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George Guvamatanga

Barclays Bank Zimbabwe has warned that weaker financial institutions may struggle to stay viable as top tier ones compete with foreign banks that have increased their exposure on the domestic market offering below-market interest rates to firms with strong business models.

Managing director George Guvamatanga told a recent Imara Investment Conference in Harare that some highly capitalised local financial institutions have lowered lending rates to below seven percent per annum from a sector average of nearly 20 percent after local firms turned to offshore funding to oil operations.

Guvamatanga said Barclays sees its interest income growing significantly this year driven by an aggressive lending approach to creditworthy businesses and individuals at a time when most institutions have taken a cautious approach due to toxic loans stemming from chronic liquidity constraints on the domestic market.

Zimbabwe’s bad-loan ratio marginally improved to 15 percent at the end of the first quarter of 2015, from 16 percent at the close of last year, according to central bank data. The country’s regional peers’ non-performing loan ratios are typically in the single-digit range.

Guvamatanga said stable companies have found alternative ways of funding their operations, forcing banks to lower interest rates below market averages. This emerging trend, he said, could eat into the margins of weaker banks with high operating costs.

“We’ve had some corporates going offshore and accessing money at rates just below seven percent, some even at rates below six percent (per annum). So we’ve had to also review our own rates and start competing with those offshore sources of funding,” Guvamatanga said.

“So there’re corporates accessing funding today from local banks’ balance sheets at interest rates below seven percent so it has become very competitive. But the challenge that most institutions will face is that if your cost base seating up there in the sky and the margins are dramatically reducing as we are seeing, it’ll become very difficult for the smaller institutions to remain viable and to remain competitive especially if they can’t have access to cheaper sources of funds. It means that you can’t compete for top tier business.”

Barclays Plc owns 68 percent of Barclays Zimbabwe. Guvamatanga said the bank was targeting a loan to deposit ratio of 70 percent from 59 percent as at December 2014. The bank’s loan to deposit ratio has been gradually increasing from 17 percent at the introduction of the multi-currency regime in 2009 to 41 percent in 2012 before further climbing to 47 percent in 2013. — The Source.