Banks’ failure reverse liberalisation gains

The liberalisation of the financial sector in Zimbabwe was an integral part of the Economic Structural Adjustment Programme (Esap), a programme which was introduced by the government in 1991.

By Nesbert Ruwo

Esap was aimed at restructuring the economy from a predominantly centralized (state-controlled) economy to a market-driven economy.

The structural adjustment programme was a pre-condition for obtaining lateral support from the Bretton Woods institutions, the World Bank and the International Monetary Fund (“IMF”).

The economic reforms saw the liberalisation of interest and exchange rate and de-segmentation of financial institutions. Prior to the financial liberalisation, Zimbabwe’s financial system comprised of the Reserve Bank of Zimbabwe (RBZ), five commercial banks, two discount houses, four merchant banks, three building  societies, six finance houses and the Post Office Savings Bank (POSB) and specific purpose institutions such as Agricultural Finance Corporation (AFC) the Industrial Development Corporation (IDC), the Zimbabwe Development Bank (ZDB), Credit Guarantee Company, Small Enterprises Development Company (Sedco), and the Venture Capital Company of Zimbabwe (VCCZ).

The market reforms in the financial sector brought up new business opportunities, which encouraged new players into the sector. New banks started operations in the commercial banking, merchant banking, building society, finance house, and asset management sub-sectors.

Over the years the new banks that entered the market included AfrAsia (formerly Kingdom Bank), Barbican Bank, MetBank (formerly Metropolitan), First Bank Corporation, Time Bank, Trust Bank, Interfin Bank (formerly CFX), Royal Bank, ZABG, Genesis Investment Bank, Capital Bank and several other institutions within the asset management, micro-finance, investment banking subsectors.

The financial sector was flourishing and the stock market was booming. New and innovative products were launched. The economy experienced real financial deepening as new players and products came into the market. This was the Zimbabwean dream to encourage local entrepreneurs to participate in the local economy.

UNCTAD research shows that growth of local banks in many African countries is mainly due to a combination of low entry requirements and the perception that banking provides opportunities for profit not available in many other sectors of the economy. In all of the countries where local banks were set up in significant numbers, the regulatory barriers to entry were low. Noteworthy in that research is that political interference subverted prudential criteria in the granting of licences, notably in Nigeria where retired military officers were directors of many banks and in Kenya where many banks had prominent politicians on their boards.

Like in other countries, the Zimbabwean local players saw opportunities to exploit the market gaps not covered by the traditional banks.  The locally-banks were able to gain market share by targeting customers neglected by the established banks and by offering better services. However, some of these locally-owned banks were very aggressive in their asset-liability matching when compared to foreign owned banks which have remained very conservative in their lending policies. Moral hazard kicked in due to macroeconomic instability, greed, related party lending, weaker bank capital bases, concentrated shareholder bases as well as the credit markets which these local banks focused on.

Now move on to 2015. Most of the indigenous banks and financial institutions that entered the market are no longer in existence or are struggling to meet regulatory capital requirements. The first high profile case of an indigenous bank failure came in 1996 when Roger Boka’s United Merchant Bank (UMB) went under. It is widely accepted that the reason for the failure of that bank was poor risk management; the bank is alleged to have loaned heavily to politicians although the absence of an effective regulatory and supervisory framework in a radically reformed sector could also be partly to blame.

United Merchant Bank, First National Building Society, Zimbabwe Building Society, Barbican, Renaissance Merchant Bank, Trust Bank, Royal Bank, Genesis Investment Bank, Capital Bank Corporation, Interfin Bank and most recently (as this past week) AfrAsia Bank have all gone under. These are some of the locally-owned institutions that came into being as a result of the liberalisation of the financial sector.

Looking at the failed institutions, one can pick up common themes on the causes of the failures. These include illiquidity and insolvency (due to high levels of non-performing loans (NPLs)), moral hazard (insider loans, high risk exposures and real estate), macroeconomic instability, and high operating expenses. All this indicates the vulnerability of indigenous banks to economic cycles and impact of less robust credit management systems. Statistics from the RBZ show that recently failed banks, for example, Capital Bank, Allied Bank and AfrAsia Bank all experienced high NPLs.

Banks with foreign-based parents or links with international institutions have virtually remained unscathed. These include Stanbic (whose parent is the South African behemoth Standard Bank), Standard Chartered (Standard Chartered plc), Barclays Bank (from the Barclays Africa Group), MBCA (owned by South Africa’s Nedbank), and CABS (an Old Mutual Group subsidiary). CBZ remains a stellar example of the indigenous banks still in operation thanks to government ownership and business. It is currently the largest bank in Zimbabwe in terms of core capital at $109 million as of 31 December 2014 as listed in the recent RBZ monetary policy statement. Other notable local banks still in operation include Steward Bank and NMB Bank.

While all is not lost in the locally-owned institutions space, local banks face greater risks than their foreign-owned bank counterparties whose parents have geographically diversified operations and deep pockets. The risk of continued failure of locally owned banks could reverse the gains of financial liberalisation and entrench the oligopolistic nature of the sector. There is need, however, for a robust regulatory framework to ensure that banks are fully capitalised and have strong credit risk management and good corporate governance systems, and that there is no concentration of bank ownership, while keeping in check the adverse impact of moral hazard.

Nesbert Ruwo (CFA) is an investment professional based in South Africa. He can be contacted on nesr@opportunvest.co.za. This article was first published in The Standard.

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