BANK SUPERVISION ANNUAL REPORT - 2017 TABLE OF CONTENTS GOVERNOR’S FOREWORD ....................................................................................................... 6 DIRECTOR’S FOREWORD .......................................................................................................... 8 CHAPTER 1: OVERVIEW OF MACROECONOMIC ENVIRONMENT ....................................... 10 CHAPTER 2: MAJOR DEVELOPMENTS AND OTHER SUPERVISORY ACTIVITIES IN THE BANKING SECTOR ............................................................................................. 14 CHAPTER 3: CONDITION & PERFORMANCE OF THE BANKING SECTOR .......................... 24 CHAPTER 4: LEGAL & REGULATORY DEVELOPMENTS ...................................................... 54 CHAPTER 5: CONSUMER EDUCATION AND CONSUMER PROTECTION ............................ 56 CHAPTER 6: OUTLOOK ........................................................................................................... 59 APPENDIX 1: FUNCTION AND ORGANIZATION OF BANK SUPERVISION DIVISION .......... 63 APPENDIX 2: MAJOR SUPERVISORY TOOLS AND METHODOLOGIES ............................... 65 APPENDIX 3: REGISTERED BANKING INSTITUTIONS AS AT 31 DECEMBER 2017 ............ 69 APPENDIX 4: STATISTICAL TABLES AS AT 31 DECEMBER 2017 ........................................ 72 2 List of Tables Table 1: Empowerment Facilities Utilisation ..................................................................................................... 20 Table 2: Financial Inclusion Indicators .............................................................................................................. 23 Table 3: Architecture of the Banking Sector ..................................................................................................... 24 Table 4: Other Institutions under the Supervision of Reserve Bank ............................................................. 24 Table 5: Banking Sector Capitalisation (USD million) ..................................................................................... 25 Table 6: Deposit Insurance Payments as at 31 December 2017 .................................................................. 52 List of Figures Figure 1: Trend in Economic Growth ................................................................................................................. 11 Figure 2: Annual Inflation Growth Trend ........................................................................................................... 12 Figure 3: Zimbabwe’s Trade, Primary, Secondary & Current Accounts (US $m): 2011-2017 ................. 13 Figure 4: Cumulative Inquiries ............................................................................................................................ 18 Figure 5: Banking Sector Capitalisation Levels – (2013 - 2017) ................................................................... 26 Figure 6: Trend in Banking Sector Assets (2013 to 2017) ............................................................................. 27 Figure 7: Loans to Deposits Ratio Trend December 2016 to December 2017 ........................................... 28 Figure 8: Trend of Banking Sector Deposits (USD million) ............................................................................ 29 Figure 9: Composition of Deposits as at 31 December 2017 ........................................................................ 30 Figure 10: Distribution of Deposits as at 31 December 2017 ........................................................................ 31 Figure 11: banking Sector Loans & Advances ($m) ........................................................................................ 32 Figure 12: Distribution of Loans & Advances as at 31 December 2017 ...................................................... 32 Figure 13: Loan Concentration by Banks as at 31 December 2017 ............................................................. 33 Figure 14: Sectoral Distribution of Loans as at 31 December 2017 ............................................................. 34 Figure 15: Trend in Non-Performing Loans 2013 – December 2017 ........................................................... 35 Figure 16: Sectoral Distribution of Non- Performing Loans ........................................................................... 36 Figure 17: Earnings Performance for the year ended 31 December 2017 .................................................. 37 Figure 18: Banking Sector Sources of Income as at 31 December 2017 .................................................... 38 Figure 19: Comparison of Income Mix – 2016 and 2017 ............................................................................... 39 Figure 20: Banking Sector Non-Interest Expenses – 31 December 2017 ................................................... 40 Figure 21: Trend in Profitability Indicators ........................................................................................................ 41 Figure 22: Prudential Liquidity Ratio Trend (%) ............................................................................................... 42 Figure 23: Distribution of Commercial Bank Deposits .................................................................................... 44 Figure 24: Commercial Banks’ Net Capital Base 2013 to 2017 .................................................................... 45 Figure 25: Commercial Banks Key Earnings Indicators – 2013 to 2017 ...................................................... 46 Figure 26: Income Mix for the Commercial Banking Sector ........................................................................... 47 Figure 27: Distribution of Building Society Deposits ....................................................................................... 49 Figure 28: Income Mix for the Building Society sub-sector ............................................................................ 50 3 VISION, MISSION AND VALUES 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 4 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 2017. The report also presents an overview of the supervisory operations and activities during the 12 months period. However, some selected developments up to the time of finalisation of this report were incorporated. 5 GOVERNOR’S FOREWORD 1. The financial system remains largely safe and sound notwithstanding the challenges in the macroeconomic environment. 2. A number of domestic and international developments affected the financial landscape during the review period through commodity prices, trade, and other key financial indicators. 3. According to the International Monetary Fund (IMF) Global Financial Stability Report, the global upswing in economic activity which started in the second half of 2016 continued to strengthen in 2017 supported by robust growth in emerging economies. As a consequence, global economic activity was projected to improve from a growth of 3.2% registered in 2016 to 3.7% before accelerating to 3.9% in 2018. 4. The Sub-Saharan Africa economies also recorded positive growth of 2.6% in 2017 after shrinking by 1.5% in 2016. The upward trajectory is expected to continue in 2018 and 2019. 5. The domestic economy is estimated to have grown by 3.7% in 2017, underpinned by growth in the agriculture, mining, energy and service sectors. The government initiated a number of programs to position macroeconomic parameters such as FDI, current account deficit and fiscal deficit on a sound footing. These initiatives, which are in earnest under purposeful implementation, will improve the investment climate, performance of the economy and the country’s rankings under the “easy of doing business” and competitiveness indices. 6. It is commendable that amidst a number of environmental challenges, the banking sector continued to perform satisfactorily and stayed competitive. The banking sector maintains adequate buffers over the minimum capital requirements. Stress tests conducted during the review period indicate that banks can withstand severe shocks under a range of assumptions. 6 7. The Reserve Bank made significant strides in improving the credit infrastructure which is expected to complement bank’s credit management practices. The establishment of the credit registry in 2017 is envisaged to bolster credit underwriting standards in the banking sector and cultivate an improved credit culture across the economy. 8. The banking sector also made notable progress in promoting access to finance through several strategies such as value chain financing and the enhanced usage of electronic distribution channels. On its part the Reserve Bank introduced revolving empowerment facilities targeting marginalized groups such as youth, women and SMEs. Various empowerment and productive finance facilities amounting to $451.5 million were put in place in 2017. 9. The Bank continued to invest in the programmes which promote effective management and mitigation of emerging risks. Some of the emerging issues