By Alex Tawanda Magaisa
ONE of the key elements of the quarterly review presented by the governor of the RBZ last week was the announcement of the proposed Zimbabwe Allied Banking Group (ZABG) whose life is
intended to begin in the New Year.
This announcement represents a major turning point in the attempts to deal with the banking crisis and may have major implications beyond the banking sector including the entire economic landscape. It is often said that desperate situations call for desperate measures. This proposal is a desperate measure in a series of measures to stem the tide in the sector.
In my view, it must be assessed in the context of the authorities’ series of measures used thus far to deal with the problems.
Firstly, it represents an acknowledgement that the injection of liquidity support, encouragement of mergers and placement of banks under curatorship have largely failed to achieve the target of reviving and stabilising individual institutions and the banking sector.
The combination of the general economic crisis and sudden calls for compliance with new regulations forced a number of under-capitalised and poorly-managed banks to recede into panic. The ensuing bank-runs and mass withdrawals by depositors added to the pressure and consequently the RBZ was forced to intervene to prevent systemic risk that might have led to the collapse of the entire banking system, hence the Troubled Banks Fund to provide liquidity support to ailing institutions and the placement of selected institutions into curatorships to allow ailing banks some breathing space. The anticipated mergers have largely failed to take place because of the poor condition of individual institutions.
The ad-hoc approaches may have prevented the collapse of the entire banking system but they have not been able to resuscitate the individual institutions, hence the extension of curatorship for some of them. Put simply, the approaches taken thus far did not cause any material change in the banking sector with a view to stabilisation. Faced with this failure, the RBZ was left with at least three options: liquidation of insolvent banks, inviting foreign partners or taking control of the banks. Liquidation was probably considered to be too painful for the meantime.
In a country chanting the slogans of indigenisation, invitations to foreign banking partners though prudent, have probably become politically incorrect and in any event, the dire conditions and negative image of Zimbabwe would probably make it a hard task to invite foreigners into the sector.
In forming the ZABG, the RBZ has taken the route of effectively assuming control of the failed banks. It may have taken this route upon realising that it had injected enormous amounts of public funds in its earlier attempts to provide liquidity support through the Troubled Banks Fund.
The risk of losing this money in the event of liquidations was probably considered to be too high. On the other hand, it may also be that the RBZ recognises that there is some value locked away in the banks currently under curatorship and rather than let it bleed through liquidation, there may be a chance to salvage some of it.
The desire to rescue public confidence also comes into play particularly in view of the proposal’s commitment to pay out small depositors and retain the institutions as running units. Yet in the context of previous compulsory acquisition of private property, such as agricultural land, if not properly managed, this process could send unfortunate signals to the domestic and foreign market with regards to the security of the right to property which is fundamental in the modern economy.
Now, it has been stated in some papers that this proposal marks the nationalisation of the banking sector. Others think this is the right solution to the problems. I may fairly state that this proposal is neither new nor unique in situations of severe financial crises. It was used, for example in South East Asian countries when the Asian financial crisis hit that region in the late 1990s.
A country like Indonesia had implemented liberalisation and deregulation in the financial sector although defects such as under-capitalisation in the banks, poor management and poor supervisory and prudential regulation existed within the system. After attempting all other measures, the government eventually intervened by taking over failed banks to whom liquidity support had been granted in huge amounts in a bid to stem the tide.
When the survival of the majority of banks becomes wholly reliant on liquidity support, it signals that the problem runs too deep within the system. Not only does it place a huge burden on public funds, but it also creates conditions in which complacency and poor governance practices flourish. It seems the RBZ is taking a similar route but if poorly implemented, it could lead to possibly unintended results, such as the nationalisation of the greater portion of the banking sector, systemic risk and potential for greater failure and reduce the gains of the market economy.
In my view, at this stage the question is not whether the ZABG should have been proposed but rather, whether it is properly designed and equipped to deal with the prevailing situation in the banks under curatorship without exposing currently sound banks to the risk of contagion. It must also avoid creating conditions in which corporate governance standards decline.
In this regard, it will be necessary to ensure that it maintains its independence from the RBZ and in particular political machinations which might produce the same scenario that exists in parastatals where corporate governance standards are considered to be poor.
It is also important to make key distinctions between the banks under curatorship so that the ZABG only constitutes banks that have a stronger chance of revival. The weakest must be separated from those in a relatively better position to avoid grouping them together as a single entity because the ZABG will continue to suffer from the burdens carried by those weakest units.
Thus, it is necessary to carry out due diligence on the banks under curatorship and look into such things as the burden of non-performing assets and for example, if the NPL portfolio is too large and risky, it might debilitate the new entity and lead to another catastrophic failure.
The weakest banks that have no reasonable chance of recovering as part of the new entity should be allowed to take the natural course and liquidate. It may be painful but it may send signals to the market that the authorities will not always bail out failing banks.
The loss of fortune and the loss of jobs are two of the “sticks” that ought to exist in a market economy to give incentives to managers and directors to use proper governance systems. In this vein, even the politically-connected institutions should not be spared.
In Indonesia, at the height of the crisis, the central bank was strong enough to close a bank that was partly owned by the son of one of the top politicians and that gave confidence that the authorities were not selective in their attempts to resolve the crisis. Even international financial institutions began to open up to calls for support. If people question the fairness of the authorities in dealing with banks in trouble, credibility is lost and efforts will be in vain.
The ZABG is also tantamount to an enforced merger of the different banks. There will be differences in corporate culture and the hard task of dealing with the human capital matters due to the inevitable duplication in duties. It may also be necessary for the RBZ to devise special vehicles to deal with the problem of non-performing loans – again the experience of using securitisation in South-East Asian countries may be useful in this regard.
In conclusion, the RBZ has chosen a path travelled before in other countries perhaps after realising the futility of the measures used up to now. Whether it will succeed will depend on a number of factors including its design, efficiency, the reaction of the market and the genuineness of the authorities.
On the one hand, it does appear like a form of nationalisation of a portion of the sector, which, added to other banks in which the state is heavily involved, will give it greater control of the sector albeit for the temporary period. Experience elsewhere demonstrates that nationalisation runs counter to the promotion of good corporate governance which the RBZ has used as a key part of its reforms. The public will want to know what else will happen to currently sound banks should they fall into problems in the near future – will there be another entity or will they join the ZABG as an extra unit?
People may also question whether similar measures may be taken in respect of private companies involved in other commercial and industrial activities. On the other hand, it is a desperate last resort in a series of measures to handle the banking crisis.
In my analysis, I have generously given the authorities the benefit of the doubt, and hope that they are doing this because it is what they genuinely believe to be helpful in solving the problems after the previous failures. But what Zimbabwean banking needs, at least for the long-term, is major structural reform and that work needs to be done now. I suspect that beyond this problem-ridden surface are even greater deficiencies within the sector that need to be tackled.
Alex Tawanda Magaisa is Baker & McKenzie Lecturer in Corporate & Commercial Law at The University of Nottingham E-mail