RBZ must improve information management

By Alex Tawanda Magaisa

THE proper management of information is critical to operations of the banking industry.



While there ar

e deep-rooted causes for the emergence of the current crisis in the banking industry, its continuation is partly fuelled by poor information management by the responsible authorities, including the Ministry of Finance and the Reserve Bank of Zimbabwe (RBZ). In some cases there has been information leakage or unnecessary deliberate disclosure that negates the efforts to resolve the crisis.



In recent times the big news in the press has been about banks facing problems, dismissal of top management and bank executives allegedly fleeing arrests.


In my view, the RBZ must take a more careful and principled approach to solving the problems in the sector by maintaining confidence and resist the urge of playing to the gallery or courting unnecessary publicity. There is always a danger that its commendable efforts to solve problems can be manipulated by populists intent on pursuing political goals. The current approach by the RBZ to solve problems in the financial sector shows some significant shortcomings as far as management of information is concerned. The following are some of the key issues that need to be highlighted.


Unnecessary disclosure


The undue publicity and gung-ho approach of the RBZ is causing more uncertainty and panic in the market than its efforts suggest. The ultimate objective of its supervisory duties is to ensure market stability and to protect the financial system. In June last year, the government established the Deposit Protection Board to safeguard depositors’ funds in the event of bank failures.


I argued at the time that the scheme should not be an excuse for lack of supervision. The RBZ and the Deposit Protection Board must play complementary roles. The scheme ideally reduces the risk of contagion by limiting the “run-on-bank” problem whereby depositors rush to withdraw their deposits en masse, not only from the vulnerable institution but also from other banks. It reassures depositors of the safety of their funds so as to protect stability of the financial markets.


Unfortunately the handling of the crises affecting several individual banks, such as Trust, Intermarket, and Century seems to suggest that publicity of heroics is taking precedence ahead of the principles and rationale behind the scheme. While the Deposit Protection Scheme is meant to create confidence, unfortunately, the undue publicity of banks facing problems undermines that confidence and increases the risk of the systemic risk.

It is unsurprising therefore that the efforts to restore public confidence will be futile since the current approach fuels panic and instability. There does not seem to be any co-ordination between the RBZ and the DPB and it is necessary to synchronise their operations so that the public is reassured that they are covered even in the interim.


Unrelated information


In addition in some cases, even information that is unrelated to the stability of the banks has been carelessly disseminated in ways that negatively affect that stability of or at least cast doubt on the stability of individual institutions. The RBZ has not done enough to protect those institutions by adequately reassuring the public in the face of negative information.

For example, information surrounding the circumstances of the directors of the NMB Bank Ltd has been disseminated within the context of the general crisis affecting banks that the general public has been left wondering about the safety of the bank. Yet in fact, there is nothing to suggest that the NMB Bank is facing any problems. While the RBZ did well to reassure the public about the soundness of NMB, it only did so at a late stage when damage might have been caused already and in addition, it remains unclear whether the rest of the other banks are safe.


Due to the piecemeal disclosures and uncertainty that has emerged, it appears that the RBZ has put itself in an unenviable situation in which it has to either make a wholesale reassurance of the stability of the individual banks or risk creating doubt about their status by remaining silent. It may be easier to reassure the public in respect of banks that are sound but the task becomes more difficult when faced with a bank that is not on solid foundations.


If the RBZ reassures the public that it is sound when in fact it is on the brink of collapse, it may find itself courting liability for losses that may be incurred by depositors who would have kept their deposits on the basis of the guarantee. The correct approach is for the RBZ to maintain strict confidence in its dealings with individual banks and come out to publicly protect individual banks when it is necessary to do so.


Confidentiality


Traditionally confidentiality is the hallmark of banking. The confidentiality required between the banker and the customer translates on a wider scale to the relationship between the RBZ and the banks that it supervises. The idea is to create a complementary relationship that is based on confidence, which is not to say that the RBZ should be lenient. In fact, it must be fair and authoritative without necessarily being dictatorial.


The ultimate duty is to protect the market and the interests of depositors are paramount to this eventuality since banks rely on depositors for their core business. This means that the RBZ may also play a protective role to banks when they are in trouble hence the recent Troubled Banks Fund (TBF).

The TBF is useful for purposes of providing liquidity support to ailing banks but this will come to nought if information about banks getting liquidity support is disseminated to the market at the same time. This is because that information inevitably informs the public that the individual bank is in trouble and therefore reduces confidence in that bank. Ultimately, the injection of liquidity amounts to a waste of taxpayers’ money if the bank cannot recover from the malaise due to bank runs caused by disclosure of its temporary insolvency.


Disclosure


The RBZ may argue that it does not deliberately place information into the public domain. However, a closer analysis shows that information disclosure can either be express or implied. Express disclosure takes place when the RBZ directly gives information to the public through the press or other channels. Implied disclosure can take different forms such as taking action or introducing public measures that imply that the bank is in trouble.


If the RBZ confirms that it has given liquidity support to Bank X it is implying that Bank X is in trouble. Such information should be kept private for the liquidity support to have any positive impact. For example, the dismissal of Trust Bank directors as a condition for giving liquidity support was an indication that the bank was facing problems especially when the RBZ had indicated that it was offering liquidity support only when the banks succumbed to management changes.


Despite the liquidity support, Trust continued to suffer bank-runs and its stability remains shrouded in doubt because the approach to assisting it was wrongly managed. While the RBZ should take measures to ensure that management is prudent, there are better ways of ensuring this than taking contradictory measures simultaneously. Some disclosures may lead to wrong interpretations by the public.


For example, information about NMB Bank directors’ circumstances might appear to the public as casting doubt on the stability of the bank whereas in fact that is not the case. In such cases the RBZ needs to protect the individual institution and the market by diluting the negative information and confirming stability.


Approaches


The unprecedented publicity of the efforts of RBZ governor Gideon Gono suggests that he is performing some kind of miracle on the economic landscape in Zimbabwe. Yet in reality what Gono is doing is no more different from what his predecessors attempted to do but were thwarted by politicians. If there is any difference it is that the political situation now allows him to pursue policies that were politically unacceptable during the time of his predecessor.


Towards the end of his tenure, Leonard Tsumba together with Simba Makoni, as the then minister in charge of economic affairs, were unable to push through their economic policies mainly because the government was more interested in maintaining artificial stability. They were even accused of being “economic saboteurs” at the time for suggesting the devaluation of the Zimbabwe dollar.


The present auction system has effectively devalued the Zimbabwe dollar. There is nothing fundamentally new that the RBZ is doing now that has not been suggested before. The tendency to laud Gono as some kind of super hero has more to do with political machinations than anything else.


In any event, the problems arising in the banking sector today are a product of the government’s policies and are indicative of the mismanagement of the economy. For example, it is the same government that permitted the entry of a large number of commercial banks in a small market that can hardly accommodate them. During the crisis government pretended not to see any wrongdoing and allowed banks to engage in the parallel market because it was necessary for them to do so to raise foreign currency. In that environment, unconventional means of doing business proliferated because businesses had to survive. However, it was hard to enforce good corporate governance when necessity required that companies use different methods to engage in the extra-legal market.


It is difficult to understand how government can now claim any glory when it created the environment that required these activities in the first place. Therefore, before lauding the government for doing a good job, it is necessary to understand that it is responsible for the mess. Do you congratulate a man for putting out a fire that he has deliberately caused?


Conclusion


Due to its sensitivity, it is necessary to ensure that information disclosures do not prejudice efforts to stabilise the individual institutions, the sector and the market. The way in which information is being managed currently is wrong since it casts doubt on the very institutions that it seeks to help. It undermines the purpose of the Deposit Protection Board and the Troubled Banks Fund.


Secondly, general disclosure of related information creates wrong impressions on the stability of individual institutions thereby prejudicing their reputation. There are at least two things that the RBZ can do. Firstly, it must strive to maintain strict confidence and avoid unnecessary leakage of information that casts doubt on the banks’ stability during the period that it is offering liquidity support. It is also necessary to avoid measures that create implied disclosures of instability.


If it has to disclose, it ought to coordinate with the DPB so as to reassure depositors and reduce the risk of systemic risk in the sector. Secondly, the RBZ must move to publicly protect individual institutions when wrong impressions about their stability are created through disclosure of related prejudicial information. This also reduces doubt, uncertainty and the possibility of systemic risk.


In my view the RBZ must reduce the hype, as undue publicity only serves limited interests of populists intent on making the crisis and the anti-corruption fight a rallying point for political purposes. It does not serve the interests of maintaining bank and market stability, which the bank ought to safeguard for its monetary policy to succeed.


-Alex Tawanda Magaisa is Baker & McKenzie Lecturer in Corporate & Commercial Law at the University of Nottingham.