral Credit Shocks


Source: RBZ (2019


Mar-14
Aug-14
Jan-15
Jun-15
Nov-15
Apr-16
Sep-16
Feb-17
Jul-17
Dec-17
May-18
Oct-18
Mar-19

Mar-17
Jun-17
Sep-17
Dec-17
Mar-18
Jun-18
Sep-18
Dec-18
Mar-19
Jun-19
Sep-19
CONSUMPTIVE
OTHER
AGRICULTURAL
MANUFACTURING
COMMERCIAL
MINING
DISTRIBUTION
CONSTRUCTION
TRANSPORT
COMMUNICATION
FINANCIAL
Minor
( 2 banks)
Moderate
(7 banks)
Major
(9 banks)
Minor
(3 banks)
Moderate
(4 banks)
Major
(5 banks)
No. of Banks with
CAR<12%
Minor(2
banks)
Moderate
(3 banks)
Major
(6 banks)
No. of Banks with CAR<12%
FINANCIAL STABILITY REPORT AS AT 30 JUNE 2019

Market Risk
Interest Rate Risk...
As at 30 June 2019 the banking sector had an
overall
liability-sensitive
book,
with
a
cumulative re-pricing gap of ZW$2.36 billion in
the 1 -365 days’ time bucket. Thirteen (13)
banking
institutions
had
liability-sensitive
books, implying that the banks were potentially
exposed if market interest rates increased.
The Reserve Bank stress tests results showed
that seven (7) banks were susceptible to major
interest rate shock as depicted in
Figure 19. In the outlook period and in light of
noted vulnerabilities, banks are expected to
continuously monitor their interest rate
sensitive
portfolios
and
take
necessary
management actions to ensure that losses
arising
from
interest rate changes
are
minimised.
Foreign Exchange Risk...
During the first half of 2019 foreign exchange
risk rose due to the depreciation of the local
currency against major currencies. Exchange
rate risk is of major concern in the outlook
period as the banking sector continues to have
a negative net open position which will result in
further losses should the exchange continue to
depreciate. It is however envisaged that policy
measures will be put in place to address the
effects of the negative net open positions
arising from liabilities such as foreign lines of
credit among others.
In order to measure the impact of exchange
rate shocks on the banking sector, various
scenarios involving the depreciation of the local
currency were applied on the net open position
of all banks using balance sheet data as at 30
June 2019. The results of the stress test show
that seven (7) banks are vulnerable to all
exchange rate shocks (Figure 20). The combined
asset value of banks that are vulnerable to the
major shock was ZW$6.93 billion.

Figure 19: Interest Rate Risk Shocks and
Impacts

Source: RBZ (2019
Figure 20: Foreign Exchange Risk Stress Test
Results

Source: RBZ (2019
Liquidity Risk...
The liquidity holdings of banks were strong
during the first half of 2019 with total liquid
assets of ZW$11.21 billion in June 2019. All
banking
institutions
complied
with
the
minimum required Prudential Ratio of 30%. In
the outlook period, liquid assets are expected to
remain above the minimum requirements at
most banking institutions.
The structure of liquid assets shows a
progressive reduction in Treasury Bill holdings
of banks, which comprised 40.08% of total
liquid assets in December 2018 and 31.13% in
June 2019. A diversified liquid asset portfolio
reduces concentration risk in one asset class
thereby reducing overall liquidity risk in the
banking sector.
Minor
(2 banks)
Moderate
( 4 banks)
Major (7
banks)
No. of Banks with
CAR<12%
Minor
(7 banks)
Moderate
(7 banks)
Major
(7 banks)
No. of Banks with CAR<12%
FINANCIAL STABILITY REPORT AS AT 30 JUNE 2019

Distress
in
banking
institutions
usually
manifests itself through liquidity challenges.
The Reserve Bank assesses the vulnerability of
banking institutions to liquidity risk through the
use of liquidity stress tests. The main objective
of liquidity stress testing is to highlight the
impact of liquidity stress situations on banks’
solvency. Liquidity stress testing also highlights
the length and extent of the stressful period
that banks can withstand.
The liquidity stress test is conducted in two
parts, namely, the simple liquidity run and the
granular approach.
Simple Liquidity Run...
The simple liquidity run tries to evaluate how
many days a bank can survive in a high liquidity
stress period. A survival period of 5 days is
generally, an acceptable minimum. The
liquidity shortfalls that are simulated are
matched with the proportion of assets that can
be disposed of to cover the requisite liquidity
shortfall.
A total of two (2) banks were susceptible to a
major simple liquidity stress test as their cash
flows became negative before the fifth day of
the stressful period.
In the outlook period, banks need to ensure
that they hold adequate liquid assets to
withstand high liquidity runoff rates. The
Reserve Bank is also finalising the requisite
guidance on the Basel III Liquidity Coverage
Ratio (LCR) and Net Stable Funding Ratio (NSFR)
frameworks to enhance tools for monitoring
market wide resilience to liquidity risk.
Granular Liquidity Risk Stress Test...
A granular liquidity stress test breaks down
liquid assets according to each instrument and
assumptions are also made on the liquidity level
of each instrument. On the liabilities side, the
stress test develops separate assumptions for
demand, savings and time deposits, as well as
interbank and other financial institutions’
deposits.
Results of the institution specific liquidity
shocks show that most banks will remain
resilient for more than 5 days.
Figure 21: Average Prudential Liquidity Ratio

Source: RBZ (2019
Network Analysis of the Banking Sector...
The transmission of shocks in the banking
sector
depends
on
the
level
of
its
interconnectedness. The interconnectedness of
the banking sector is usually presented in the
form of a network topology. The methodology
used by the Bank to analyse vulnerabilities
arising from the linkages in the banking system
is described in the following paragraph.
Useful Definitions in Network Analysis
Suppose we have a network of interbank
lending as depicted by the diagram in Figure 22.
The in degree is the total number of inward
credit lines a bank receives and the out degree
is the number of credit lines a bank issues.
Node Strength (NS) is the total value of flows
originating or terminating in a given node. The
in-strength, NSin, for a bank, is the total
amount of credit it receives and the outstrength, NSout, is the total amount of credit
it lends.
The node clustering is the total number of
complete triangles that bank B is in relative to
the number of potential triangles bank B can be
a member of based on the number of
connections Bank B has.


FINANCIAL STABILITY REPORT AS AT 30 JUNE 2019

The degree distribution is the probability
distribution of the degrees of nodes within the
network. It indicates how many nodes have a
certain degree and shows how interconnected
the banks within the network are.
Hubs and authorities are key actors within the
financial network as they are the ones that
originate the credit and absorb the credit
respectively. A hub issues credit to an important
authority and an authority receives credit from
an important hub.
PageRank (PR) is determined by counting the
number and quality of links to a bank to
determine a rough estimate of how important a
bank is. The underlying assumption is that the
most important banks are likely to receive more
links from other banks with high PR and the PR
is given iteratively by:
PR(Bi) = 1−d
N
+ d× ቌ

PR(Bj)
L(Bj)
Bj ∈Network
ቍ
Where Bj is a bank within the network, d is the
dampening
factor
assuming
every
bank
borrows from the usual banks they have
relations with, L(Bj) is the number of loans
Bank Bj has issued and N is the total number of
banks in the network.
Figure 22: Banking Sector Network as at 30
June 2019

Source: RBZ (2019), Graph done using Node X.
In the above network topology, banks that are
net borrowers are represented by red vertices,
whilst net lenders have blue vertices. The size
of vertices reflects the relative size of a bank’s
borrowing or lending as compared to other
banks. The lines which connect the different
vertices are called edges. These reflect the
direction of flow of funds from the lending
bank to the borrowing bank. Their thickness
shows the relative size of the funds borrowed.
Figure 22 shows the interbank network as at 30
June 2019. Eight of the twenty-three banks
(including DTMFIs) were net lenders (in blue),
four were non participants in the interbank
network (not shown on the diagram) and
fourteen were net borrowers (in red).
During the period under review, Bank3, Bank10
and Bank13 had high out-strength. This implies
that these banks were the most important
lenders within the interbank market, providing
ZW$148.56 million, ZW$99.75 million and
ZW$111.70 million in credit, respectively. The
three institutions accounted for 69.52% of the
total interbank loans.
With respect to node in-strength, Bank5,
Bank2, Bank4 and Bank23 had the highest
node in-strength. These financial institutions
were the most important borrowers within the
interbank
network
as
their
borrowings
accounted for 65.17% of total interbank loans.
Banks which depend on interbank loans to
finance their assets face potential roll-over risk
when the institutions that provide them with
funding decide not to allow the roll-overs.
The degree distribution of the banks showed
that for both borrowing and lending most banks
are connected to a few institutions. With
respect to lending Bank9, Bank13, Bank10,
Bank5 and Bank4 are highly connected. With
respect to borrowing Bank23, Bank14, Bank4
and Bank6 are highly connected.
Furthermore, the clustering coefficients show
that there are banks, such as Bank2 (with
clustering coefficient of 0.83) which are part of
a
dense
sub-cluster.
A
high
clustering
FINANCIAL STABILITY REPORT AS AT 30 JUNE 2019

coefficient indicates that pairs of banks
connected to any given bank are also connected
to each other. High clustering coefficients also
reflect the contagion risk in the banks
connected to Bank2. This means that if one of
the banks fails in the Bank2 sub-cluster, its
failure could negatively impact other banks that
are indirectly connected to the failed bank.
Figure 23: Degree Distribution

Source: RBZ (2019)
The analysis also showed that banks such as
Bank21 and Bank11 had a clustering coefficient
of 0 since they were only connected to one bank
each respectively, whilst Bank1 has the highest
clustering coefficient of 1, meaning all the
three banks Bank1 is connected to are also
connected
through
either
lending
or
borrowing.
Bank3, Bank10, Bank9, Bank4 and Bank13 were
the top five important suppliers of credit within
the network, i.e. they are the hubs. Failure of
any these banks will have an adverse impact
on the banks that depend on them for the
supply of liquidity.
Similarly, the top five important borrowers, i.e.
authorities, were Bank5, Bank2, Bank1, Bank4
and Bank18. In this regard, the failure of any of
the main creditors or borrowers in the
interbank market may weaken the whole
network.
If a hub falls into distress, this will result in an
accelerated disintegration of the network. The
activities carried out on the interbank network
by Bank3 and Bank10 made these banks
important to the network as they are important
hubs and they are key sources of credit within
the network. The two banks have issued a
substantive amount of credit to important
authorities.
Furthermore, Bank5, Bank2 and Bank1 are
important authorities, and have received credit
from important hubs. The three authorities
have a high in strength and their distress will
negatively impact the key issuers of credit.
The PageRank indicates that Bank4, Bank6,
Bank23 and Bank5 are relatively important
banks within the network basing on the number
and quality of banks they are connected to.
However, we note that though Bank3 and
Bank10 are important lenders, they are ranked
low due to the few connections they have. This
implies that the two key lenders issue
substantively high loans to few institutions.

Contingency Measures for Systemic Risk
In order to reduce the counterparty credit risk
exposure which impedes interbank market
activities, banks usually lend to each other on a
fully collateralised basis, with the main security
being Treasury Bills.
Furthermore, the Bank acts as a lender of last
resort, providing the necessary liquidity
coverage to solvent institutions in liquidity
distress, thereby reducing the probability of
shock transmission within the network.
Shadow Banking
In a broader context, shadow banking refers to
a scenario where financial or non-financial
entities
carry
out
unregulated
banking
activities.
Significant
volumes
of
these
unregulated banking activities, might affect the
stability of the financial system as flows might
FINANCIAL STABILITY REPORT AS AT 30 JUNE 2019

end up leaving the formal banking system into
the shadow banking system.
Economic agents in highly stressed economic
environments might end up engaging in
unregulated activities, with the simplest
example being foreign exchange black-market.
Since shadow transactions are not captured in
the formal system, the volume of tax revenue
flowing into the fiscal system is negatively
affected.
The Bank is cognisant of the potential negative
impact of shadow banking activities on financial
stability and ensures that all regulated banking
institutions
operate
in
an
accountable,
transparent and as per
the
regulatory
requirements.

FINANCIAL STABILITY REPORT AS AT 30 JUNE 2019

In the aftermath of the Global Financial Crisis of 2007-2009, which provided ample evidence of the consequences of financial
instability, policymakers and academics have devoted resources to develop composite measures of financial stability and bank
soundness. The aim of these measures is to enable informed assessment of financial stability and banking system soundness, and
adoption of appropriate policies to mitigate the risks. In this regard, the Bank constructed a Banking Sector Soundness Index (BSI)
as a single measure of banking system soundness which gives an overall picture of the state of the banking system. The BSI is
mainly based on five CAMELS components, namely:
1.
Capital Adequacy;
2.
Asset Quality;
3.
Earnings and Profitability;
4.
Liquidity; and
5.
Sensitivity to Market risk.
The data used in the BSI for Zimbabwe is compiled from Financial Soundness Indicators (FSIs) that are available on a quarterly basis.
These are then transformed using empirical normalization to fit the data within the range of 0 to 1. The following equation is used
to normalize the ratios:
I =
X−X
X௫−X

Where:
Ii is the sub-index value at point i
Xi is each data point i
XMin is the minima among all the data points
XMax is the maxima among all the data points
Xi, 0 to 1 is the data point i normalized between 0 and 1
After the normalization of each ratio, a sub-index is computed using a simple average of the normalized ratios. The formula for this
step is given below, using the capital adequacy sub-index as an example:

The overall BSI is then computed as the sum of the equally weighted sub-indices and calculated using the following equation:

Where BSI௧ is the value of the BSI at time t and ∑
w
ୀ,,,,௦
= 1
BOX 1: BANKING SECTOR SOUNDNESS INDEX (BSI)
FINANCIAL STABILITY REPORT AS AT 30 JUNE 2019

The Bank has started investigating the implementation of various machine learning tools to predict bank
distress. The predictive power of these tools will continue to be enhanced over time as more data on more
diverse features is accumulated.
Machine learning algorithms can be grouped into supervised, unsupervised, semi-supervised, and
reinforcement learning algorithms. Supervised learning models are based on generating functions that map
inputs into desired outputs. With unsupervised learning, input data is not given labels and known outcomes
(Hammond, 2015). A machine learning model is prepared by extracting structures presented in the input data.
For instance, this might be extraction of general rules. Unsupervised learning is often seen as a mathematical
process of reducing redundancy or categorizing data based on similarities (Scikit-Learn-Developers, 2018). For
semi-supervised learning, input data comprises of a mix of labelled and unlabelled phenomena (Bloice &
Holzinger, 2018).
Support Vector Machines (SVM), Decision Trees, Classification and Regression Trees (CART), Linear
Discriminant Analysis (LDA), Random Forest and K-NN algorithms were considered and all factors come from
both institutional and macroeconomic variables.

Figure 24: Boruta algorithm clustering banks based on non-performing loans (RBZ, 2019).
The study shows that the Support Vector Machine and Random Forest appear to be more efficient algorithms
to predict financial distress for the given data, in comparison to other algorithms. To achieve efficiency and
effectiveness in supervisory work, the Bank will continue to evolve the utilization of machine learning and
other tools. Future work will focus on identifying more features with higher predictive capabilities in the
identification of banks that are likely to become distressed.
BOX 2: MACHINE LEARNING IN BANK FAILURE PREDICTION
FINANCIAL STABILITY REPORT AS AT 30 JUNE 2019

The interconnectedness of banks through borrowing and lending on the interbank market creates linkages
through which shocks maybe transmitted within the banking system if one of the banking institutions was
to fail. The following network-based approach, among others, may be used to assess the level of systemic
linkages that enable bank supervisors to foresee future sources of distress and initiate relevant strategies
aimed at minimising this risk: Let X be a matrix of interbank exposures, capturing bilateral liabilities and
claims. If the banking system consists of N banks, the matrix X will be of the order N× N, where represents
xij the claims of bank bi in a row against bj in a column, such that ai= ∑xij
j
is the sum of assets due to
bi and li= ∑xij
i
is the sum of liabilities.
X =
⎣
⎢
⎢
⎢
⎡0
⋯
xଵ
⋯
xଵே
⋮
⋱
⋮
⋱
⋮
xଵ
⋯

⋯
xே
⋮
⋱
⋮
⋱
⋮
xேଵ
⋯
xே
⋯
0 ⎦
⎥
⎥
⎥
⎤

i
aଵ
⋮
a
⋮
aே

(1)
jlଵ
⋯
l
⋯
lே

A graph G= (V, E) consists of a set V of vertices and a set E of edges. The vertices are the headers of the
columns in the matrix X. A directed edge eij originating from bank bito bank bj if xij ≠0. The
neighbourhood of Ni of a bank bi is defined as its immediately connected neighbours as follows Ni=
{bj: eij ∈E, eji∈E}. Define ki as the number of vertices in the neighbourhood of bi, |Ni|. The in degree,
degin = |Ni\൛bj: eji∈Eൟ| and the out degree, degout = |Ni\൛bj: eij∈Eൟ|. The node strength, NS, is
the value of the flow originating or terminating in a give node. The in node strength, NSin
i = ∑
xij
N
jୀ1
and
the out node strength, NSout
i
= ∑
xji
N
jୀ1
. The in Herfindahl-Hirschman Index (HHI) is a measure of market
concentration. The in-HHI is defined as the sum of the lenders’ squared shares in each borrower’s in
strength, in−HHIi= ∑

xij
∑
xij
N
jస1
൰

N
iୀ1
and the out-HHI is define as the sum of the borrowers’ squared
shares in each lender’s out-strength, out−HHIi= ∑

xji
∑
xji
N
jస1
൰

N
iୀ1
. Let bj, bk ∈Ni then the clustering
coefficient Ci is given by the proportion of edges, ejk∈E, ekj∈E , to the number of edges that could
possibly exist between the banks in Ni and is computed using the formula Ci=
| ൛ejk:bk,bj ∈Ni,ejk∈Eൟ|
ki(kiି1)
. The
degree distribution of a graph G, represents the probability that a randomly chosen bank bi has degree ki.
The authority score denoted authi and the hub score denoted hubi are defined recursively as authi= ∝
∑xijhubj
j
and hubi= β∑xijauthj
j
where ∝, β are constants, in matrix form γauth= XTXauth and
γhub= XXThub, where γ= (αβ)ି1 implying that auth is an eigenvector of XTX and hub is an
eigenvector of XXT. Define an adjacency matrix A= X1൛xijஷ0ൟ, then the PageRank of bank bi is given by
PR(bi) = μ∑Aij
PR(bj)
degout
j
+ θ with μ= 0. 85 and θ= 1.
Once vulnerabilities have been identified through the combined use of the tools discussed above, relevant
mitigating strategies are deployed to ensure that the impact of adverse shocks in the network is minimised.

BOX 3: NETWORK ANALYSIS OF BANK INTERCONNECTDNESS
FINANCIAL STABILITY REPORT AS AT 30 JUNE 2019

BOX 4: CREDIT TO GDP TREND FOR ZIMBABWE 2009-17
One of the early warning indicators of domestic banking crises is the Credit-to-GDP ratio (BIS Quarterly
Review, March 2016). This is the difference between the current private credit ratio as a percentage of
GDP and its trend value estimated using the HP filter.
The credit-to-GDP ratio was estimated using quarterly data for the period 2009 first quarter to 2016
fourth quarter. Credit to the private sector as compiled in the monetary survey was used to proxy total
credit. Since Zimbabwe does not compile GDP statistics on a quarterly basis, the annual nominal GDP
data was spliced using seasonally adjusted Government tax revenue. Tax revenue was chosen as the
appropriate splicing series because it was found to be highly correlated with GDP when annual data was
compared.
The Hedrick and Prescott Filter (1980,1997) (HP Filter) was used to separate the long run trend and
cyclical components of the credit-to-GDP series. The HP filter strives to find a trend component, given an
appropriate smoothening parameter λ, that minimises the following function,
∑
(y௧−τ௧)ଶ+ λ∑
(τ௧ାଵ−2τ௧+ τ௧ିଵ)ଶ
்ିଵ
௧ୀଶ
்
௧ୀଵ
(2)
Where T denotes the sample size, λ is a (nonnegative) smoothing parameter that for quarterly data is
often chosen to equal 1600.Aikman et al. (2010), suggest that credit cycles are substantially longer than
business cycles, supporting the use of a smoothing parameter of 400,000 in the HP filtering. However, for
Zimbabwe, the smoothing parameter was set at 1600 in line with the standard practice for quarterly data
and due to the shortness of the data series. The smoothing parameter of 400,000 will be explored as the
dataset grows. The chart below shows a plot of the actual credit-to-GDP and its trend.
Figure 1: Actual Credit-to-GDP and Trend for Zimbabwe (2009-2017)


ctgdp
HPTREND01

Where the ctgdp is the actual Credit to GDP and the HPTREND01 is the Credit to GDP long term trend
FINANCIAL STABILITY REPORT AS AT 30 JUNE 2019

The chart above shows that the credit-to-GDP ratio was above its long run trend from the third quarter of 2010
to the end of 2013. In this period, Zimbabwe experienced an unsustainable increase in credit growth which
resulted in high nonperforming loans. The Bank intervened by issuing banks with tighter credit risk
management standards which burst the credit bubble.
The credit-to-GDP gap has to be estimated simply as the difference between the actual credit-to-GDP ratio
and its long run trend. The chart below shows the estimated credit-to-GDP gap.
Figure 2: Credit-to-GDP Gap (%)

The credit-to-GDP gap rose from 2009 and peaked at the end of 2011. This shows how credit risk was building
up in the Zimbabwean banking system.
The Credit-to-GDP ratio is also an important input into the computation of the countercyclical buffer under
the Basel III framework currently being drafted for local implementation.

Recovery
Boom
Normal
Recession

HEATMAP OF BANKING SECTOR RISK OUTLOOK
The heatmap which summaries banking sector risk outlook suggests that local currency liquidity risk is
projected to be low, while foreign currency availability will continue to be a challenge in the short-term.
Foreign currency liquidity is expected to stabilise in the long term against the backdrop of various policy
measures geared at export generation and import substitution among others.
Table 2: Banking Sector Risk Outlook Heatmap

2019 Est
2020 Prj
Liquidity (LCY)
Asset Quality
Solvency Risk
Profitability
Contagion Risk
Cyber Risk
Compliance
Operational Risk
Market Risk
Shadow Banking
Interest Rate Risk

Less Risk
Very Low
Low
Moderate
High
Very High
Extreme
More Risk

Credit risk is projected to be moderate though banks still need to be vigilant and proactive to ensure
that the resurgence of non-performing loans is curtailed.
Bank solvency risk is projected to be high. Although banks will continue to be profitable in nominal
terms, they will need to continue implementing capital preservation strategies to ensure that their
capital remains adequate in real terms to support their business activities.
While banks are projected to continue being profitable in nominal terms, they might face long term
viability risk if they continue to experience negative growth in real terms underscoring the need for
sustainable business models..
Interbank contagion risk is projected to be moderate. This risk will continue to depend on the topology
of interbank exposures and the balance sheet dynamics of the market participants. There are a number
of safety nets to cushion various categories of stakeholders that may be exposed by the failure of a
systemic institution. These backstops will limit the relaying of systemic shocks across the system.
Cyber risk is projected to be extreme due to technological transformation and the increased usage of
e-banking platforms that criminals are continuously targeting.
Compliance risk projected to be low, while Operational risk is projected to be moderate. Market Risk
is projected to be high driven by foreign exchange risk as some banks have large net open positions.
Interest Rate Risk is projected to be moderate in sympathy with the likely direction inflation. Shadow
Banking is projected to be high as the regulation of emerging financial innovations continues to present
steep learning curves for regulatory authorities locally and internationally.

3. FINANCIAL SAFETY NETS
Introduction
The financial sector regulatory authorities
employ various safety nets, to ensure the safety
and soundness of the financial system in the
event of a disruption. Financial safety nets act
as backstops to the failure of financial
institutions through the use of various
instruments that include:
a. Requiring banking institutions to set forward
looking provisions that absorb expected
credit losses under various stress scenarios.
This is covered by the IFRS 9 framework
which was implemented successfully by all
banks in Zimbabwe since January 2019;
b. Requiring appropriate levels of capital
buffers over and above the minimum
regulatory capital requirements to enhance
the loss absorption capability of capital
when
banks
face
higher
risk
than
anticipated;
c. Setting
appropriate
risk-based
capital
regimes based on the levels of risk present in
bank portfolios;
d. Enhancing and strengthening the Deposit
Protection Fund to enable it to compensate
depositors in the event of failure of a
contributory institution; and
e. Setting up early intervention regimes such
as the imposition of restrictions on
dividends, remunerations, replacement of
management or other regulatory sanctions
on non-compliant banking institutions. The
Reserve Bank has a Troubled and Insolvent
Banks Policy in place that specifies the
regulatory mechanisms in place for early
intervention in troubled banks.

Role of the Deposit Protection Corporation in
Financial Stability
The Deposit Protection Corporation (DPC) is a
statutory body whose operations are governed
by the Deposit Protection Corporation Act
[Chapter 24:29] as read in conjunction with
Statutory Instrument 156 of 2013. Functions
and objectives of the Corporation are:
a.
to administer the Deposit Protection
Corporation Fund;
b.
to levy contributions from contributory
institutions;
c.
to pay compensation to depositors in the
event of the insolvency of a contributory
institution;
d.
to monitor the business and activities of
contributory
institutions
to
ensure
minimal exposure to the Fund;
e.
to assist the Minister and the Reserve Bank
in the formulation and implementation of
fiscal and Monetary Policy so as to ensure
sound
banking
practices
and
fair
competition among banks in Zimbabwe;
and
f.
to keep the public informed of:
i.
the Corporation’s role in contributing
towards the stability of Zimbabwe’s
financial system;
ii.
the rights of depositors in the event of
a contributory institution becoming
insolvent; and
g.
to exercise any other function conferred or
imposed on the Corporation in terms of
this Act or any other enactment.
The roles and functions of the Corporation help
to promote financial stability by providing
limited insurance cover to depositors in the
banking sector, whereby in the event of a bank
failure, depositors are compensated the
insured portion of their deposits from the
Deposit Protection Fund. The availability of a
deposit insurer in an economy is essential to
minimize the risk of bank runs, where
depositors in the entire market engage in panic
withdrawals due to failure of one bank or
rumours of fragility in the banking sector.
Membership
to
the
Deposit
Protection
Corporation is mandatory by law for all licensed
deposit-taking institutions regulated by the
Reserve
Bank
of
Zimbabwe.
Currently
membership includes all commercial banks,
merchant banks, building societies, discount
houses, finance houses, deposit-taking microfinance institutions, People's Own Savings Bank
(POSB) and Infrastructure Development Bank of
Zimbabwe (IDBZ).

As at 30 June 2019, membership to the DPC
Scheme comprised of 27 contributory banking
institutions (CBIs) as shown in Table 3 below:
Table 3: Membership to the DPC Scheme as at
30 June 2019
Type of Institution
Number
Commercial Banks

Building Societies

Merchant Banks

Savings Bank

Infrastructure
&
Development
Bank

Deposit-Taking
Micro-finance
Institutions(DTMFIs)

Total

Source: DPC (2019)
Deposit Protection Corporation Fund (RTGS
FCA Deposits)
The DPC continuously monitors the safety,
soundness and performance of all banking
institutions to ensure that all potential risks are
adequately covered by the fund.
Risks to the Deposit Protection Corporation
Fund:
i. Ensuring that premium rates charged to
contributing institutions are aligned to
the underlying actuarial risks;
ii. Preserving the DPC fund via effective
management of various financial risks;
including investment risk due to volatile
exchange rates and rising inflation; and
iii. DPC has 11 contributory institutions (CIs)
on the watch list category (i.e. institutions
with composite CAMELS ratings of 3, 4
and 5) with an aggregate exposure of ZW
70.9 million against DPC Fund of ZW 68.8
million as at 30 June 2019. This implies
that the DPC Fund only covered 97% of
the exposure of the CIs on watch list.
Reserve Bank of Zimbabwe Lender of Last
Resort (LOLR)
The Reserve Bank offers the lender of last resort
facility to solvent banks that would have
otherwise failed to get funding in the interbank
market. Although the illiquid bank might be
solvent, temporary liquidity challenges might
mean that it fails to meet the demands of the
customers and creditors in the short term. This
might lead to customers panicking due to the
fear of losing their money leading to a bank run.
If this is not managed well, leading possibly to
fire sales, the bank might eventually end up
becoming bankrupt.
Consequently, the contagion created might
spread to other banking institutions through
the interconnections such as interbank loans,
payments in transit and guarantees. This might
lead to a systemic crisis in the country.
LOLR funding is secured, usually with Treasury
Bills, and is usually provided at a punitive rate
to ensure that the institution does not end up
relying on Reserve Bank for its daily liquidity
support.
Contingency Planning and Systemic Crisis
Management
Financial sector regulatory authorities have put
in place, a Contingency Planning and Systemic
Crisis Management framework consisting of a
set of policies, actions and processes necessary
for
the
prevention,
management
and
containment of banking systemic distress and
crisis.
The framework is designed to enhance the
preparedness of Government and regulatory
authorities in the face of systemic financial
stress. Engaging in contingency planning prior
to a crisis will help the supervisory authorities
to identify the types of actions that may be
necessary during a crisis, as well as the skills,
policies and processes that would be required
to support these actions.
There are key components of contingency
planning and systemic crisis management.
These
include,
sound
institutional
arrangements
with
explicit
inter-agency
coordination mechanisms and powers that
allow for early intervention in a problem bank
to prevent its failure.

4. INSURANCE AND PENSION INDUSTRY
Insurance Industry...
The insurance industry remained generally
stable during the first half of 2019, regardless of
the challenging operating environment. The
sector is anticipated to remain mostly resilient
in the medium to long term.
Table 4: Industry Performance by Premium
Income
Premium Income ($000)
Class of Business
30 June 2018
30 June 2019
Short term Insurers
144,177
347,311
Life Assurers
200,015
252,182
Funeral Assurers
20,973
25,240
Total Gross Premiums
365,165
624,733
Source: IPEC (2019)
The annual premium income growth was 71%,
as shown in Table 4 above. This reveals
potential vulnerabilities in some parts of the
industry based on its inability to generate
premium growth in real terms for the period to
30 June 2019. The insurance industry assets
were USD$3.12 billion in June 2018 and
ZW$7.63 billion in June 2019.
Figure 25: Insurance Industry Total Assets ($
Blns)

Source: IPEC (2019)
The insurance industry had a compliance level
of 82.35% with minimum capital requirements
(MCR) as at June 2019. The compliance rate is
based on unaudited returns and does not take
into account the provisions of Statutory
Instrument 95 of 2017 in terms of inadmissible
assets. Funeral assurers had the lowest MCR
compliance of 55%.
To ensure the resilience of the sector to various
shocks in the outlook period, there is need for
regulated entities to meet the regulatory
minimum capital requirements.
Sources of Systemic risk (vulnerability) in the
insurance sector...
Systemic Risk
Some major insurance players are members of
groups of companies or are themselves parents
to other companies. This exposes the regulated
entities to group wide exposures which
potentially compromises not only their own
soundness and safety but also the entire
financial system.
Premium Debtors
The insurance business model assumes that
there must be upfront payment of premiums by
policyholders. Such pre-funding arrangements
allow the insurance industry to build huge
insurance pools from which claims, other
contractual obligations and investments are
made. Premium debtors have remained a big
challenge for players as it greatly affects the
quality of assets and ability to settle claims.
Forex Shortages to pay external reinsurance
premiums and obligations
Reinsurance business is international in nature
and therefore reinsurance contracts and
obligations must be transacted in foreign
currency. The current shortages of forex have
put international reinsurance contracts at risk
of not being honoured thereby exposing the
nation’s
economic assets to
inadequate
insurance cover.
Confidence issues
The issue of low confidence has remained a
major challenge for the insurance industry. To
mitigate against this, the Insurance and

MAR-18
JUN-18
SEP-18
DEC-18
MAR-19
JUN-19

Pensions Commission has conducted a number
of public awareness programmes that include
insurance awareness days and other consumer
awareness programmes in conjunction with
Consumer
Council
of
Zimbabwe.
The
Commission is also encouraging the sector to
develop innovative products, such as indexlinked products, where feasible, to build
confidence in the industry.
Pensions Industry...
The pensions industry had assets of USD$4.38
billion as at 30 June 2018 and ZW$7.04 billion
as at 30 June 2019.
Figure 26: Pensions Industry Total Assets ($
Bns)

Source: IPEC (2019)
Equities made up 43.74% of the total pensions
industry’s assets. While this provides a possible
channel for the transmission of contagion risk
between the capital market and the pensions
industry, if the equity portfolio is well
diversified, it also provides a possible hedge
against inflation.
The pensions industry’s surplus for the 6
months ended 30 June 2019 amounted to
ZW$1.15 billion. This was mainly composed of
fair value gains totalling ZW$828.74 million for
the period under review. The fair value gains
were mainly due to property revaluations and a
bull run on the Zimbabwe Stock Exchange
during the period under review. The expenses
to total income ratio also declined from 11.24%
to 3.75%. The breakdown of Income,
expenditure and resulting surplus for the period
is shown in Table 5 below.
Table 5: Pensions Industry Income and
Expenditure Indicators
Indicator
June 2019
June 2018
Total Contributions ($m)
211.61
177.92
Investment Income ($m)
992.00
91.56
Total Income ($m)
1,350.83
278.66
Total Benefits Incurred ($m)
138.61
119.03
Total Expenditure ($m)
191.76
157.65
Income Surplus(Deficit) in $m
1,159.06
121.02
Expenses/Contributions
23.94%
19.13%
Expenses/Total Income
3.75%
11.24%
Source: IPEC (2019)
Inflation Risk
Inflationary pressures have led to the erosion of
insurance and pension contributions and has
also led to the deterioration of insurance cover
and value of other accruing insurance benefits
such as annuities.
Informal Sector Pension Coverage
In the outlook period, the National Social
Security Authority (NSSA) is contemplating the
development of appropriate social security
packages for the informal sector, not only to
alleviate the vulnerability of employees in this
sector, but also to expand the social security
contribution base. Unlike some schemes for the
formally employed, where employers and
employees make contributions to NSSA, these
schemes will be solely financed by contributors.

MAR-18
JUN-18
SEP-18
DEC-18
MAR-19
JUN-19

INSURANCE AND PENSION INDUSTRY HEATMAP
Profitability is projected to be moderate and is poised to grow with improving confidence in the sector
that will boost real premium income. The insurance sector needs to continue devising strategies to price
for value and real revenue growth over the outlook period, to guarantee the sustainability of the
industry.
Table 6: Insurance and Pension Industry Risk Outlook Heatmap

2019 Est
2020 Prj
Profitability


Credit Risk


Funding Risk


Investment/Market Risk


Solvency Risk


Concentration Risk


Operational Risk


Less Risk
Very Low
Low
Moderate
High
Very High
Extreme
More Risk

Premium arrears related credit risk outlook is high. The industry needs to devise strategies to ensure
that premium collections are enhanced by overhauling their overall business models and aligning them
to the reigning socio economic environment.

Funding risk is projected to be moderate due to uncertainty in premium income which might affect the
viability of the sector.
Investment market risk is projected to be moderate due to uncertainty in the performance of the stock
and property markets. Strategic asset allocation is an important key factor to achieve stable real returns
in uncertain operating environments.

Solvency risk is moderate as capitalisation is still a challenge for some subsectors of the insurance
sector.

Concentration risk is projected to remain high as systemically important institutions continue to
dominate the industry. However, the authorities will continue to monitor systemic risk and the industry
is projected to be stable in the outlook period.

Operational risk is projected to be moderate as cyber security risk continues to dominate the operations
of financial sector players.

5. CAPITAL MARKETS
Stock Market Developments
The performance of the local bourse improved
during the period ended 30 June 2019. This was
largely due to an increase in the demand for
stocks which are perceived as a store of value in
current operating environment. As a result, the
All Share and Top 10 indices closed the quarter
at 204.75 points and 197.21 points, from 121.66
points and 114.61 points, respectively in the
quarter ending 31 March 2019.
Figure 27: ZSE All Share & Top 10 Indices

Source: ZSE, 2019
Outlook
The performance of the Zimbabwe Stock
Exchange (ZSE) is expected to move in tandem
with macroeconomic developments.
Industrial and Mining Indices
The Industrial and mining indices registered
quarter-on-quarter gains of 68.53% and
31.59%, respectively, over the review period.
In general, the capital market sector outlook is
considered stable. Only one securities advisory
firm was licensed in the second quarter of 2019.
A summary of the total number of licensed and
registered institutions as at 30 June 2019
(Securities Market Intermediaries) is shown in
Table 7.

Table 7: Securities Market Intermediaries
Type of institution
30 June

30 June

Securities Exchanges

Central Securities Depositories

Securities Dealing (Stock broking)
firms

Securities Investment (Asset)
Management firms

Securities Custodial firms

Securities Transfer Secretaries
firms

Securities Trustee firms

Securities Advisory firms

Source: SECZ, 2019
The capital markets institutions in Zimbabwe
are interconnected with other categories of
licensed entities such as registered banks.
Settlement of trades is done on the Real Time
Gross
Settlement
(RTGS)
platform
and
settlement banks post collateral to the Reserve
Bank. Therefore, settlement banks’ liquidity
positions play a fundamental role in the capital
markets.
Contagion and Systemic Risks
The Securities and Exchange Commission of
Zimbabwe (SECZ) uses the index volatility and
contagion matrix as systemic risk indicators to
track the relationships that can spur contagion
within the financial markets.
ZSE Industrial Index Volatility
The volatility index was calculated using both
Industrial and Mining Indices from March 2009
to June 2019. The Industrial Index Monthly
Exponentially
Weighted
Moving
Average
(EWMA) relative volatility is shown in Figure 28.

30-Jun-18
31-Jul-18
31-Aug-18
30-Sep-18
31-Oct-18
30-Nov-18
31-Dec-18
31-Jan-19
28-Feb-19
31-Mar-19
30-Apr-19
31-May-19
30-Jun-19
All Share Index
Top 10 Index

Figure 28: Industrial Index EWMA Relative
Volatility (March 2009 – August 2019)

Source: ZSE (2019)
The market experienced increased volatility due
to macroeconomic dynamics. The industrial
index volatility was estimated at 2.0% as at 30
June 2019 as compared to a volatility of 1.7%
that was recorded in March 2019, using a
smoothing constant of 0.97. As shown in Figure
28 the market was less volatile over the first
eight years of dollarization and increased in the
last two years.
Figure 29: Zimbabwe Stock Exchange Volume/
Turnover
Source: ZSE (2019)


Investment Management Firms
Funds
under
Management
(FuM)
was
ZW$13.45 billion from USD$4.85 billion as at 30
June 2018. The amount as at 30 June 2019 was
attributed mainly to the revaluation of property
investments that were converted from USD
values to local currency values at interbank
foreign exchange rates. Comparing with last
quarter (ended 31 March 2019) the FuM
increased by 105% from $6.54 billion. Figure 30
shows the FuM trend from December 2016 to
June 2019.
Figure 30: Funds Under Management (Dec2016
-June 2019)

Source: SECZ (2019)
Quoted equities accounted for 64.84% of FuM,
followed by property and money market
investments which had 26.90% and 2.67%
respectively as illustrated in Figure 31 below.
The sector’s exposure to the banking sector
retreated from 6.67% as at 31 March 2019 to
2.67% as at 31 June 2019. The decrease in the
FuM in money market investments was mainly
attributed to reallocation of assets due to
inflation expectations and repricing of other
asset classes with inflation which adversely
affected the proportion of money market
investments.


Mar-09
Mar-10
Mar-11
Mar-12
Mar-13
Mar-14
Mar-15
Mar-16
Mar-17
Mar-18
Mar-19

Stock Returns
June 2013
Sept 2017
Aug 2017
Jan

EWMA =2.00364%
Constant ~ 0.97
-

1,000
1,200
Jan-14
Aug-14
Mar-15
Oct-15
May-...
Dec-16
Jul-17
Feb-18
Sep-18
Apr-19
TURNOVER ($ MILLIONS)
VOLUME (MILLIONS)
Volume
Turnover

Q4:2016
Q1:2017
Q2:2017
Q3:2017
Q4:2017
Q1:2018
Q2:2018
Q3:2018
Q4:2018
Q1:2019
Q2:2019
$ Millions

Figure 31: Distribution of Funds Under
Management as at 30 June 2019


Source: SECZ (2019)
Settlement Systems
The collateral security deposits held stood at
ZW$76.28 million as at 30 June 2019. Collateral
deposits are lodged by settlement banks in
relation to their settlement activity. The
collateral is determined by Chengetedzai
Depository Company (CDC) from time to time.
In the event of the participation exposure
breach versus the collateral value held,
additional collateral will be called in by CDC. The
systemic effect of the settlement banks’
liquidity remains critical as they play an
important role in settling securities.
Assets under Custody
Assets under custody stood at ZW$12.16 billion
as at 30 June 2019. Although the growth was
positive, repatriation of dividends to foreign
investors remained a challenge which impacted
negatively on the capital markets which thrive
on their attractiveness to regional and
international
investors.
The
inflationary
environment continued to push prices upwards
thereby influencing revaluations of equities and
other investments. In the outlook period, the
market is expected to show growth consistent
with developments in the macroeconomic
environment.
Turnover and Brokerage
Turnover and Brokerage stood at ZW$545.64
million and ZW$10.04 million respectively as at
30 June 2019. The turnover was driven by
increased
participation
on
the
markets.
Inflationary pressures and the possible loss of
value of the local currency contributed to the
increased turnover as investors were moving
away from the money markets to equities as a
safe haven. Local investors contributed 63% of
total turnover for the period under review.
Capacity Utilisation
The Confederation of Zimbabwe Industries’
manufacturing survey noted that capacity
utilization within the sector had recovered
marginally in 2018 to 48.7% from 45.1% in 2017.
The ongoing foreign currency shortages has
continued to generate uncertainties in the
operating environment. As the majority of
industry relies on imported raw materials,
failure to access foreign currency severely
affects their operations. This may dampen
capacity utilization by the manufacturing sector
and increase the risk of deterioration in asset
quality amongst banks that are exposed to the
sector.

CASH AT
BANK/ CALL
DEPOSITS,
1.61%
MONEY
MARKET,
2.67%
BONDS,
2.65%
EQUITIES
(QUOTED),
64.84%
EQUITIES
(UNQUOTED),
0.93%
PROPERTY,
26.90%
NON
PERFORMING
ASSETS,
0.00%
OTHER, 0.44%

CORPORATE SECTOR HEATMAP
Corporate sector profitability is projected to be moderate as companies implement agile and dynamic
strategies to weather against the macro-economic environment.
Table 8: Corporate Sector Risk Outlook Heatmap

2019 Est
2020 Prj
Profitability


FX liquidity Risk


Interest Rate Risk


Strategic Risk


Solvency risk


Operational Risk


Capacity Utilization


Less Risk
Very Low
Low
Moderate
High
Very High
Extreme
More Risk

FX liquidity risk is projected to remain moderate to high in the short term but is expected to improve
in the medium to long term as export-oriented strategies are expected to bear fruit.

Interest rate risk is projected to be moderate as most corporations are financed through bank loans
and interest rates are projected to move in sympathy with evolving inflationary pressures. However,
regulatory interventions to stimulate growth in the productive sector is likely to see a culture of
moderate interest rates.

Strategic risk is projected to be high due to the possible uncertainty that might arise from vulnerabilities
inherent in the macroeconomic environment. Companies need to ensure that they set their strategies
cognisant of their business positioning in respect of its resilience to the evolution of the macro economic
and business cycles.

Solvency risk is projected to be moderate as corporates need to ensure that their strategies allow them
to generate profit in real terms.
Companies face high operational risk arising from incidences related to the operating environment.
These include, water and power shortages and criminal activity such as armed robberies, both internal
and external frauds and other emerging risks including compliance and cyber risks.
Capacity utilisation has gradually been improving but may be dampened for sectors such as those that
have inputs that require foreign currency and continue to face challenges in accessing it. This may
increase the risk of deterioration in asset quality amongst banks that are exposed to the sector.
Insurance and other contributions from these entities will also be compromised.

6. FINANCIAL MARKET INFRASTRUCTURE
Introduction
Financial infrastructure provides the necessary
platforms that enable market participants to
transact in a secure, sound and stable
environment. The Zimbabwean regulatory
authorities provide the required supervision
and oversight of the infrastructure through
legislation and a diverse set of monitoring tools.
This ensures that the market participants are
not compromised by the emergence of
unforeseen risks which might threaten the
safety, stability and soundness of the financial
system, fair competition and best practices.
National Payment Systems
The National Payment System (NPS) is one of
the pillars of financial stability in the economy.
Accordingly, the Bank’s National Payment
Systems Department (NPSD) aims to smoothly
conduct its core mandate of maintaining a
stable
and
resilient
financial
market
infrastructure which is critical to support
sustainable
economic
growth
and
development.
In this regard, the Bank endeavours to achieve
its financial system stability mandate through
the effective design, research-based policies,
operation,
supervision
and
oversight
of
regulated market players.
The NPSD evaluates payment systems related
applications and grants approval where the
applicant meets the minimum requirements
using appropriate regulatory structures.
Furthermore, the NPSD’s Oversight Unit
conducts continuous off-site surveillance and
analysis of the payment systems providers
(PSPs) using information submitted in a
prescribed
manner
and
pre-determined
frequency.
On-site
inspections
of
financial
service
providers are also conducted in order to assess
the
financial
performance,
corporate
governance
structures
and
internal
risk
management processes as well as their
compliance with relevant laws and regulations.
To this end, during the period under review, the
vulnerabilities related to payment systems
operations were minimal in view of the riskbased measures in place and compliance with
international best practices.
The national payment systems are largely
characterised by international, regional and
local payment services providers with the latter
accounting for 77% of the total Financial Market
Infrastructures (FMIs). This impacts positively
on competition and best practices across the
payment systems landscape.
As at 30 June 2019, the national payment
systems comprised of 24 participant banks and
seventeen (17) payment system providers as
shown in the Table 9 below.
Table 9: Payment System Providers
NAME OF FMI
BRIEF DESCRIPTION
NUMBER OF
PARTICIPANT
BANKS
Real Time Gross
Settlement System
(RTGS)
-Zimbabwe
Electronic Transfer
Settlement System
(ZETSS)
Settlement hub for the
country –interbank funds
transfer

Central Securities
Depository (CSD) for
Government
Securities
Holding and transferring of
securities in a dematerialised
form

SWIFT
Secure payment channel
used globally

SADC -RTGS
Settlement hub for the SADC
Region –cross border
interbank funds transfer

Central Securities
Depository (CSD) for
Equities
Holding and transferring of
equities in a dematerialised
form

Zimswitch Holdings
(Pvt) Ltd
Local Switch and ZIPIT

Payserv Zimbabwe
(Pvt) Ltd (Paynet)
Electronic processing of
payment instructions –
Electronic Funds Transfer
(EFT)

MasterCard
International Card Switching
Facilities

Visa
International Card Switching
Facilities

NAME OF FMI
BRIEF DESCRIPTION
NUMBER OF
PARTICIPANT
BANKS
Union Pay
International (UPI)
International Card Switching
Facilities

MyCash
Mobile Financial Services/
Mobile Money

Ecocash
Mobile Financial Services/
Mobile Money

Getcash
Mobile Financial Services/
Mobile Money

One Money
Mobile Financial Services/
Mobile Money

Telecash
Mobile Financial Services/
Mobile Money

Cheque Clearing
House
Cheque Clearing

IceCash
Electronic Payment Solutions

Major Payment Systems Vulnerabilities
The Real Time Gross Settlement System (RTGS)
is the most critical payment system which
processes and settles large values and timecritical payments between system participants
and also has linkages with other payment
systems such as the retail and central securities
depositories. Therefore, its failure could have a
systemic impact; with negative repercussions to
financial stability within the country.
With respect to private payment systems,
concentration of payments on one platform,
remained a challenge which impairs the whole
financial system if and when the system
undergoes upgrades, experiences downtime
and falls under distress. This has led to
unnecessary disruptions in economic activities.
Notwithstanding the above, there are a number
of vulnerabilities related to other payment
systems such as the retail payment systems. For
example, the system downtime incidents on
account of intermittent disruptions caused by
long periods of power outages which affected
internet, card, mobile phone services and other
systems.
A key point to note, is that, such disruptions
were in most cases resolved within a reasonable
time period based on approved business
continuity plans. Overall, a substantial number
of large value and time-critical payments were
processed and settled despite the disruptions.
Table 10 summaries some of the major
vulnerabilities and the subsequent mitigating
measures put in place. The overall vulnerability
of the national payment systems, remains in the
low category.
Table 10: Major Risks to FMIs
SYSTEM
VULNERABILITIES
MEASURES
RTGS/CSD

Inability of system
participants to
settle their
obligations

Downtimes

Delayed settlement
due to liquidity
challenges

System capacity

Cyber security
threats

Money laundering


Prefunding & managed
through real time
mechanisms which is
inbuilt in the system

Ensure approved business
continuity plans are place

Ensure uptime of 99.999%

Close monitoring and
enforcement of rules

Enforcement of systems
capacity policy

Adopt a regtech and
suptech –Electronic
Financial Surveillance
system, e.t.c.

Adopt and implement best
practices –standardsPFMIs & FATF Swift for
Cybersecurity

Credit push.

Offsite analysis and on-site
inspections
SWIFT

Cybersecurity

De-risking

System supplier designed
controls such as the
Customer Security
Programs

Use bureaus such as Trust
Link

Establishment of selfregulatory bodies-

Enforce compliance with
FATF and BIS
recommendations and
adopt Financial inclusion
measures for defined
customer base
Mobile
Financial
services
Card
payments

Cyber security

Frauds/thefts

Exposure of
customer funds
under mobile
money

Network
connectivity

Money laundering

Technological risks

Foreign currency
constraints

Rigorous Licensing process

Ensure approved business
continuity plans are in
place

Ring fencing through Trust
Accounts

Ensure uptime of
99.9999%

Close monitoring and
enforcement of rules

Education and awareness

Enforcement of systems
capacity policy

Adopt a regtech
andsuptech –online
monitoring and read only
facility etc.

Adopt and implement best
practices –standardsPFMIs & FATF

Offsite analysis and on-site
inspections

User acceptance testing
before launch

Systems Performance Barometer
A high level availability of 99% for the Large
Value Payment, Clearing and Settlement
Systems (Real Time Gross Settlement System
(RTGS) and Central Securities Depository (CSD)
was recorded during the first six months ending
June 2019 as shown in Figure 33.
The negligible interruptions experienced can be
attributed to increased oversight efforts and
significant
improvements
in
terms
of
collaborative systems management.
Correspondingly, the mobile money platforms
achieved an average up time of 99.8% for first
half of in 2019 with the ATMs at 92.3.7% as
shown in Figure 33. The 0.2% system down time
for retail payment systems was largely
attributed to system interruptions related to
scheduled upgrades.
Collateral Management
National payments platforms largely the
electronic transactions continued to record
strong double-digit growth.
Cheque payment methods remained constant,
mainly due to the high uptake of digital
payment
mechanisms
by
consumers
as
opposed to traditional payment instruments.
Given the corresponding demand for instant
payments and the increasing net debit
exposures in real-time-retail payment systems,
financial institutions have been required to
improve the monitoring and management of
their collateral positions as well as exposures as
in Figure 34.
Payment Systems Capacity Issues
The Bank in collaboration with regulated
entities have adopted a cautious approach and
review of the system capacities to ensure
sustainable, reliable, resilient and high system
performance on an ongoing basis as shown in
Figure 32.
To date all banks and FMIs are implementing
the requisite system capacities on an on-going
basis to ensure the accommodation of
increased volumes and values and that services
delivered are achieved without constraints.
Figure 32: Quality of controls to overcome the
inherent risks in the payment streams

Figure 33: Average system up time from
January to June 2019

**Please note, the measure of average up time does not include directly planned or
externally initiated shut downs of the systems.
The measures implemented were aligned to
international best practice at a minimum, while
encouraging the critical service providers to
ensure availability of their facilities as expected
in line with the respective service level
agreements.

After Controls
Inherent Risk

RTGS
MOBILE
ATMs

Governance
Governance, capacity and stability of payment
systems infrastructure, is particularly important
in view of the ever-increasing complexity and
diversity of the range of products and services
offered to the market through traditional and
digital channels.
Figure 34: Collateral growth and stability to
June 2019


Risk Management and Oversight Activities
AML/CFT
During the period ended 30 June 2019 the
NPSD’s
oversight
activities
focused
on
developing the risk-based approach with a
particular emphasis on anti-money laundering
and counter financing of terrorism (AML/CFT)
activities in line with the Financial Action Task
Force (FAFT) Recommendations. All FMIs
submitted their AML/CFT self-assessments on a
quarterly basis and the majority were working
towards full compliance.
In the outlook period, the NPSD will
continuously apply the risk-based approach
holistically
and
where
necessary
take
appropriate corrective measures to ensure
stability and integrity of the national payment
systems.
Cyber Security Issues
Over the years, the payment systems sector has
implemented a number of measures to detect
and control cyber security threats among
others.
In the 2019 Monetary Policy Statement, the
Bank directed PSPs and banks to carry out cyber
security risk assessments of their activities and
put in place commensurate control measures. It
served as guidance to effectively implement
cybersecurity policy towards the enhancement
of the entity’s resilience in the face of growing
threats and attacks.
During the period under review PSPs and
participating banks were at different levels of
assessing cybersecurity risks. The assessment
process allows the institution to identify and
understand the potential cyber risks that affect
their operations and institute relevant controls.
Furthermore,
the
NPSD
intensified
its
surveillance and monitoring role to enforce
compliance against cyber threats in a timely
manner ultimately enhancing financial system
stability.
In the outlook period, the NPSD expects the
completion
of
assessments
and
implementation of security measures to
strengthen payment systems and hence
ensuring the safety and soundness of the
infrastructure
Migration to EMV Technology
The Reserve Bank, in collaboration with banks,
initiated a process to migrate all payment cards
and related access ATMs and POS from
magnetic stripe technology to Euro MasterCard
and Visa (EMV) technology to scale up security
in the electronic card payment system.
These current and existing efforts have
culminated in a measurable reduction of cloned
card incidents in the market as compared to the
prior period. To this end, the market achieved
EMV compliance of over 80% of the card and

Jan Feb Mar Apr May Jun
Millions
Millions
Zimswitch
CDC
Cheque (RHS)

related infrastructure in the country, exceeding
the targeted 60% for the year.
In the outlook period, NPSD is working with the
necessary institutions to ensure 100% EMV
compliance in the market to meet international
best practices.
National Payment Systems Statistics
The total payment streams transaction values
for eight months ending August 2019 amounted
to $206.5 billion and volumes were 1.7 billion.
The retail payment streams cumulative values
and volumes were $50.3billion and 1.2 billion,
respectively with mobile constituting the
largest proportion of 55% in terms of value.
All access points and devices recorded a
positive growth during the year under review
except for ATMs and active mobile subscribers
respectively as shown in Tables A3.1 to A3.3.

Credit Registry
In an endeavour to promote access to credit by
individuals, small to medium enterprises as well
as the corporate sector the Bank and the
Government took measures to enhance the
credit infrastructure in the country through the
establishment of a Credit Registry. The Credit
Registry became operational during the first
half of 2017.
The Credit Registry and private credit bureaus
support an information sharing mechanism
amongst credit providers to transform credit
reporting systems and instil a good credit
culture amongst borrowers. The enhanced
credit
reporting
infrastructure
seeks
to
facilitate effective collection, reporting and
sharing of information on borrowers’ credit
history and payment patterns.

Collateral Registry
Cognisant of the challenges faced by SMEs and
households in accessing credit markets due to
their lack of immovable collateral that
mainstream lenders require as security, the
Bank also took initiatives to establish a
Collateral Registry. The Collateral Registry,
which maintains records of movable assets
accepted and registered by lenders, seeks to
expand the range of qualifying collateral
accepted by banks as part of the broader
reforms to promote access to finance for small
enterprises and individuals. The Collateral
Registry Is expected to be operational during
the first half of 2020. Movable collateral that
can be used as security shall include industrial
equipment, inventory, accounts receivables,
farm products, household items, fixtures, bank
accounts etc.

FINANCIAL MARKET INFRASTRUCTURE HEATMAP
Table 11: Financial Infrastructure Risk Outlook Heatmap

2019est
2020prj
Concentration Risk


Cyber Risk


Credit Risk


Operational Risk


Shadow Financial Services


Less Risk
Very Low
Low
Moderate
High
Very High
Extreme
More Risk

Concentration risk is projected to be high in the short to medium term due to high concentration in
systemic private payment systems. Risk is expected to decrease as other players enter the market and
also due to other initiatives by regulatory authorities.
Counterparty credit risk in the payment systems is generally low as collateral, insurance and escrow
arrangements among others are used to mitigate against this risk.

Cyber Risk- given the high uptake of digital financial services in the economy, it has heightened the
cyber risk potential. Highly vulnerable to attack by sophisticated hackers and fraudsters who keep on
devising strategies to hack into various types of online platforms. While banking institutions may
deploy sophisticated security systems to counter this, vulnerabilities occur regularly.


The use of shadow financial services and innovative is fraught with hazards as these platforms do not
satisfy AML and CFT compliance requirements.

7. REGULATORY DEVELOPMENTS
Banking Sector...
Basel II/III Implementation
The Bank has adopted a gradual approach to
Basel III implementation and is in the process
of developing guidelines covering, among
others, capital and liquidity risk standards. The
new framework aims to improve the quality,
consistency and transparency of capital while
reducing pro-cyclicality, as well as, enhance
liquidity management in banking institutions.
The
capital
framework
introduces
two
additional
buffers,
namely,
the
capital
conservation and countercyclical buffers. The
capital conservation buffer is designed to
ensure that banks build up capital buffers
outside periods of stress which can be drawn
down as losses are incurred in the event of an
economic
downturn. The
countercyclical
buffer aims to ensure that banking sector
capital requirements take account of the
macro-financial environment in which banks
operate. The countercyclical buffer, together
with the leverage ratio and other requirements
for D-SIBs cover some of the macro-prudential
aspects of the new standards.
The liquidity framework will change the
balance sheet structures of banks by increasing
the component of highly liquid and lowyielding assets and decreasing their holdings of
less liquid assets. The Reserve Bank is working
on a guidance for the Liquidity Coverage Ratio
(LCR) and the Net Stable Funding Ratio (NSFR)
to be rolled out in the first half of 2020.
The objective of the LCR is to ensure that banks
maintain adequate levels of unencumbered,
high quality assets that can be converted into
cash to meet its liquidity needs for a 30-day
time horizon under an acute liquidity stress
scenario specified by supervisors. The LCR
should be greater than 100% on an ongoing
basis.
The NSFR compares the amount of available
stable funding to the amount of required
stable funding and this ratio should also be
equal to at least 100% on an ongoing basis.
International Financial Reporting Standard
(IFRS) 9
The Bank, in collaboration with the Public
Accountants & Auditors Board (PAAB), the
Institute of Chartered Accountants Zimbabwe,
accounting firms and banking institutions,
developed a road map for the adoption and
implementation of the International Financial
Reporting Standard 9, effective 1 January
2018. Guidance on the implementation of IFRS
9 in Zimbabwe was then issued to the market.
IFRS 9 was successfully implemented by all
banking institutions with compliant financial
statements being published for period ended
31 December 2018 and thereafter. The
adoption of the new accounting standard is
expected to increase the banking sector’s
resilience to adverse credit macroeconomic
shocks.
Recovery Planning
The Bank issued Prudential Standard No. 12018/BSD: Guidance on Recovery Planning in
April 2018, after consultations with the
banking sector. The Prudential Standard was
issued to guide the development of Recovery
Planning Frameworks by banking institutions.
Recovery planning is one of the major
regulatory reforms that was put in place in the
aftermath of the Global Financial Crisis 2007-9.
The overall benefit of recovery planning is the
orderly and timely management of crisis
situations in financial institutions, thereby
avoiding spill over effects into the rest of the
sector,
which
inevitably
erodes
overall
depositor confidence.
D-SIB Framework
The Bank is in the process of finalising the
market guidance on domestic systemically
important banks (D-SIB).

A domestic systemically important bank (DSIB) is a local banking institution whose failure
or distress might lead to market wide
disruption in the provision of financial services
thereby generating negative externalities. The
negative externalities include economic or
social
costs
to
people
beyond
the
shareholders, creditors and employees of the
distressed systemically important banking
institution. The spill over effects include the
following:
i. disruption in the availability of financial
services or supply of credit to the economy
directly, to the extent that other banking
institutions may not quickly fill the void;
ii. loss of confidence and fear of contagion,
which in turn leads to tightening of bank
funding; and
iii. disruption of financial markets if the D-SIB
plays a pivotal role in the provision of
critical services, such as payments,
settlements and custody, to other financial
institutions.
As such these banking institutions are sizable,
highly interconnected, with less substitutable
products or high complexity, whose failure can
lead to the paralysis of the economy.
Cognisant of these negative externalities, the
Reserve Bank has adopted a set of principles
that constitute the D-SIB framework, in line
with international best practice. The objective
of this framework focuses on putting in place
relevant
regulatory
measures
for
the
identification, monitoring and management of
systemic risks arising from the distress of local
systemically important institutions.
The
framework
presents
the
following
principles, among others:
a. the assessment methodology for the
identification of D-SIBs;
b. the
additional
prudential
measures
covering additional capital and liquidity
requirements;
c. frequency of monitoring; and
d. other supervisory requirements.
Macro-prudential Policy
In line with the objective of maintaining a
robust and stable financial system, the Bank
has developed a macroprudential policy. The
policy, which provides for effective macroprudential tools, appropriate governance
arrangements, and systemic risk assessment, is
currently in the final stages of being
operationalised.
Implementation of Sustainability Standards
The Bank is spearheading the implementation
of sustainability standards in all local banking
institutions. These standards require banks to
provide relevant support and incentives to
corporations that adopt various sustainable
practices, including the use of clean energy and
other renewable natural resources. Banks will
implement
sustainability
standards
by
ensuring that all their cross industry lending
and relationships are geared to support
compliant entities.
In that regard, the Reserve Bank of Zimbabwe
is now a member of the Sustainability
Standards and Certification Initiative (SSCI)
Council. The SSCI is driven by the European
Organisation for Sustainable Development
(EOSD) under the Global Sustainable Finance
Network.
The
objectives
of
SSCI
include
the
development of core competencies and
capacity building to create effective global
systems; driving global change through
benchmarking of all standards, domestic and
international;
and
providing
a
unique
stakeholder
platform
for
collaboration,
knowledge sharing, and networking.
National Payments Systems...
Retail Service Payment Systems Provider
In February 2019, the National Payments
Systems Division (NPSD) issued a circular on
additional requirements that should be
provided and fulfilled by any entity intending
to offer retail service payment systems.

Review of NPS Act and Oversight Framework
and Recognition Criteria
The National Payment Systems Act [Chap:
24:23] of 2000, is currently under review
jointly with the key stakeholders, with the aim
to further strengthen and align the regulatory
efforts to market developments.
Complimentary
to
that,
the
Oversight
Framework and Recognition Criteria were
being reviewed on an on-going basis and are
intended to foster the design, development
and implementation of electronic retail
payment systems leveraging on the available
technology.
Customer Security Programme
The Customer Security Programme (CSP),
launched by the Society for Worldwide
Interbank
Financial
Telecommunication
(SWIFT) in 2016, is designed to assist
customers implement practices that are critical
to act as preventive measures against
cybercrime and enable customers to detect
and recover when breaches occur.
The operations of SWIFT are reviewed on an
ongoing basis to ensure security of the
financial system.
As at the end of June 2019, 98% of the
Zimbabwean banks were compliant with the
SWIFT Customer Security Program, whilst 2%
were in their final stages towards compliance
on all mandatory controls that were required
at the time of their respective attestation.
The Bank continued to monitor and work with
banks to unceasingly implement security
controls in line with the desired CSP so as to
ensure efficiency and resiliency of payment
systems in the industry as a whole.
Market
Conduct
and
Consumer
Empowerment
Financial education remained a key focus
across the NPSD strategic objectives which is
primarily intended to empower and protect
financial consumers. The NPSD continued to
work closely with all key stakeholders to
expand the reach and coverage of financial
education initiatives particularly for digital
financial services.
Cyber risks, to financial consumers, continues
to endure a crucial attention of the NPSD’s
oversight of market conduct. In particular, the
Reserve Bank took specific measures to ensure
that payment providers act responsibly when
repricing transactional services. At the same
time PSPs are required to do more in helping
individuals avoid higher charges and persistent
fraud traps through information provision.
The Bank designed and printed pamphlets
covering security and type of products
available as well as general informational
details on digital payment systems. The
pamphlets are a subset of a broader initiative
by the Bank to establish a set of allencompassing consumer information. The
educational measures are taken with a view to
address expectations of consumer and while
aligning PSPs internal governance, conduct and
operations with fair consumer outcomes.
Collaboration and Cooperation
The NPSD as a regulator of payment systems
cherishes the continued cooperation between
the
local,
regional
and
international
institutions which is essential in developing
consistent
and
high-quality
oversight
measures.
Generally, cooperation entails a range of
ongoing processes for payment systems day to
day activities, including general information
sharing and collaborative efforts.
To
strengthen
cooperation
with
other
regulatory authorities, the Reserve Bank
participated in meetings and engagements
with key regulators namely POTRAZ, IPEC,
SECZIM and DPC. The major focus areas of
discussion and collective action related to
consumer protection, financial literacy and
supervisory aspects.

The Bank is a member of several regional and
international institutions including the SADC
Payment
Systems
Oversight
Committee
(PSOC), among others. In addition, the Bank
also collaborates with the World Bank,
International Monetary Fund and other central
banks world over.
To this end, the Bank will continue to
collaborate and cooperate with the local,
regional and international bodies to achieve
economic stability and growth through
independent
assessments
and
technical
assistance
on
payment
systems
infrastructures.
Regional and International Developments
The SADC Integrated Regional Electronic
Settlement System (SIRESS) was renamed to
the Southern African Development Community
Real Time Gross Settlement (SADC-RTGS)
system effective 1st of October 2018. It
continues to grow in terms of values and
volumes a shown in figure A3.2.
The platform was implemented to reduce the
costs and improve efficiency of cross border
payment thus eliminating the need for
corresponding
banking
services
whilst
promoting trade within the regional.
Further developments on the platform include
the finalisation and inclusion of the US dollar
(USD) as settlement currency into the SADCRTGS system.
Interoperability
According to the Guidelines for Retail Payment
Systems and Instruments (2017) ‘All payment
facilities to be introduced by operators shall
conform to specified National Payment System
requirements to attain infrastructure sharing
and interoperability’.
Therefore, interoperability measures aimed at
boosting
efficiency,
accessibility
and
competition within the payment ecosystem
continued to be implemented on an ongoing
basis.
Among others, the Bank enforced the
implementation and completion of the
Zimswitch-ZIPIT Project Phase 2 by all
participant banks to include all key AML/CFT
issues in the faster payments for the country.
The project will enable the creation of an
integrated and interoperable digital retail
payments ecosystem which will facilitate real
time and seamless electronic funds transfer
across payment systems.
During the period under review, funds
transfers from mobile, internet and POS
machines were enabled to facilitate mobile
integration with mobile money accounts
bringing the requisite convenience to the
transacting public.
The Bank is currently seized with spearheading
the integration of mobile financial services
with a key focus on wallet to wallet across all
mobile payment players in the market.
AML/CFT
The NPSD is also developing the risk-based
approach with a particular emphasis on antimoney laundering and counter financing of
terrorism (AML/CFT) activities in line with the
Financial
Action
Task
Force
(FAFT)
Recommendations.
Risk Based Capital for Insurance Companies
and Pension Funds (Solvency II)
The Insurance and Pensions Commission is
adopting a risk-based capital framework for
the Insurance and Pensions industry aligned
with the Solvency II international standards.
The new framework has three pillars covering
minimum capital requirements, own risk selfassessment
process
and
disclosure
requirements.
The risk-based capital framework will not
eliminate minimum capital requirements but
the available capital will be appropriately
allocated to cover various risks including:
insurance, credit, operational, among others.
The new framework ensures that each insurer
is resilient to shocks arising from various risks,

ensuring a high likelihood of the insurer
remaining solvent under stress.
IFRS 17 Implementation Process
The Insurance and Pensions Commission is
working in conjunction with other regulators to
implement
the
International
Financial
Reporting Standard 17 (IFRS 17) as issued by
the International Accounting Standards Board
(IASB). IFRS 17 rules state consistent principles
for
the
recognition,
measurement,
presentation and disclosure of insurance
contracts. These rules are targeted to become
effective by the year 2021.

APPENDICES
Appendix 1: Macroeconomic Indicators for Zimbabwe

2018 EST
2019 PRJ
REAL SECTOR
REAL GDP AT 2012 MARKET PRICES (US$' M)

NOMINAL GDP AT MARKET (US$'M UP TO 2016)

GDP AT MARKET PRICES % CHANGES

GDP PER CAPITA

PRICES
MONTH-ON-MONTH (END PERIOD) %

ANNUAL INFLATION (END PERIOD) %

ANNUAL INFLATION (PERIOD AVERAGE) %

EXTERNAL SECTOR
TRADE BALANCE (US$M)

CURRENT A/C BALANCE (US$M)

CURRENT A/C BALANCE (% OF GDP)

MONETARY SECTOR*
BROAD MONEY M3 (ZW$ '000)

DOMESTIC CREDIT (ZW$ '000)

CREDIT TO PRIVATE SECTOR (ZW$ '000)

CREDIT TO PARASTATALS (ZW$ '000)

CREDIT TO GOVERNMENT (NET )(ZW$ '000)

NOMINAL MINIMUM LENDING RATE (%)

NOMINAL MAXIMUM LENDING RATE (%)

STOCK MARKET INDICES
INDUSTRIAL INDEX (POINTS)

MINING INDEX (POINTS)

GRAND MARKET CAPITALISATION (US$M)

PUBLIC FINANCES
REVENUE EXCLUDING GRANTS

REVENUE INCLUDING GRANTS

CAPITAL EXPENDITURE AND NET LENDING

RECURRENT EXPENDITURE

TOTAL EXPENDITURE AND NET LENDING

BALANCE EXCLUDING GRANTS

BALANCE INCLUDING GRANTS

POPULATION (MILLIONS)


Appendix 2: Additional Financial Markets Statistics
Table A2.1: Average industry capitalization levels
Type of Institution
30 June 2019
(USD$M)

30 June

(ZW$M)
Minimum Capital
Stock Exchange
8.02
1.95
1,000,000
Alternative Trading Platform
(Finsec)
0.08
0.42
Central Securities Depositories
3.90
2.47
1,000,000
Securities Dealing firms
1.27
0.62
75,000
Securities Investment
Managers
4.57
2.72
150,000
Securities Custodial firms
3,310.0
1,610.0
500,000
Securities Transfer Secretaries
firms
2.06
1.31
150,000
Source: SECZ (2019)

Table A2.2: Average earnings
Type of Institutions
30 June
2019 ($M)
30 June
2018($M)

Change
(%)
Stock Exchange
3.12
0.69
356%
Alternative Trading Platform
0.07
-0.15
-148%
Central Securities Depositories
0.98
0.13
660%
Securities Dealing firms
0.32
0.13
151%
Securities Investment
Management firms
1.98
0.44
346%
Securities Custodial firms
0.57
2.03
-72%
Securities Transfer Secretaries
firms
0.61
0.24
154%
Source: SECZ (2019)

Table A2.3: Funds/Assets Under Management/Custody and Turnover

Indicator
30 June

(ZW M)
30 June 2018
(USD M)

Change
(%)
Securities
Exchanges
Turnover

201%
Central Securities
Depositories
Turnover

201%
Securities Dealing
firms
Brokerage

201%
Securities
Investment
Management firms
Managed funds
13,405
4,854
176%
Securities Custodial
firms
Assets under
custody
12,160
5,939
105%
Market
Capitalisation
Value
27,017
9,792
176%
Source: SECZ (2019)

Appendix 3: Additional Financial Infrastructure Statistics
Table A3.1: Monthly Payment Systems Transaction
values from Jan to Aug 2019
MONTH
VALUES IN BILLIONS ZW$

RTGS
Cheques
Card
ATM
POS
Mobile
Interne
t
19-Jan

19-Feb

19-Mar

19-Apr

19-May

19-Jun

19-Jul

19-Aug

TOTAL


Table A3.2: Monthly Payment Systems Transaction
volumes from Jan to Aug 2019

VOLUMES IN MILLIONS

RTGS
Cheques
Card
ATM
POS
Mobile
Internet
19-Jan

19-Feb

19-Mar

19-Apr

19-May

19-Jun

19-Jul

19-Aug

TOTAL


Table A3.3: Payment Access Points and Devices 2015 to
June 2019
PAYMENT SYSTEMS ACCESS POINTS

2019 June
Change
ATMs

-0.54%
POS


112,523
12.60%
Mobile
Payment
Agents


51,415
1.33%
PAYMENT SYSTEMS ACCESS DEVICES
Debit Cards

Credit Cards

Prepaid
Cards

Active
Mobile
Banking
Subscribers


6,095,412
-0.71%
Active
Internet
Banking
Subscribers


382,203
8.24%

Figure A3.2: SIRESS Month on Month Comparison
Values 2017 and 2018


ZAR 0.00
ZAR 0.20
ZAR 0.40
ZAR 0.60
ZAR 0.80
ZAR 1.00
ZAR 1.20
ZAR 1.40
ZAR 1.60
ZAR 1.80
Values in ZAR Billions