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Zimbabwe: Bank Capitalisation and the Politics of Uncertainty

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DESPITE continued vulnerabilities arising from the macro-economic environment, exacerbated by the outbreak of the Covid-19 pandemic, Zimbabwe’s banking sector has remained adequately capitalised, sound and resilient.

Adequate capitalisation has seen banks buoyant to various stress shocks applied to credit, interest rate and foreign exchange risks.

The latest report by the Reserve Bank of Zimbabwe (RBZ) reflects that as at June 30, 2020, all banking institutions were adequately capitalised, as the banking sector average capital adequacy ratio stood high at 61,72%, well above the 12% benchmark level. Further, all banking institutions were reported to have adequate capital buffers to absorb moderate shocks and militate against inherent risk of insolvency.

The RBZ further reported that as of that date, the banking sector aggregate core capital was ZW$20,99 billion (US$262,37 million) , representing an increase of 180,99%, from ZW$7,47 billion (US$93,37 million) as at December 31, 2019.

The growth in banking sector aggregate capital was largely attributed to growth in retained earnings, buoyed by revaluation gains from foreign exchange denominated assets. This followed movements in the foreign exchange rate due to the introduction of the foreign exchange auction in June 2020. As such, profitability and retained earnings have proved to be a function for buttressing capital.

Capital Adequacy Ratio (CAR) for the Zimbabwe banking sector has trended upwards since 2016, hovering well above the benchmark ratio of 12%. Capital Adequacy Ratio measures the amount of capital a bank retains compared to its risk.

Minimum capital threshold

Cognisant of the prevailing economic challenges as well as negative impact of Covid-19 pandemic outbreak, the RBZ extended the deadline for bank’s compliance with the requirement for meeting the minimum capital levels by one year from December 2020 to December 31, 2021. In addition, banking institutions are also required to continue to assess the adequacy of their economic capital levels against their own risk profiles.

In fact, particular attention should be given to credit risk, operational risk and business risk, which have since been significantly increased by the Covid-19 pandemic outbreak. The dynamic nature of the financial landscape, amid increasing economic uncertainties have prompted monetary authorities to apply US dollar linked minimum capital requirements for banks and other financial entities, in an effort to ensure banks are adequately capitalised at all times.