A credit crunch (also known as a credit squeeze, credit tightening or credit crisis) is a sudden reduction in the general availability of loans (or credit) or a sudden tightening of the conditions required to obtain a loan from banks. A credit crunch generally involves a reduction in the availability of credit independent of a rise in official interest rates. In such situations, the relationship between credit availability and interest rates changes.

Often a credit crunch is accompanied by a flight to quality by lenders and depositors as they seek less risky repositories for their money. There is a flight to liquidity by banks that will only lend to highly liquid or creditworthy companies which traditionally would not need to borrow, whilst depositors seek perceived large, well-capitalised, banks with strong depositor bases and therefore higher relative liquidity. In Zimbabwe, the signs have been experienced - the hoarding of cash by the multinational banks that have a lot more respect for institutional memory, and the increasing inability of some creative banks to perform very basic functions of serving depositors and effecting payments on their behalf.[1]


The Zimbabwean economy has not been performing well since 2000. The country experienced a fall in production in the manufacturing and mining sectors as well as in Foreign Direct Investment (FDI). In February 2009, Zimbabwe adopted a multicurrency regime wherein the United States Dollar was the dominant currency and this helped to quash hyperinflation, restore stability, increase budgetary discipline, and reestablish monetary credibility. Apart from the notable gains in economic stabilization between 2009 and 2012, the economy remained fragile, with Gross Domestic Product (GDP) growth collapsing from peaks of 10.6% in 2010 to low levels of 4% in 2018. The ratio of deposits that can be accessed immediately as cash withdrawal, moved from a peak of 13% in 2009 to 3% in 2016.

Since 2016, various measures to address the liquidity crisis have been employed, ranging from tightening the regulatory environment in the financial sector, to the introduction of Bond Notes in November 2016. Despite these various interventions, the credit crunch was not abated, compromising normal business and consumer welfare. Bank queues continued to exist, and the economy remained hamstrung with very low signs of recovery.

Credit Crunch in Zimbabwe

In 2017, Zimbabwe’s banking sector client loan growth remained slow, contracting by a projected 4% year-on-year by end of the same year due to the credit crunch, an international research firm said. According to BMI, a subsidiary of Fitch Group, government debt was crowding out private sector finance and potentially exposing the banking sector to default as Zimbabwean banks were buying Treasury Bills (TBs) (see Government Bonds) at a faster rate than retail lending. The research foresaw client loan growth reaching 2% year-on-year by end of 2018.

According to the 2017 mid-year Monetary Policy statement, loan to deposit ratio decreased to 52,1% by June 30 from 63% registered in the same period in 2016. The amount of TBs being held by Zimbabwean institutions, mostly banks, rose by over 20% in the first half of the year to $2,5 billion, of which over a third was used to finance government expenditure.

“TBs are also being used heavily to fund growing government deficits (Deficit Financing in Zimbabwe), thereby exacerbating the country’s credit crunch. Banks are, meanwhile, hiking charges for electronic transfers, which are largely responsible for profit growth. The unsustainable growth and high risks in the banking sector contain the potential for a systemic crisis,” BMI said.[2]

Causes of Liquidity Crisis in Zimbabwe

An interplay of various actors and factors are responsible for the cash crisis and liquidity challenges afflicting the economy;[3]

Public Sector Budget

The public-sector budget, its structure and financing, is partly to blame for the liquidity and credit crisis. The country experienced poor revenue generation against unrelenting expenditure demands, poor export performance and the central bank’s quasi-fiscal operations characterized by deficit monetization. For instance, government had, as at September 2018 borrowed $9.6 billion from the domestic banking system through Treasury Bills, thus sucking out a substantial amount of liquidity that could have been available for private sector development.

The Financial Sector

The banking sector has allowed the quality of their loan books to deteriorate overtime, hence diverting a substantial proportion of liquidity from the financial sector. The level of non-performing loans (NPLs) rose from around 1.09% as at December 2009 to a peak of 20.14% in 2014, resulting in a negative knock-on effect on the volume of available liquidity in the market. As at 30 September 2018, the Zimbabwe Asset Management Company (ZAMCO) had US$1.13 billion worth of NPLs. Thus, the deterioration in the loan portfolio of banks worsened the financial crisis, limiting the availability of funds for on-lending to corporates.

Illicit financial flows

Illicit financial flows have also worsened the crisis resulting in an estimated loss of US$2.83 billion between 2009 and 2013, translating into an annual average cash leakage equivalent to US$570.75 million. The mining sector accounted for the bulk of the leakages, constituting 97.9% of the illicit outflows from the country. The RBZ has estimated a leakage of US$1.8 billion through this valve in 2015, with US$1.2 billion of this accounted for by corporates whilst outward bound remittances accounted for the balance.

International Trade linkages

Zimbabwe has been running a current account deficit since dollarization, with the import bill being dominated by consumer goods at the expense of capital. A negative trade balance has persisted since 2009, recording US$2.4 billion in 2016. The country’s current account deficit averaged about 8.5% between 2000 and 2008, and 14.1% during the multiple currency era. The annual deficit is estimated to have widened to $1. 03 billion in 2018. These deficits, alongside weak capital inflows have led to a steady drain of dollars out of the economy. The worsening trade imbalances and inclination towards holding or externalizing physical cash have continued to drain cash balances from circulation in the economy, and the adverse effects are being transmitted to the banking sector, manifesting in cash shortages at banking institutions.

Low Banking Sector Confidence

The Zimbabwean public has lost trust and confidence in the banking institutions to the extent that the major dealings with them involve withdrawals of funds to safety, and if it were not for controls on withdrawals like those imposed during the hyperinflation of '''2008''', the banking sector would have collapsed. Lack of confidence in the financial sector, coupled with punitive charges and uninspiring interest rates on deposits have seen domestic savings declining to an estimated -11% of GDP, implying a huge savings investment gap. On the other hand, gross fixed capital formation declined by 8%, reflecting high consumption and dissaving behaviour in the economy.

Role of Reserve Bank of Zimbabwe in 2012

On a rescue mission in February 2012, Zimbabwe dipped into its IMF Special Drawing Rights (SDR) General Allocation and withdrew $110m, of which $20m was expected to help the Reserve Bank of Zimbabwe (RBZ) resume its function as lender of last resort. The government also ordered the repatriation of $71m from its offshore funds to help struggling banks and companies from defaulting.

From 1 March 2012, new limits on nostro account balances came into effect. Nostro accounts are deposits held by local banks in a foreign country in the denomination of that country to help facilitate international transactions. In the hope of easing liquidity problems, the government directed local institutions to maintain in their nostro accounts a maximum of 25 per cent of their balances offshore, and bring the rest back into the country.

As part of its “raft of measures”, the government also proposed the introduction of plastic money, or tradable paper, backed by statutory reserve. Though tradable paper may have temporarily solved circulation problems, the trouble with any sort of locally regulated alternative tender was a man called Gideon Gono, the Reserve Bank governor. The last time Zimbabwe experienced a similar monetary crisis, he authorised the printing of lots and lots of money backed by nothing.[4]


  1. [1], Zimbabwe Independent, Published: 16 March, 2012, Accessed: 4 November, 2020
  2. Fidelity Mhlanga, [2], Newsday, Published: 29 November, 2017, Accessed: 4 November, 2020
  3. Betta Sibanda, [3], Parliament of Zimbabwe, Published: May 2019, Accessed: 4 November, 2020
  4. Tendai Marima, [4], Aljazeera, Published: 28 March, 2012, Accessed: 4 November, 2020