Continuing turmoil in banking sector
EVER since the sudden cras
h of ENG Asset Management Company, the Zimbabwean banking sector has been in a state of extreme turmoil. It was within days of the initial exposé of the appalling state of affairs at ENG that Zimbabweans were confronted with the facts that other asset management companies, and several banks, were in a parlous state and facing probable collapse.
At one stage it was almost a daily event that the national media would disclose the dismal circumstances and insecurity of another financial institution. Within a very short time, the Reserve Bank of Zimbabwe (RBZ) found it necessary to intervene in some bank or asset management company or other, the interventions raging from providing very considerable bridging funds from RBZ’s troubled banks’ fund to placing the institutions in liquidation or under curatorship.
Several causes have been identified for the previously unknown, unsatisfactory and very damaging state of so many of the institutions that have constituted the Zimbabwean financial sector. Although yet to be confirmed by convictions of some directors of some of the collapsed, or near-collapsed, institutions, allegations have been pronounced that such directors had disregarded all principles of good governance.
In some instances, the allegations are that such directors had used depositors’ funds to invest in vast fleets of luxury motor vehicles and houses, houseboats at Kariba, country estates and other profligate excesses.
In other instances, directors and senior management stand accused of investing the funds entrusted to them into speculative and unacceptably high risk investments, tantalised so greatly by the possibilities of spectacularly extraordinary profits that they abandoned the very fundamentals of monetary prudency and responsibility.
And, in a number of instances, they extended this rash practice by simultaneously providing massive indefinite period, or long-term, loans to related parties. Generally, it is alleged, that they did so without any recourse to collateral security necessary to protect the lender and its depositors, and without disclosure to colleagues, auditors and public sector monitoring and surveillance entities of the relevant relationships.
Yet a further cause of the near collapse of some of the banks, asset management companies, and others within the financial sector, has been under-capitalisation, both in terms of operating finance, and in terms of managerial and operational skills.
Promoters of the new banks and other financial institutions were attracted magnetically to the perceived prospects of immense future wealth, such perceptions being founded upon the very evident and considerable successes of some long-established banks. Imbued with beliefs that not only were financial sector enterprises horns of cornucopia, but that the flows of abundance from those horns were automatically accessible, they plunged into money-market activities ill-prepared, inadequately capitalised and equipped, and without necessary skills.
Still another catalyst of the collapses was the fact that the financial sector was grossly over-traded. Responsible businessmen, economists, and many others have long pondered how it was possible for a country of only 12 million people, of massive unemployment and a distressed and depressed economy, could justify and support such a vast plethora of banks, building societies, asset management companies and other financial enterprises.
Banking licences were issued by the licensing authority with almost total disregard for the merits or otherwise of licence applicants, and without any attempt to consider whether the economy could support yet further banks.
At one stage, very recently, the relatively miniscule Zimbabwean economy had at least 18 registered commercial and merchant banks and building societies. (Interestingly, it was reported last week that the IMF team to Zimbabwe consider that the Zimbabwean economy justifies the existence of a maximum of seven banks). Simultaneously, and despite the catastrophic failure, only a few years ago, of the ill-fated Access to Capital asset management company, which left many impoverished, over 50 asset management companies came into being. Some were, and are, of undoubted repute and competence, but others were very clearly not so. For a transitional period of time, whilst interest rates were soaring upwards as a result of money market shortages and imprudent money management, most of those management companies thrived. But their monetary successes were unsustainable in a volatile economy, and especially so when they were under-capitalised, lacking in skills, and engaging in speculative, high-risk investments.
The first trigger to the collapse was the inclusion in the monetary policies announced by RBZ governor, Gideon Gono, less than three weeks after his appointment, of an intent that all asset management companies would have to be licensed by the central bank. Licensing requirements would include capital adequacy, requisite managerial resources, lodgement of statutory reserves with RBZ, and submission to comprehensive RBZ monitoring and surveillance. Almost immediately thereafter, the partial implosion of the financial sector commenced.
The initial collapse was that of ENG Asset Management, with potential deficiencies of many billions of dollars. Rapid-fire disclosures were of vast outlays of monies on a fleet more than 35 exceptionally costly, luxurious motor vehicles, many up-market houses, and diverse hazardous investments. But also disclosed was that various banks, pension funds, insurance companies and asset management companies were heavily exposed to ENG, having deposited very many billions of dollars with them, having failed to carry out appropriate risk-evaluation exercises before doing so. Prima facie, most of the investment analysts and directors of those investing entities relied solely upon their personal contacts and friendships with ENG’s founders and executives, and upon the bullish reports emanating from ENG as to their investment successes.
As the contaminated state of ENG’s affairs became increasingly known, and the extent that others were at risk of sustaining massive losses, depositors anxiously sought to withdraw their funds from them, desperate to save their assets.
This set off a chain reaction of one, and then another, and then another, financial institution, becoming illiquid and unable to service withdrawal demands. In some cases the illiquidity was solely because of the very great extent of withdrawals by depositors. Even very sound financial institutions, with considerable asset resources, cannot conjure up sufficient liquid funds to enable mass, simultaneous, pay-outs to depositors.
Thus some, because of under-capitalisation, or because of imprudent investment, were suddenly in jeopardy of collapse, whilst others who would under normal conditions have been considered to be of minimal risk, were unexpectedly cast into a like circumstance of potential closure. And, as this happened progressively to more and more, public panic became increasingly pronounced, thereby exacerbating the financial sector’s instability. RBZ had to take rapid, dynamic and protective actions, forcing the closure and liquidation of some banks before there was further erosion of their resources, assisting others with short-term funding, and imposing stringent management controls, including instances of curatorship.
These actions were very necessary and, in most instances, wholly unavoidable, but a regrettable, certain consequential hardship on depositors resulted. Employees had difficulty in accessing salaries, the impoverished could not withdraw what little funding as would have been available to them for essentials, pensioners and many retired persons were suddenly stranded and unable to pay rentals, purchase foodstuffs and other essentials.
Some businesses have had their very operations jeopardised, all their funds being locked up indefinitely in the straitened institutions.
RBZ has had no alternative but to act as it has done, but it is critical that the relevant liquidators and curators do everything possible to enable resumption of operations of the financial institutions at the earliest opportunity, and insofar as possible transitionally facilitate partial releases of funds to the depositors in desperate need.
Equally, they and RBZ must give high priority to pursuing mergers or takeovers of the troubled enterprises with others possessed of substance and skilled resources. And, as far as reasonably practical, the RBZ must provide further, interim funding from the troubled banks’ fund. Only by such actions can the disastrous prejudice to many be countered or minimised, and the financial sector restored to normality.