BANK SUPERVISION ANNUAL REPORT - 2018 TABLE OF CONTENTS GOVERNOR’S FOREWORD ............................................................................................................................ 5 DIRECTOR’S FOREWORD ............................................................................................................................... 7 CHAPTER 1: OVERVIEW OF MACROECONOMIC ENVIRONMENT ............................................................ 9 CHAPTER 2: SUPERVISORY ACTIVITIES & MAJOR DEVELOPMENTS IN THE BANKING SECTOR ... 14 CHAPTER 3: CONDITION & PERFORMANCE OF THE BANKING SECTOR ............................................. 24 CHAPTER 4: FINANCIAL LITERACY EDUCATION AND CONSUMER PROTECTION ............................. 47 CHAPTER 5: OUTLOOK ................................................................................................................................. 50 APPENDICES .................................................................................................................................................. 52 APPENDIX 1: FUNCTION AND ORGANIZATION OF BANK SUPERVISION DIVISION ............................ 52 APPENDIX 2: MAJOR SUPERVISORY TOOLS AND METHODOLOGIES ................................................. 54 APPENDIX 3: REGISTERED BANKING INSTITUTIONS AS AT 31 DECEMBER 2018 .............................. 58 APPENDIX 4: STATISTICAL TABLES AS AT 31 DECEMBER 2018........................................................... 60 2 RESERVE BANK OF ZIMBABWE VISION, MISSION STATEMENT Vision To become a transformative and responsive Central Bank. Mission Maintaining financial stability and financial inclusion through credible policies and risk based supervision of banks, supported by a skilled human resource base and a modern integrated ICT system. Values Trust Integrity Passion Transparency Accountability Efficiency Creativity 3 PURPOSE OF THE REPORT The Banking Supervision Annual Report is issued in terms of section 78 of the Banking Act [Chapter 24:20]. The purpose of this annual report is to provide an analysis of the condition and performance of the banking sector in Zimbabwe for the year ended 31 December 2018. The report also presents an overview of the supervisory operations and activities during the period under review. Some selected developments up to the time of finalisation of this report were incorporated. 4 GOVERNOR’S FOREWORD 1. The banking sector has continued to demonstrate resilience despite challenging macroeconomic conditions. The domestic environment was characterized by inter alia, foreign currency shortages, and inflationary pressures. The global economy was affected by unique factors at a time there were weakening financial market sentiment, trade policy uncertainty and concerns about China’s outlook. 2. Zimbabwe has not been spared from global developments with some international institutions embarking on de-risking which has put the country at the risk of losing access to global financial systems. The country was also negatively affected by unfavourable weather condition which adversely impacted on the agricultural season. 3. The African Development Bank anticipated economic growth for the southern African region to improve in the medium term, rising to an average 2.0% in 2018 and 2.4% in 2019. The anticipated improvement in the medium-term economic outlook is premised on expectations of increased investment flows. 4. The improvement in economic performance for the region was however, subdued, falling below the regional annual growth target for all member states of 7%. Some challenges continue to linger in the economic outlook for the southern African region in particular high unemployment, fiscal slippages, and rising debt in some countries, as well as policy uncertainty. 5. The domestic economic growth is projected at 4.2% for 2018 down from 4.7% for 2017. The government’s re-engagement initiatives with the international community, in particular the international financiers, is expected to result in capital inflows which will propel the economy. 5 6. Government led initiatives such as the Transitional Stabilization Programme 2018-2020 are aimed to achieve financial stabilization, stem liquidity challenges and attract foreign direct investment. This is expected to improve the balance of trade and increase economic growth. In addition, Government activities under the theme, Zimbabwe is open for business, are anticipated to attract investors and grow the economy. 7. It is noteworthy that, the introduction of the Credit Registry and the use of forward looking credit risk management tools in line with IFRS9 will further improve the banks’ risk controls and enhance the provisions coverage ratio. 8. The Reserve Bank has maintained the momentum in the implementation of various initiatives aimed at building an inclusive financial sector. These efforts are reflected in the improvement in key financial inclusion indicators such as number of MSMEs and women with bank accounts as well as value of loans to women. 9. The pace of technologically developments in the financial services sector is expected to continue in the coming years. The Reserve Bank continues to support innovation in the financial sector while ensuring that risks arising from such developments do not adversely affect the Central Bank’s regulatory and supervisory objectives. Balancing financial innovation, financial inclusion, consumer protection and financial stability is key for the Reserve Bank. 10. I would like to take this opportunity to acknowledge all stakeholders who supported our efforts and call for even closer collaboration as we strive to build a sustainable and inclusive financial sector. Dr. J. P. Mangudya Governor 6 DIRECTOR’S FOREWORD 1. The banking sector has remained resilient in 2018 as reflected by adequate capitalisation, satisfactory asset quality and improved earnings performance notwithstanding the challenging macroeconomic environment. 2. The Reserve Bank continued to monitor the performance of the sector through its wide range of supervisory tools anchored on risk-based supervision methodology. As part of on-going efforts for strengthening of the supervisory frameworks, the Reserve Bank issued new guidelines to the market during the year ended 31 December 2018. 3. The number of banking institutions remained at 19, with credit-only microfinance institutions increasing to 199 up from 179 in 2017. Government established EmpowerBank Limited in 2018 to serve the interests of special needs groups such as the youth, bringing to six (6) the number of deposit-taking microfinance institutions. 4. The banking sector average capital adequacy ratio was 30.23% up from 26.84% for 2017, which was above the regulatory minimum of 12%. The sector’s capitalisation was underpinned by organic growth. The Reserve Bank continues to monitor banks’ capitalisation levels to ensure the sector’s has capacity to support the financing needs of the economy. 5. Asset quality improved, as reflected by a decrease in the non-performing loans to total loans ratio from 7.08% as at 31 December 2017 to 6.92% as at 31 December 2018. Total banking sector assets increased by 24.27% over the year, from $11.25 billion as at 31 December 2017, to $13.98 billion as at 31 December 2018. The expansion in the asset base was largely driven by loans and advances, which increased by 11.05% from $3.80 billion as at 31 December 2017 to $4.22 billion as at 31 December 2018, as well as investments in Treasury Bills and other government securities. 7 6. The banking sector remained profitable during the year ended 31 December 2018, reporting aggregate net profit of $425.26 million, compared to $242.25 million in 2017. Fees & commissions and interest income from loans and advances were the major sources of income. 7. The banking sector’s average prudential liquidity ratio, which was well above the regulatory minimum of 30%, increased from 62.62% in 2017 to 68% in 2018. Banking sector deposits increased from $8.48 billion to $10.32 billion during the review period. 8. In line with the financial inclusion drive, the Reserve Bank collaborated with stakeholders in implementing various initiatives to enhance access to formal financial services by the majority of the people. A number of banking institutions, deposit-taking microfinance institutions and credit-only microfinance institutions accessed revolving productive facilities and financed value chain and export generation projects. In 2018, the total disbursements amounted to $277.16 million and these supported the marginalized groups such as youth, women and micro, medium and small-scale enterprises. 9. The banking sector remained stable during the year ended 31 December 2018. Banking institutions bolstered their solvency profiles, embarked on strategic re-alignment, enhanced their governance practices and risk management systems as well as increased investments in technological. However, on-site examinations conducted during the year identified some risks including cybersecurity and operational risk. 10. In line with the core principles for effective banking supervision, the Reserve Bank continued to collaborate with other supervisory authorities in the financial services sector both locally and regionally participating in supervisory colleges for some cross border banks. The colleges provided regulators with a platform for sharing information, collaborative work, coordinated interaction and crisis preparedness. 11. Going forward, the Reserve Bank will continue to enhance its supervisory tools