Lessons from Africa on cutting bad loans

What a week! Hotly contested General Election results. Kenya Airways #ticker:KQ shareholders approved a restructuring plan. Uchumi #ticker:UCHM began talks with a potential investor.

South Africa’s President Jacob Zuma narrowly survived a motion of no-confidence (who has survived more scalpels than Jacob Zuma?).

Then Trump promised North Korea fire and fury, which in a swift rejoinder, branded as simply wind and flatulence (via Twitter-of course).

And just when you thought you’ve had enough of it Zuku, the Internet and pay-TV firm, announced price increments for its fibre packages effective September 8, 2017—citing increase in costs and inflationary pressures. For the record, July 2017 inflation abated further to 7.5 per cent.

I mean, there’s no shortage of blood boilers and aphrodisiac around you. Don’t you need a break? Yes you do.

And talking about a break, let’s head out of Kenya a bit.  Zimbabwe has just delivered another lesson on how to deal with mountains of non-performing loans in a banking sector. Before I move on, here’s a brief background of how banks ended up with mountains of non-performing loans.

So the story goes that during Zimbabwe’s 2008-2009 hyper-inflationary period, businesses and individuals were cash-starved. Remember when Zimbabwe’s central bank, the Reserve Bank of Zimbabwe, introduced a $100 trillion Zimbabwean banknote?

When the hyper-inflationary period ended around 2010, there was a rush by cash-starved individuals and businesses to retool through credit from commercial banks.

But there was one major problem: this rush to borrow was on the expectation that a prolonged economic rebound phase would crystallise, which did not—and then the eggs started hatching. By September 2014, 20 per cent of commercial banks’ loans in Zimbabwe were non-performing.

It was threatening to spiral out of control. Worried about this, the Reserve Bank established a bad bank vehicle in August 2014 to buy non-performing loans from banks on commercial terms.

The vehicle would be named the Zimbabwe Asset Management Corporation (Pvt) Ltd (or simply ZAMCO).

Initially, doubts were raised from different quarters (including me) on how the vehicle would be funded, given that, at the time of its formation, Zimbabwe was facing biting liquidity crunch.

Additionally, there were sequencing risks to be navigated—such as loan eligibility, valuations and payment mechanisms. But it seems everything has worked out well.

By the close of June 30, 2017, ZAMCO had bought loans worth nearly $1 billion, bringing down the ratio of non-performing loans in the banking sector to just eight percent.

But Zimbabwe delivered just the second major lesson in sub-Saharan Africa. The first major lesson was delivered by Nigeria at the height of the 2008-2009 banking crisis.

At the time, the Central Bank of Nigeria formed the Asset Management Company (or simply AMCON) to buy non-performing loans from commercial banks. This helped bring down non-performing loan ratios from a high of 35 per cent in 2009 to 3.2 per cent at the close of 2013.

Zimbabwe’s lesson could now become valuable to Ghanaian banking authorities, who now have a mountain of non-performing loans at their hands to deal with.

Latest data from the country’s regulator, Bank of Ghana, shows that at the close of May 2017, 22 per cent of commercial bank loans were non-performing; mostly loans advanced to the country’s energy sector.

Kenya can only observe—although there’s no crisis yet of such quantum. But there are always lessons everywhere. In Uganda, commercial banks, under their umbrella of Uganda Banker’s Association, have been mulling forming the first privately-funded bad bank vehicle.

If it crystalises, then it would open a new bad loan resolution window. And the key lesson would be that government doesn’t always have to drive the process. Meanwhile, I hope you did enjoy the short break.