Tuesday, August 08, 2006

Aetiology of Zimbabwe Banking Crisis 2003-4

Aetiology of Zimbabwe Banking Crisis 2003-04
Dr T. A. Makoni

Executive Summary
As a prelude to my research project on entrepreneurship in the Zimbabwean
banking industry for the period 1995 –2005, I review the aetiology of the
financial crisis in the light of other crises worldwide. The Reserve Bank of
Zimbabwe (RBZ) has placed the blame for the crisis on entrepreneurial bankers
while these blame the macroeconomic policies of the government. Others blame
the crisis on political interests or personal vendettas.Entrepreneurship in
financial services suffered a huge shock from a banking
crisis that started in December 2003. A number of indigenous banks collapsed as
a result. After an extensive analysis I argue that the fragility in the
Zimbabwean financial services was a result of mistakes (not criminal activity)
by all three stakeholders, namely borrowers, bankers and regulators, as they
navigated the uncharted waters of financial deregulation and liberalisation.
However the real cause and trigger of the banking crisis lies squarely at the
feet of the regulator. 1 BackgroundThe deregulation of the financial services
in the late 1990s resulted in an explosion of entrepreneurial activity leading
to the formation of banking institutions. This sector was hailed as the beacon
of Zimbabwean entrepreneurship and the glory of the nation in tough times. It
proved to be
highly profitable, with exponential market growth. However after a new governor
was appointed in December 2003, a change in the monetary policy stance
precipitated a banking crisis that resulted in bank collapses and closures. As
at 31 December 2003 there were forty banking institutions but a year later the
number had declined to twenty nine, comprising eleven commercial banks, five
merchant banks, five discount houses, four finance houses and four building
societies. The collapsed banks included nine institutions placed under
curatorship and three that were placed under final liquidation. This has
resulted in blame shifting between the affected bankers and the regulatory
authorities as to what triggered the crisis.Dermirg-Kunt et al (2000) define a
banking crisis as a period in which significant segments of the banking system
become illiquid and/ or insolvent. This is normally characterised by:
Bank failuresEnactment of emergency measures by regulatory authorities
significant deposit flights to perceived safer banks
High levels of non-performing loans andHuge bail out costs.After the December
2003 Monetary Policy Statement, and for the greater part of 2004, these signs
of a banking crisis were evident in Zimbabwe.Banking crises are not as
infrequent as may first appear. For example Glick et al (1999) carried out a
survey on ninety (90) banking and currency crises in both industrial and
developing countries from 1975 to 1997. In another paper (Beim, 2001) it is
noted that researchers from the World Bank have reported 113 banking crises in
93 countries for the period 1975-1999. That implies an average of five banking
crises per year over that time period. Numerous
research projects have been carried out in an attempt to identify the causes or
triggers of banking crises.2 Reserve Bank of Zimbabwe Attribution of CausesThe
RBZ argues that the key reasons for the crisis in the banking sector
are:Extensive diversion of management’s attention to other commercial
activities, rather than running their institutionsHigh prevalence of insider
loansFailure to diversify shareholding structures leading to undue influence by
owner managers Evasion of core banking business and engaging in speculative
activitiesInvolvement in parallel foreign currency dealings Poor corporate
governance epitomised by: inadequate or virtually non-functional board
oversight, and with weak controlsInadequate or poor risk management
systemsAbuse of holding and associate company structures to evade regulation
and channel depositors’ funds into non-registered entities e.g. asset
managersRapid and ill-planned expansion drives that overstretched their limited
resources and Misrepresentation and creative accounting.(RBZ, 2003, RBZ, 2004b:
37-42, and Zimbabwe Independent, 2005:B31)The affected bankers and analysts
have doubted this explanation as the main cause of the crisis. It should be
noted that there is an asymmetry of information as the central bank has access
to all media platforms while it has put a gag order on bankers speaking to the
press. From a purely theoretical perspective, causes of banking crises should
be both macroeconomic and microeconomic in nature.The one sided nature of the
blame attribution makes a case for the researcher to analyse other crises to
objectively establish possible causes.

3 The Framework of AnalysisBeim (2001:5)
posits that banks fail only when one or more major sources of funding are
withdrawn. He hypothesises that there are two phases to banking
crises and four sets of agents, namely depositors, government as guarantor,
private external lenders and intergovernmental financial institutions e.g. the
International Monetary Fund and World Bank. He labels the phases as:

Phase One:
The silent phase when vulnerability emerges. In this phase economic value is
destroyed due to numerous factors but this is not acknowledged and
hence quietly builds up eroding the banks’ capital. The phase is characterised
by increased non-performing loans (NPL).

Phase Two: In this critical stage it is
publicly acknowledged that banks are insolvent and the various agents attempt
to take action to remedy the situation. It is this stage that converts to a
full blown banking crisis.He uses the framework to review 113 systemic banking
crises originally identified by Caprio and Klingebiel (1999). Beim (ibid:2)
disagrees with Honohan (1997), who categorises causes of crises into
macroeconomic factors, microeconomic factors and factors endemic to government
dominated banking systems. He contends that these factors often occur in
combination and seem to provide little theoretical traction. I will base my
analysis of the aetiology of the Zimbabwean financial crisis on this

3.1 Phase OneThis phase has both macroeconomic and microeconomic
causes. It does not constitute a banking crisis but refers to factors that
create vulnerability and fragility in the sector. At this time there is no
public acknowledgement of the potential crisis.3.1.1 Macroeconomic factors
Honohan (1997:9) is sceptical that macroeconomic factors cause banking crises
since even countries whose macroeconomic fundamentals were strong, e.g. Brazil
and Malaysia, still had banking crises while others whose macro-fundamentals
were weak did not suffer any banking crises. However it can be argued that
these do create vulnerabilities in the sector.Market-oriented economic reforms
accompanied by financial liberalisation have been positively correlated to
banking crises, as they tend to result in an excessive build up of bank credit
and a lending boom, leading to asset price bubbles. (Burdisso et al, 2002,
Corsetti et al, 1999:24).

Zimbabwe has been through a structural economic
reform program since the early 1990s at the insistence of multi-lateral
lenders. It has been reported that financial liberalisation and deregulation
resulted in financial fragility due to inadequate bank regulation and
supervision in Asian Crisis (1997), and Mexican Crisis (1994). Deregulation
increased new entries into the banking sector and thus spread the available
pool of skilled bankers too thinly. This was compounded by the massive brain
drain as professionals emigrated to countries where salaries were more
competitive. Naturally this affects the risk assessment capability of the banks
as well as the managerial competences.

It should not surprise the regulators
when the quality of loan books deteriorates. Hawkins and Mihaljek (n.d., page
3) observe that deregulation reduces sources of cheap funds and thus reduce
profit margins, thereby straining the banks’ margin of safety that is generally
slim within a hyperinflationary environment.Hyperinflationary environments tend
to increase bank vulnerabilities to crises. Boyd et al (2000:12) argue that
inflation lowers the real rates of return resulting in a smaller pool of
savings while increasing the potential pool of borrowers. This happens because
lower real rates of return reduce the attractiveness of savings while
increasing the attractiveness of borrowing. Entrepreneurial bankers
aggressively promoted borrowing to fund consumer and corporate expenditure due
to the negative real interest rates in Zimbabwe between 1998 and 2003. This
increased the exposure of the banks as the creditworthiness of borrowers
declined and yet, due to strong competitive rivalry, aggressive lending was one
way of retaining market share. However, with lower savings and cheaper sources
of funds dissipated, the banks had to source expensive money to fund the
borrowings. Naturally investors and lenders started demanding higher rates of
return closer to the inflation rate. This meant bankers had to invest in high
risk, high return investments to meet the customer demand and also be able to
mobilise resources.

I therefore argue that the speculative investments engaged
in by the bankers was a reflection of market realities and also necessary for
the banks’ survival. These market realities were not caused by the bankers but
by macroeconomic policy makers. Hyperinflation lowers the real return on a
variety of assets e.g. deposits, treasury bills and equities. Consequently the
value of the banks’ equity capital is eroded by inflation.

When Zimbabwean
regulatory authorities in response increased the statutory reserves of banks in
this hyperinflationary environment, they reduced the real return to banks and
this was passed on as lower returns on deposits as well as increase in service
charges for previously “free services”. The Reserve Bank subsequently accused
the banks of extortion and directed that banks to remove the service charges as
well as increase the interests on deposits. This action further
exacerbated the vulnerability of banks by reducing their profit margin.
Burdisso (2002:18) contends that high inflation signals poor macroeconomic
and/or large fiscal imbalances. Yet the monetary authorities in Zimbabwe were
blaming the bankers for fuelling inflation.Corsetti et al (1999:8) found that
countries with huge current account deficits/imbalances based on balance of
payments develop an external competitiveness problem leading to a currency
crisis. They further argue that a currency depreciation and external imbalances
imply a causative role of current account problems in the banking crises.
Zimbabwe’s economy has been contracting for six successive years. The GDP
growth for years 2002-2004 was
negative. (RBZ, 2004). The country’s total external debt has been rising
annually due to failure to service it. For example the total external debt
increased from US$3.86 billion in 2003 to US$4.3 billion in 2004. (RBZ,
2004:27). Zimbabwe was in a CGP (Currency, Growth, Debt) trap where currency is
overvalued, growth is faltering and debt servicing is a challenge.

De la this
trap also adversely affected the Zimbabwean financial sector.For the six years
prior to December 2003, the Reserve Bank maintained a fixed rate of exchange
and yet there was an acute shortage of foreign currency. This resulted in
increased parallel market trading by banks with the complicity of the Reserve
Bank. Most of the country’s economic activities, including fuel and energy
procurement, parastatal requirements and the 2000 Election, were funded through
parallel market funding in which the RBZ played an active part.

However the RBZ used market players, mainly the commercial and merchant banks,
as agents in sourcing the foreign currency for them. Cunningly, the RBZ let the
banks carry the risk for foreign currency dealings and in some cases did not
repay the banks the foreign currency on time, leading to unnecessary exposure.
Even in 2005 the current governor of the RBZ resorted to the
parallel market to source funds for the reimbursement of the IMF loans. Given
the role of the RBZ in the parallel market, it can be argued that there was
tacit approval of this activity, and hence entrepreneurial bankers exploited
this and maintained large open foreign currency positions. It is hypocritical
to accuse bankers for trading on the “illegal” parallel market when it was the
only market available then. I argue that the whole economy at that stage was at
that stage could be viewed as a patriotic.

Then as now, government policy had virtually driven many aspects of the economy onto the parallel market.Some
bankers hedged against inflation through speculative foreign currency trading.
The fixing of the exchange rate in a hyperinflationary economy created huge
vulnerabilities for the banking sector. However the major adverse impact of
both inflation and poor exchange rate management systems by2 the
central bank was the immediate erosion of the capital value of the banks, which
led to under-capitalisation. prudential regulations and bank supervision, as
well as insufficient expertise in the regulatory institutions, increase the
probability of banking crises. As
has been noted in a previous paper, Zimbabwe did not have sufficient banking
regulations and expertise at bank supervision. The new Banking Act was enacted
in 1998 and subsequently reviewed about thrice since then. Prior to this a 1965
Banking Act governed the banking sector. The banking supervision department was
introduced in 1985 at RBZ and from then until 2000 it relied on
prudential guidelines and moral suasion to promote prudent risk taking within
banking sector. Basically the RBZ had no teeth and was learning the ropes along
the way. There is evidence to show that until the outbreak of the crisis,
banking supervision and surveillance were lax. As one banker said, “With the
frequent reports from banks, how was it possible for the the regulators in this
crisis.” It is thus evident that compliance and enforcement of official
prudential requirements, once these were legislated around 2000, were low.

3.1.2 Microeconomic factors

Due to the liberalisation of the economy there was
an excessive optimism about lending to rapidly expanding indigenous companies
and speculative property developers whose booming output and rapidly rising
collateral values gave
banks a false sense of security. Firms became highly geared. Bankers formed
self-fulfilling views of the creditworthiness of nvestments in the property and
equity markets. This led to a boom in lending and an increased demand of the
products, which resulted in an asset price bubble. However this credit
expansion was based on unrealistic prices and price trends of the assets, which
could be reversed by any macroeconomic downturn that would cause the asset
bubble bursting. Retrospectively, it is evident that banks riding on the wave
of optimism over-lend to projects with no long term prospects, increasing their
vulnerability. Of course we are all wiser in
retrospect, and hence it is easy to criticise these actions now. It is noted
that all economic players were praising the bankers in 2002-2003 as having kept
the economy vibrant. How fickle can market sentiment be?Honogan (1997:10)
argues that bankers “hunt in herds” and therefore adopt market norms to avoid
criticisms from shareholders, regulators and analysts for not exploiting

In mid-2003 a number of the conservative banks, especially
Commercial Bank of Zimbabwe (CBZ), came under fire from shareholders and
analysts for comparatively poor performance against the aggressive indigenous
banks. At the same time the foreign banks also came under the political
spotlight for their reluctance to lend money to the booming indigenous sector.
It follows that the banks that were conservative in lending to the indigenous
sector and taking low return investments, felt the need to conform in order to
avoid censure from stakeholders.The aggressive competition for market share
also led to excessive lending. Many bankers felt that if they lost this battle
they would become unviable. This competition reduced the stringent lending
regulations, increasing the
incidence of non-performing loans.The 1994 Mexican Crisis was partially
attributed to poor quality loans financing investments of dubious profitability
or speculative purchases of existing financial assets. The net result was a
high presence of non-
performing loans characterised by a high proportion of bad loans, excessive
exposure to the property sector and overly optimistic estimates of loans’
collateral. (Corsetti et al 1999:28). It is evident that in the last quarter of
2003 that there were significant speculative investments in land, property,
vehicles, stock at the ZSE and take-over of companies. However at that stage
this was a response to market demands for high return and high risk
investments. Inflation was galloping towards 600% and investors demanded above
or near inflation returns. The market cheered them on. It can be argued that at
this stage the level of non-performing loans was still low and the banks were
merely vulnerable but there was no crisis.In the Latvian Crisis it was observed
that some banks were created not primarily to service the banking needs of the
public and establish solid business relationships that could serve the long run
interests of the bank, but as a rent-seeking activity of oner mangers who
sought to maximise their wealth quickly. The loose legal and supervisory
framework governing the banking sector encouraged this. (Fleming and Talley,
1996). In some cases this
was also evident in the Zimbabwean. However from an entrepreneurial perspective
is it wrong to set up a business for wealth creation purposes? If there is no
value for the creators of the business then it eliminates one of the critical
incentives for entrepreneurial activity – the profit motive. Since when did
rent-seeking behaviour from entrepreneurs become criminal? Entrepreneurs by
nature seek to exploit loopholes to maximise the returns on their
investments.Similarly some banks were formed with the primary purpose of
providing cheaper sources of funds for the entrepreneurs’ other business
activities. This per se is neither criminal nor unethical as long as proper
procedures are followed. As Honohan (1997) argues concerning self-lending, “who
would not want to benefit from the asset price boom?” onogan (ibid:11)
describes a psychological phenomenon called “disaster myopia” as the tendency
to ignore potentially catastrophic events that have a small probability of
occurring and hence no contingency plans are crafted to minimise their adverse
impact. It does appear as if Zimbabwean bankers suffered from this syndrome.
It is difficult to imagine that few took steps to plan for the the consequences
of high risk investments in an unstable economy, especially considering that
the multi-national banks at the same time were downsizing, selling off non-
profitable branches and pursuing very conservative lending policies. They were
also moving away from high cost erve cash and reduce expenditure. Scenario
planning could have helped entrepreneurial bankers appreciate the weak
threatening signals from the environment.

Recklessness and fraud have also been
identified as factors that increase the vulnerability of the banking sector.
This is evident where adequate controls on risk and appropriate rewarding
structures are lacking. For example if but no meaningful penalties when they
are unsuccessful, then risk-preferring behaviour is noted. The same applies if
loan officers are rewarded for volumes of loans generated rather than loans
repaid. Inappropriate managerial incentives also cause vulnerability e.g. when
top managers are unduly concerned about growing the bank’s asset base. The
Z$200 billion to Z$800 billion, seems to fit into this category. It is also
noted that Trust lost a significant amount of money to internal fraud in late
2003, which made it vulnerable to the harsh economic environment. The twin
desires for growth and parochial self-interest of loan officers would lead to
insufficiently diversified loan book and poor credit assessment. The slim
skills base in the rapidly expanding banking sector further exacerbates this.
Consequently inexperienced bankers were now trusted with brokering huge deals,
thereby exposing the banks. An example of inappropriate reward and inadequate
control systems is how one dealer sank Baring Bank in 1995.Strangely, the
regulators did not seem concerned about the excessive growth of Trust Bank and
ENG Capital and yet reporters were questioning their exponential growth. The
wait and see laissez faire attitude of the central
bank is possibly responsible for increased financial fragility. Preventive
measures could have been taken earlier and the crisis might then have been
avoided. The factors in this phase did not of themselves cause the banking
crisis. They Fragility in the banking sector, like in Latvia, involved joint
vulnerabilities and joint liabilities of the industry stakeholders. Within the
stakeholders, namely the borrowers, the enterprising bankers and the
regulators, were all prone to mistakes and hence are jointly liable for the
banking crisis. Due to increased competition, the borrowers had easier access
to credit and consequently invested funds in speculative and non-productive
economic when their projects failed they exposed the banks as well. The
depositors demanded high returns from the banks, which encouraged banks to
engage in high return and high risk investments. Consequently they were also
assuming the risk in their investment prtfolios. Characteristically, many
depositors in 2003 avoided conservative banks and preferred the high interest
paying asset managers, micro-finance institutions and indigenous banks.The
bankers made their own mistakes, due to pressure from the increased
competition, shareholders, analysts as well as a poor skills base, that led to
poor lending and investment decisions resulting in more non-performing loans.
Banking supervisors and regulators were also learning their trade along the way
and consequently made their own mistakes. Indications of corruption from
banking supervision department were rampant at that time. In the Latvian
Crisis, poor surveillance and supervision by Central Bank led to the
resignation of the head of banking supervision, however in Zimbabwe the then
head of banking supervision was promoted to head a newly formed bank. This is
indicative of the way the Central Bank is biased in its view of the causes of
the banking crisis.A study of banking system failures in emerging economies by
Honohan (1997) concludes that for a banking crisis to occur there has to
be:errors in macroeconomic and monetary policy management and microeconomic
deficiencies in bank behaviour.It is therefore my considered view that the RBZ
view is partisan and a correct attribution of the causes of the banking crisis
includes all the banking sector stakeholders. Honohan (ibid:12) categorically
contends that a widespread banking crisis that is attributed to poor bank
management may as well be attributed to poor supervision and enforcement. This
view has been confirmed by legal precedence set in the Bank of Credit and
Commerce International (BCCI) case whereby in March 2001 the House of Lords in
the UK granted leave to its liquidators to sue the regulators, the Bank of
England, for up to GBP1 billion, for negligence, regulatory laxity and failure
to monitor BCCI effectively, leading to the crisis. This case confirms my
argument that the regulators and the bankers should be considered jointly
liable since they both made mistakes. However as Beim (2001) states, a banking
crisis occurs when one or more major sources of funding are withdrawn. As at
November 2003 there was no such activity in Zimbabwe and hence there was no
banking crisis but just a fragile financial sector. This was thus a silent
phase, which resulted in increased non-performing loans. So what triggered or
caused the banking crisis in Zimbabwe?3.2 Phase Two (The Crisis)
Beim (2001:5) contends that a banking crisis is triggered by an event that can
point. Malaysia had a solid financial sector and a strong economy that had been
expanding for the eight years prior to the crisis. However it was affected by
the currency crisis of the Thai baht and yet there were no apparent linkages
between these two economies. The trigger, however, was that major investors in
the alaysian economy where the same as in the Thailand economy so when the Thai
economy fell, these investors withdrew their funds and speculation increased.
The result was a massive depositor flight, leading to a banking crisis. In
Argentina, although the economy was robust and the banking sector was solid and
conformed to the Basle recommendations of prudential regulations, a banking
crisis erupted when the government, which had huge debt holdings, failed to pay
its debts and depositor flight resulted Depositors are content to leave their
money in banks if they have the security their investments are at risk, a bank
run occurs. In December 2003 the incoming governor introduced a stringent
monetary policy statement and intimated that the banking sector was in trouble.
He also clearly spelt out that some banks would fail and this led to panic in
the market. In a bid to be confidentiality and exposed the market to
information which it was not primed to process. As a result there was a massive
bank run on indigenous banks. A nder pressure for immediate registration with
stringent regulations. This arguable led to the collapse of ENG Capital and a
bank run as the market interpreted the governor’s statement to mean that
indigenous banks were not safe. A similar scenario occurred in Latvia when the
Central Bank insisted on audited financial statements from all financial
institutions in 1995, after a period of lax supervision. The largest bank,
subsequently led to its collapse and the resultant contagion effect. (Fleming
and Talley, 1996)The government, through the Reserve Bank, is the guarantor and
banker of last resort. However the governor withdrew the overnight
accommodation window and failed to assure the nation as guarantor. This exposed
the banks. The governor then directed banks to unwind their positions overnight
lest they find themselves in a liquidity crisis with high punitive
accommodation rates offered by the Reserve Bank backed by tough conditions.
Corporate accounts where withdrawn from entrepreneurial banks immediately and
a “flight to quality” was observed as money was moved to foreign owned banks
which were perceived as being safer. Access to the interbank market for the
affected banks was closed, as other banks feared a contagion effect and the RBZ
threatened to ring-fence the affected banks.
Intergovernmental lenders, e.g. the IMF and World Bank, and private external
lenders had given Zimbabwe a wide berth due to its skewed economic policies and
hence were not available as sources of funds.According to this model the
banking crisis was triggered by the massive depositor flight and the withdrawal
of the government as sources of funds,.Beim (2001) argues that a change in
leadership is one of the major triggers of banking crises. In most cases this
refers to change in political leadership. owever in the Zimbabwean scenario, I
argue that the change of leadership at the central bank was the trigger of the
banking crisis. The new leaders
observed the fragility of the industry and publicly acknowledgd and aimed to
clean up the pre-existing problem. In this way the new governor sought
political credit for solving the problem and hence avoided being blamed for
creating it. There have been unconfirmed reports that his motivation was to
create a platform for higher political office by solving the economic crisis
the country was going through. His sudden zeal and desire for unprecedented
transparency as to the financial crisis can be understood in this light.However
his good intentions seem to have ignored the interlinkages of the banking
sector as a system and hence led to what he was trying to prevent. In the next
section I analyse the steps taken by the new governor and their implications
for the ensuing banking crisis.3.2.1 Possible Aetiological Factors Underlying
Bank CrisisThe Central Bank accused bankers of speculative activities and
unethical behaviour and directed them to unwind their positions overnight. A
punitive overnight central bank accommodation at 400% p.a. was introduced.
However once the market players had been forced to unwind their positions
overnight, the offloading of their investments e.g. properties, land, vehicles,
stock exchange holdings, flooded the market leading to a crash of the stock
exchange and the property market. Economists call this an asset price burst.
This action has the following consequences, which are detrimental to banks’
health:Bankers sought to withdraw their investments with asset managers,
leading to the collapse of ENG and the other asset managers. The ensuing market
panic further increased the exposure of the banks.The value of collateral that
bankers held collapsed while the inflationary push and interest rate hike
increased their indebtedness. An asset-liability mismatch resulted. It can be
argued that until this stage there was minimal asset-liability mismatch in the
industry.The bankers had to withdraw credit or call in loans. However borrowers
were subject to the vagaries of a run away economy and most had no means to
either immediately repay the loans or increase their collateral. This
automatically increased the incidence of NPL (non-performing loans). Prior to
this action, the servicing of these loans had not been a problem.The credit
squeeze imposed by the governor led to a credit crunch, further
reducing the banks’ earning capacity.The resultant massive depositor flight
further worsened the banks’ liquidity
positions as no bank would have a near 100% liquidity cover.To survive the
liquidity crisis, the banks had no choice ut to resort to the
exorbitant central bank accommodation. The conditions for accessing this fund
of securities further reuced their earning capacity and hence compromised their
ability to pay back the loans. The forced departure of CEOs sent a wrong signal
to the market. How then could the bank mobilise deposits when messages were
being sent out by the regulator to say they were unsafe? How does a lender of
last resort claim to be trying to save a bank which has an liquidity crisis by
imposing harsher repayment terms than the market?
The Central Bank hiked interest rates resulting in commerce having difficulty
to obtain financing from commercial banks since an increase in the RBZ repo
rate translates into an across the board rate hike in the financial system. In
effect, it increases the cost of funds to bankers. Simultaneously the RBZ
offered the Productive Sector Financing at concessionary rates to industry at
30% p.a. compared to 400% p.a. from commercial banks. Consequently the central
bank became a competitor to the banks. The banks lost their best customers, the
corporate customers, to the RBZ and yet they had to survive the squeeze.
Consumer spending was restricted, with the net result that the banks’ income
windled. liquidity. (RBZ, 2003a:16). This statutory reserves means that one is
reducing the amount of depositor’s funds that the bank can invest profitably
since statutory reserves are monies surrendered to the reserve bank at zero
interest. This amounts to a significant withdrawal of funds from the financial
system during a liquidity crisis. Worse still, the Central Bank was getting
this money from banks at zero interest and robbing them of an earning capacity,
then lending it back to them as overnight accommodation at punitive rates of
400% p.a., or else using it as a competitive tool against the banks by lending
it to corporate customers as productive sector facility. This surely is
unethical. The higher the statutory reserves, the higher the percentage of
depositors’ funds that is unproductive, consequently banks are forced to lower
the interest rates on deposits and hence sabotage the deposit mobilisation
exercise that would improve their liquidity. Paradoxically, the Governor was at
the same time making noises about banks not passing on the profits from trading
to the
customers. This resulted in unnecessary losses being incurred by already
struggling banks. By forcing banks to lower their lending rates while
increasing the repo rate, the RBZ was actually narrowing the profit margins of
already constrained banks. equated to a significant erosion of the banks’
capitalisation. Consequently the governor increased the banks’ minimum capital
requirements. This put a further strain on the struggling banks. The governor
directed that there be a re-classification of non-performing loans from six
monhs to three months. This takes away the breathing space from borrowers and
has an adverse impact on their ability to pay back the
loans. Banks were simultaneously further burdened by the implementation of
effect reduces profitability for banks as well as increasing the burden on
commerce.The RBZ, citing international best practice, issued stringent
corporate governance directives that forced owner managers out of their
businesses despite the controversies, contradictions and lack of consensus that
fill the literature on corporate governance. Barth et al (2001:3), after
empirical research on bank regulation and supervision, categorically
state, “There is no evidence that the best practice currently being advocated
by international agencies are best, or even better than alternative standards,
in every country”. In simple language, best practice is not generalisable.
Worldwide there are numerous examples of banks with owner managers e.g. Sandy
Weil was a major shareholder and CEO of Citicorp, with strong managerial
control, for
years. Locally the RBZ itself has the Governor as both CEO and Board Chairman.
Currently the Board of Directors of the RBZ (RBZ, 2004) comprises four
executive directors (the governor and his three deputies) and four independent
directors. How then can the RBZ be modelling corporate governance to the
financial services to which they direct that good corporate governance requires
a preponderance of independent directors and a non-executive chairman of the
board? The RBZ has on numerous occasions violated issues of corporate
governance, e.g. by violating the laid down procedures for the Troubled Bank
Act, by not adhering to the schemes of meetings required before taking over
banks etcIn the Zimbabwe Allied Banking Group (ZABG) which was formed under the
auspices of the RBZ and appears to be basically controlled by it, corporate
governance issues are breached with impunity e.g. the RBZ directed that no one
involved in a failed bank should occupy a senior managerial role in the
financial services and yet about five top executives of ZABG, including the
CEO, were involved in so called failed banks. There are reports of directors of
ZABG who have or had running contracts with the bank, in contravention of the
guidelines on corporate governance. The heavy involvement of the governor in
ZABG when he represents the major shareholder is akin to the heavy
managerial control of owner managers that he deplores at indigenous banks.The
governor insisted on banks focusing on core business and issued stringent
guidelines. However Barth et al (1999:6-12), after carrying out an extensive
securities activities e.g.
real estate, insurance and securities, of commercial banks, have a higher
probability of suffering a major banking crisisThere were no beneficial effects
observed from restricting the mixing of banking and commerce. In actual fact,
forbidding this is associated with a
greater financial fragility and bank instability.Restricting banks to core
business raises the net interest margin, resulting in negative bank
efficiencies.In summary, it appears to me that the real trigger for the banking
crisis in Zimbabwe was the overzealous actions of the newly installed RBZ
governor. There have been allegations of personal agendas underlying his
motives. It’s
not easy to discount this when one considers the issues of unfair treatment of
banks in similar situations e.g. Metropolitan Bank has been implicated in
corporate governance failure and fraudulent activities through GMB bills but
nothing has happened to it. CFX was allowed to continue trading even though it
was under a curator. The formation of ZABG under the supervision of the
governor himself has been fraught with violations of the law and corporate
governance issues.I argue that, although the financial sector was fragile, it
would not have had to go through the crisis the way it did had the new governor
used a different approach. Unfortunately, he appeared to have been on a
warpath. For example in Malaysia and Norway the bad debts were ring-fenced and
acquired by a state
agency, which enabled the banks to survive and be re-capitalised. I further
contend that one does not help a wounded friend by offering an extortionary
loan that violates the laws of the land e.g. the prescribed rate of interest
and the in duplum rule.The regulatory authorities in Zimbabwe caused a
depositor flight, refused to accommodate banks, issued stringent regulations
and directives, which weakened the banks’ profit margins as well as restricting
their ability to mobilise resources. Theyfurther plunged the financial services
sector into chaos by withdrawing huge amounts of funds from the financial
market during a tight liquidity crisis, further worsening the situation. In
Zimbabwean jurisprudence the burden of proof lies with the prosecutor and not
the prosecuted i.e. people are assumed innocent until proven guilty. However
the RBZ approach has been to assume, before they were tried, that the owner
managers were guilty of fraud.. The RBZ acted in bad faith by penalising people
who were not proven guilty. Interestingly, since the first alleged bank fraud
involving United Merchant Bank (UMB) in 1995, there has been no successful
prosecution of any alleged managerial abuse in the banking sector.4 Summary
>From the above analysis, it seems that the financial fragility in Zimbabwe was
brought about by failure of all three stakeholders, namely borrowers, bankers
and regulators, who were learning the rules of the game as they went along, in
managing a transition. Unfortunately the regulators have attempted to absolve
themselves and penalise only the bankers.
The trigger of the financial crisis was arguably the change of leadership and
the way the new governor tried to clean up the mess without regard to the
interlinkages of the financial system and due process. I argue that an approach
that acknowledged the mistakes of all stakeholders and called on prevented the
crisis and limited the loss to the national economy.
…………………The End …………………….Citations
Reserve Bank of Zimbabwe, (1998) Annual Report and Statement of Accounts.
Harare, RBZ
Reserve Bank of Zimbabwe, (2000). Annual Report 2000. Harare, RBZ
Reserve Bank of Zimbabwe, (2001). Annual Report 2001. Harare, RBZ
Reserve Bank of Zimbabwe, (2002). Annual Report 2002. Harare, RBZ
Reserve Bank of Zimbabwe, (2003) Monetary Policy Statement, December 2003.
Harare, RBZ.
Reserve Bank of Zimbabwe, (2003). Annual Report 2003. Harare, RBZ
Reserve Bank of Zimbabwe, (2004). Annual Report 2004. Harare, RBZ
Reserve Bank of Zimbabwe. (2003b) Banking Supervision Annual Report. Harare,
Reserve Bank of Zimbabwe. (2004b) Banking Supervision Annual Report. Harare,
Zimbabwe Independent Newspaper, (2002). Banks and Banking 2002 Survey. Harare,
Zimbabwe Independent Supplement, 9 August, 2002.
Zimbabwe Independent Newspaper, (2003). Banks and Banking 2003 Survey. Harare,
Zimbabwe Independent Supplement, 31 October, 2003.
Zimbabwe Independent Newspaper, (2005). Banks and Banking 2005 Survey. Harare,
Zimbabwe Independent Supplement, 14 October, 2005.


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