New face, old problems- Zim needs to rein in rogue bankers

 

A new Governor will soon take over at the Reserve Bank of Zimbabwe but the incumbent will be faced with the same problem that his or her predecessor, Gideon Gono, had to confront in his early days in his term.

Gono, who has just completed his two terms, was faced with a sneezing banking sector soon after he assumed leadership of the country’s central bank in 2003. He quickly moved in and cancelled the licences of four poorly performing banks – Trust Bank, Royal Bank, Barbican Bank and Time Bank to restore confidence in the financial sector.

Now his successor looks set to be seized with the same puzzle, if events in Zimbabwe’s banking sector are anything to go by.

Since the country introduced the use of multiple currencies in 2009, four banks have closed while a fifth is winding down operations due to viability challenges.

Recently Trust Bank became the fourth bank to be closed since 2009 while Capital Bank is about to close after failing to attain viability. At the same time, there are indications that a sixth bank, Allied Bank, might follow the same route and that the situation at Tetrad Investment Bank has just started to boil over.

All these events have raised the issue of whether the government should be doing more to regulate the operations of the banks and prevent such losses particularly on depositors. 

The lack of even a single arrest or prosecution of these bankers who selfishly abuse depositors’ hard-earned funds is fomenting financial impropriety after which founding directors continue to live lavish lifestyles, driving sleek top-of-the-range vehicles and being show-offs in social places.

The poor and unsuspecting depositor in the meantime is wallowing in anguish and poverty and faces the possibility of an even bleaker Christmas, simply because the banking regulations are too weak to deal with the failed bankers. 

Continued failure of indigenous banks will certainly further dent public confidence in the operations of banks, which is believed to be the reason why an estimated US$4 billion is thought to be circulating outside the banking sector. 

President Mugabe at the launch of the Finscope SME survey in June this year slammed some indigenous bankers for abusing depositors’ funds through a get-rich-quick mentality.

The point is, people will always remember, especially when it comes to where they keep their money.

 Banking is all about trust. That is why one of the current shining lights, never mind the low-level publicity in the locally owned banks, is NMB Bank. The bank is profitable and strong not only because it restructured quickly and set about raising capital early on post dollarisation. Never mind that the logos and colours look archaic and tired. The bank is performing solidly because it has managed to retain the trust of its clients.

The failed banks have huge loan exposures to related parties while at the same time most of them have a high concentration risks in their deposits.  The biggest problem is that the directors wrongly adopted the model of diversified investment or risk spreading as was the case at Interfin. An approach which has failed to work in this dollarised environment. What happens when the flood of credit-fuelled investment schemes that lifted all investment boats in recent years begins to subside? 

The answer is, everything that went up together starts to go down together, and diversified portfolios will sink with it.

Royal Bank surrendered its licence last year in June after the Reserve Bank discovered the directors of the institution were involved in serious abuse of depositors’ funds. At that time, the bank was burdened by non-performing insider loans.  Royal, like Trust Bank, had been reissued with a licence after suffering the same fate in 2004.

When Royal shareholders surrendered their licence, the bank had a thin capital base of US$1.9 million against the requisite US$12.5m for commercial banks and cumulative losses of US$6m to June 2012. About 99.2 percent of the bank’s portfolio was not performing while some shareholders refused to sign off its accounts.

The Royal Bank closure fell hard on the heels of Interfin Bank’s placement under curatorship and Genesis Investment Bank voluntary surrender of its banking licence after failing to meet minimum capital thresholds. 

Royal Bank was founded in 2001 but three years later, the Reserve Bank closed it together with Barbican Bank and Trust.

Renaissance Merchant Bank, now Capital Bank, was placed under curatorship in June 2011 after it emerged top shareholders of its holding company borrowed millions of dollars of depositors’ funds in breach of banking regulations, driving the bank into negative equity.

Central to the outflow of cash to top shareholders was Patterson Timba, who was the largest shareholder and effective controlling shareholder in Renaissance Financial Holdings, which owned 100 percent of Renaissance Merchant Bank.  Investigations by the Reserve Bank of Zimbabwe found the two borrowed millions of dollars through loan schemes that had not been sanctioned by the systems the bank was supposed to use.

The unsanctioned loans taken by the directors left the bank with a capital deficit of US$16.6m and in need of a capital injection of US$31m to restore the capital base to the required levels at that time. 

The central bank probe also established that besides taking the lion’s share of the bank’s loans, Timba also compromised the bank’s liquidity through obtaining loans or funds from other financial institutions on the back of money market deposits placed by Renaissance.

Herein lies the challenge facing the new governor; more action is needed to reduce risks posed by the country’s banks to the broader economy. 

The sooner the Banking Act is amended to give more protection to depositors and to punish rogue bankers, the better it will be for the banking sector bearing in mind stability in the banking sector is an indispensable necessary condition for macroeconomic stability, rapid economic growth and broad-based social development. – The Herald

December 2013
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