By MUTISUNGE ZULU
THE Bank of Zambia (BoZ) on April 3 announced stimulus monetary measures to support financial system stability following the outbreak of the Coronavirus.
Covid-19 has brought with it, unique credit risks that will require a cushion passed on to counterparties such as corporates, SMEs and micro entrepreneurs, through the commercial banking system.
This is what led to the credit line mechanism in a K10 billion ($545 million equivalent) facility to commercial banks for a period of 3-5 years priced at a 100 basis points above the benchmark policy rate. (MPR+100bps = 12.5 percent).
This is the Medium-Term Emergency Funding Lending Facility (MTELF). The facility is to be looked at in tandem with the other relaxed credit and capital provisions to provide banks with space to extend borrowing in a turbulent macroeconomic environment.
Guidelines for the measures were shared weeks later to compass operationalisation of the MTELF.
What is the MTELF? The K10bn Medium Term Emergency Loan Facility is a credit line that the central bank extended to commercial banks, for three credit uses namely, onward lending, restructuring and refinancing of their asset books.
The facility is for banks that may require liquidity – in emergency situations for the three reasons highlighted pointing to cushion buffers for Covid-19-related credit shocks.
The MLTF is a like a credit card which one only draws on in emergency circumstances, the implication being banks are under no obligation to draw on it if they have no use for it. This is for banks that have credit pipelines they need to service yet do not have adequate liquidity to meet this criterion.
Under no circumstances is one obliged to draw on their credit card if they are cash flush.
The myth around banks shying away from the facility. It is misleading and inaccurate to conclude that banks are shying away from monetary stimulus based on one or two banks that are not keen on drawing on the K10bn let alone the shying away could be attributed to an array of reasons.
It could be because they do not meet the criteria from a collateral perspective or are not comfortable with other provisions the guidelines require. The guidelines are vivid in prescription as to the requirements for commercial banks to draw on.
But inferring from the health of the commercial banking industry with 18 banks, given the liquidity skews, it is very unlikely that banks would shy away given the elevated cost of funding versus the pricing of the MTELF at 12.5 percent.
The facility provides an opportunity for lower cost of funding opportunity for banks that have both long and short cash positions. How so? Commercial banks funding models benchmark of the government security curve which is currently elevated with 1-year paying 29 percent and 5-year bonds priced at 33 percent.
The BoZ MTELF is priced at 12.5 percent whose spread below the Kwacha curve is an opportunity for yields to climb down significantly. In layman’s terms, the MLTEF provides latitude for lending rates to ebb lower which will support domestic credit and ultimately economic growth especially in a suppressed environment post Covid-19 pandemic period.
Correlation between MLETF and COVID relief packages
A few banks have announced Covid credit packages which on the face of it, citizens have tied to the K10bn facility because the two fall in the same period. Arguably one is poised to believe if banks announced these packages, then ideally, they drew on the K10bn facility to accommodate the restructure, refinance or onward lending.
However, the relief packages are not in any way fully linked to the lending facility and could be on the back of already existing liquidity that banks already had. Additionally, there was no liquidity crisis by the time the Bank of Zambia announced intervention measures.
The central bank took a forward-looking view gauging the Covid-19 credit risks that would grip the Zambian market inferred from the rising unemployment, currency weakness, supply disruptions all because of the social distancing and lock down health protocols to curb the spread of the pandemic.
Most key banks in Zambia are resilient enough from a capital perspective to absorb Covid-19 shocks – even without requiring additional lines – as such were able to extend relief packages.
However, Covid-19 credit risks are forecast to deepen in the subsequent months and will require that for financial stability, those that may not be cushioned for these risks are then buffered from withering away and crippling the economy.
This is where the regulator, the Bank of Zambia who is the lender of last resort threw a life – line to those in want through a K10bn facility.
Was the economy given a K10bn cash boost?
No. Contrary to most technocrats that loosely explain the MLTEF, the economy was never injected with K10bn. Commenting on faculties that some experts are not specialists in has misled the average borrower especially the SME’s and MSMEs that there is K10bn that they can rush to draw from. There have been very inaccurate statements like, “The BoZ injected K10bn cash into the economy,” “SMEs should draw from the K10bn to cushion Covid-19 impacts,” “BOZ is giving K10bon to SMEs” etc.
The truth of the matter is banking will not change an inch at all, the same lending rules and criteria will apply save the requirements for assistance will be relaxed in the period under focus.
The central bank will take credit risk on commercial banks which will then take risk on corporates, SMEs, MSMEs and individuals impacted by Covid-19 shocks. Should they need more liquidity to deal with long pipelines, they can then approach the Bank of Zambia for funding (the celebrated K10bn facility).
But why perceived low uptake by SMEs? Finance Minister Dr. Bwalya Ng’andu highlighted last week that uptake of relief packages was still anemic and that access to the facility would be extended to Non-Bank Financial Institutions (NBFIs) to allow for wider channeling of funds to counterparties.
To clarify this issue, Zambia has been in partial lockdown which until h May 8, 2020 was relaxed with President Edgar Lungu announcing re-opening of sectors such as education, casinos, cinemas and restaurants.
A personal observation is that some Micro to Small Medium Sized Enterprises (MSMEs) businesses were still operational in the partial lockdown to include barber shops, salons and grocery stores especially in markets.
Of course observing the safety health protocols. As such, Covid-19 has affected them but not as severe as being reported. It is critical and imperative to understand the microstructure and classification of SME businesses in Zambia split by region especially that some areas have not reported any Coronavirus cases as such business is being conducted as usual.
Other SMEs in Covid-19 hit areas, are still operational as they provide services – downstream business – to large corporates such as banks, insurance companies, medical facilities such as private hospitals,
Mobile Network Operators, and chain stores. These have continued to operate normally for business continuity purposes for essential service provision.
There are SMEs that have been genuinely impacted severely too in this period and will require financial assistance. Perhaps the reason why the purported uptake of debt relief packages is low could be due to an array of reasons key of which are firstly that SMEs have not fully borne the brunt of Covid-19 impact because they continue to offer services to larger corporates. Secondly, it may be because of the higher interest cost stereotype of credit facilities in Zambia given an elevated interest rate environment.
What can Banks or NBFIs do to address the asymmetry?
More vivid awareness about the expected costs, requirements for qualification which has not happened much. It is imperative that this sector should know the difference between a facility in Covid-19 period through debt relief package and one before the pandemic.
Zambian’s treat debt with caution as no one would like to widen their debt burden in COVID era.
There are immense opportunities for financial institutions to address this information asymmetry that exists. With a deepening Covid-19 related credit risks, numbers seeking debt relief packages will shore higher in subsequent periods.
Until then, banks should increase awareness and clarity on the relief packages. It may be too premature to conclude on the weak uptake thereof. The central bank did provide for relaxed capital and provisioning requirements for banks.
However, a key challenge for FI’s would be to translate that benefit in the debt relief packages on offer. This is a component that should be addressed in the awareness to the public.
How will the vulnerable and smaller brackets be catered for?
President. Edgar Lungu, in his second and third address speech has placed emphasis on the need for barber shops and salons to be allowed to access funding in this pandemic period.
Analysing the President’s speech, it is evident that the tone from the top is vivid around his empathy as a leader for smaller business houses that have been severely impacted by Covid-19 related shocks.
The President refers to “my grandmother at the market in Chilenje selling Chikanda (African Polony), the barber shops and salon owners,” affected by social distancing health protocols in a partial lockdown that have their livelihoods impacted, all need to be assisted financially somehow because these are faculties of society that are the most prone to shocks as they possess very little to no buffers at all against Covid-19 business related shocks compared to larger corporations.
President Lungu pronounces these issues for technocrats to then operationalise. It is clear that aid must be extended to businesses irrespective of size in this economic turbulent period.
An understanding of how bank and non-bank financial institutions can assist the smaller brackets, is what the economy seeks. If marketeers that are accustomed to Marketeer Funds or if MSMEs in the agriculture sector subscribe to Cooperatives or some savings group of some sort, then how can these bodies benefit from liquidity to onward benefit their members?
How can FI’s and NBFI’s assist their existing portfolio so that no one is left behind? Financial Institutions are obliged to take risk on SMEs and MSMEs too as they are the engine of growth.
The nervousness of the public around SME funding accessibility has always been clouded with the “Access to Finance” challenges ranging from meeting basic lending criteria such as collateral to historic default risk concerns that FI’s have been exposed to over the years.
These times the economy is experiencing, are extraordinary and require exceptional solutions. The same way the Bank of Zambia is taking risk on commercial banks in a K10bn emergency credit facility, is the same way banks and non-bank institutions, in a patriotic fashion will be expected to take risk on SMEs too. That is the condition for accessing the cheap funds from BoZ.
It is not my pay grade to dictate how banks should manage that sector of the economy, however one thing that stands out is that commercial banks and non-bank financial institutions should flex to some degree to accommodate the SMEs during this pandemic period because they remain key to Zambia’s development agenda.
The central bank has already set the criteria by providing quotas with which accessing K10bn should be backed with. A significant portion is to sectors prescribed by the Seventh National Development Plan of which SMEs are part of. In reiteration, to say banks are shying away from the monetary stimulus is a grave misconception.
Mutisunge Zulu is an Economist, Strategist and Financial Analyst currently serving as National Secretary for the Economics Association of Zambia.
By MUTISUNGE ZULU