By Alex T Magaisa
THE International Monetary Fund (IMF) commended the Reserve Bank of Zimbabwe (RBZ) for measures applied to reinforce supervision, corporate governance and risk manageme
nt in the financial sector in the wake of the crisis.
Like a determined firefighter, the RBZ has tried to extinguish the rising flames not only in the financial sector but generally in almost every sphere of the economy. Apart from the points of criticism on the approach and mechanisms used in some instances, the IMF conclusion represents a fair view of the general efforts of the RBZ particularly considering that it has worked under remarkably difficult political and economic conditions.
It is particularly significant that two key elements of the RBZ efforts have been, firstly, a risk-based approach to supervision and, secondly, improving corporate governance structures in financial institutions, which hitherto were a shambles.
Nonetheless, the gains achieved have been somewhat undermined by the recent amendment to the banking legislation, which requires the governor of the RBZ to consult with the Minister of Finance prior to granting or withdrawing licences to financial institutions. This amendment is a danger to efficient financial regulation and as the IMF rightly pointed out, it represents a retrogressive step.
In brief terms, the amendment effectively means that the RBZ no longer has the autonomy to make a determination on the suitability of an applicant getting a licence or a licensed bank continuing as a player in the market.
The RBZ is the premier supervisory authority in the financial sector and prior to this amendment was responsible for licensing banks into the sector and withdrawing licences from unsuitable banks.
Given the history of regulation of banks, the recent amendment surely appears to be a retrogressive step. Prior to 2004, the Ministry of Finance had the power to authorise applicants in the banking sector. On the other hand, the RBZ had the power to supervise the banks once they had been authorised by the ministry.
This was an obvious anomaly in the regulatory system because the RBZ as the supervisory authority did not have the control over the key authorisation process, which was in the hands of politicians. The granting of the authorisation power to the RBZ in 2004 was therefore an overdue correction of an anomaly that had caused unsuitable banks to be authorised by the ministry while the RBZ had no control over the process.
In any modern system of regulation, it is recognised that the task of regulation involves a number of key processes of which authorisation and supervision are at the centre. The body that supervises banks should have the power to authorise their entry into the sector in the first place.
This allows it to check whether taking into account all factors, the applicant is a fit and proper person to be allowed to conduct banking business. Doing this requires a good measure of independence, professionalism and appropriate techniques of judging whether one is fit and proper.
This is particularly important in the modern era where risk-based approaches to supervision and corporate governance occupy centre-stage. It means that the supervisory authority must assess the risk factors at the stage of authorisation as well as at the point when considering whether or not to withdraw the licence.
This systematic risk-based approach is therefore used at authorisation, supervision and checking whether or not to cancel a licence. Because it will be responsible for supervision in future, the regulatory authority has greater incentive to ensure the application of a risk-based assessment of the corporate governance systems from the first stage of authorisation.
A properly equipped regulatory authority should have the experience and skills to deal with these approaches. This is a marked difference from the previous system where the ministry was involved – which not only lacked the expertise but also had no sufficient incentive to apply a risk-based approach because its interest ended at the point of authorisation because it had no responsibility for supervision.
Now, the reversion to the involvement of the ministry in the authorisation and cancellation processes will have negative impact on the independence and efficiency of bank regulation. It means that the RBZ no longer has the autonomy to apply its professional judgement without political influence.
Political influence harms effective regulation because it privileges partisan interests at the expense of key prudential aspects of supervision. It introduces the risk that unsuitable applicants will be granted licences in disregard of their weaknesses.
It also ushers the risk that otherwise insolvent institutions will be allowed to remain afloat simply because politicians with an interest wish to protect their personal investments and deposits which they would have imprudently made in disregard of risks. Such measures could ultimately make it difficult to contain contagion in the financial markets, affecting the very purpose of banking regulation.
More importantly, given that the state is a major player in the finance industry, its involvement in authorisation and cancellation of licences has the potential to distort the market and regulation. The state has massive influence in a number of financial sector institutions and it is difficult to see how it would allow their failure even in the face of obvious risks because of its vested interests.
In this regard, what is of major concern is the effect of this amendment on the uniformity of application of regulatory laws. Because the state is likely to be biased towards its own banks, there is a risk that put in the wrong hands the regulatory laws could be applied more harshly to private institutions.
Even the RBZ might fall into the same trap because of its vested interests in institutions such as the Zimbabwe Allied Banking Group (ZABG), which it created from the forced (and contested) merger of Trust Bank and Royal Bank in 2004.
In the latter case, critics could point out that the RBZ has great interest in seeing that its baby is seen to be doing well and surviving the difficult circumstances surrounding its controversial birth. Given its vested interests how likely is it that it will not apply the laws in the same way as it does in relation to other players? Already there have been murmurs suggesting that the ZABG is being treated with kid gloves with numerous correspondence in the press pointing to corporate governance shortcomings, etc.
The close relation to the ZABG exposes the RBZ to charges of lack of independence and bias, which affects confidence in the market. It could also undermine the RBZ’s moral authority over other players in the market, regardless of the legal powers that it wields under the law. How does it chide others when it is seen to be lax towards its own creation? That poses regulatory difficulties.
Such a case reminds us of the proposal made in this column last year which has been echoed in other articles by fellow writers and analysts – that is, of the need to create an autonomous, integrated financial services regulator.
This body would have no direct or indirect interest in the institutions that it supervises. China has done this by taking regulatory power from its central bank to the China Banking Regulatory Authority, following similar approaches in the UK, which gave power to the Financial Services Authority from the Bank of England in the 1990s.
Finally, it is ironic that at a time when more power should be given to an independent regulator, the state is diluting the independence by usurping some of the powers. The rationale given is to protect the public interest but surely, if we have an independent regulator, why should we not trust its professional judgement?
The amendment simply provides an avenue to exert political influence probably to safeguard partisan interests. Perhaps politicians were unable to withdraw their deposits and investments in time when the RBZ closed banks and placed them under curatorship last year. So they probably want the minister to be “consulted” so that upon such “consultation” the privileged can quickly secure their money before closure.
If rules should apply, they should apply to all and there is no need to “consult” where the team of professional regulators has seen it fit to close the institution or place it under curatorship. What really is the “consultation” intended to achieve other than informing the privileged few of impending danger and therefore the need to take cover?
What would the minister do that the professionals at the RBZ would have failed to achieve after rigorous examination? Under this new regime characterised by the dilution of the RBZ’s powers, we might yet see more unsound banks entering the market or more weak institutions being allowed to remain afloat on the basis of political expediency.
* Dr Alex T Magaisa is a specialist in economic and financial services law. He can be contacted at email@example.com