In this posting we examine the ways that Zimbabwean banking entrepreneurs funded their requirements during the maturity phase of their businesses. Be blessed.
In the maturity phase there is intense price competition with high but relatively stable sales at reasonable profit margins. The strategic focus moves to maintaining market share and improving efficiencies. Business risk reduces while financial risk rises to medium.
There is likely to be a net positive cash flow. Future growth prospects are medium to low. The Zimbabwean financial services reached this stage around 2003 and a significant number of the entrepreneurial banks sought to continue expanding by penetrating new regional markets to diversify their service portfolio and manage the maturity phase.
Kingdom went into Zambia, Malawi and Botswana. ABC penetrated the Botswana market. Trust was considering prospects in Ghana, Botswana and Nigeria.
In the meanwhile Royal Bank and Century were at the forefront of expanding into smaller rural towns which were abandoned by established players.
Financial institutions’ earnings per share soared as their profitability rose on the back of the expansion, foreign currency intermediation, and high risk speculative investments buoyed by negative interest rates. Dividend payouts were high. Financial counters on the stock exchange were top performers.
The sources of funding shifted from equity to debt financing and retained earnings. The challenge that entrepreneurs faced were, a shortage of official foreign currency and negative real interest rates. At this stage a number of banks took foreign currency positions and interest rate projections which were fairly risky. For example Trust Bank sat on significant foreign currency stocks, anticipating that the rate would continue to rise, and created innovative structured finance deals with Willowvale Motor Industries and Willdale Bricks based on these projections. When these projections proved untenable, Trust was stressed. Intermarket had made arrangements to purchase a significant stake of Beverley Building Society from its British based owners and had already paid a deposit from money sourced from the open market. When this became unsustainable, it had to pull out of the deal and was penalised by the Central Bank for dealing in foreign currency on the parallel market.
Many banks started funding their expansion from the Central Bank accommodation facility, due to lax supervision and low interest rates. The post 2003 change in interest rate policy caused immense stress to the whole sector.