Lessons on future of banking in Zim

Alex Tawanda Magaisa

THE difficulties affecting the banking sector should serve as a lesson on how not do things as the country seeks to create platforms for empowerment and economic growth. In this contribu

tion, I assess the emergence of the indigenous banks in the sector and the mistakes that were made during the period until 2003 which have led to the chaotic situation. I also argue that although it has its shortcomings, the post-December 2003 monetary policy regulatory regime has been necessary and hopefully lessons will be learnt for the future.

The introduction of the Economic Structural Adjustment Programme (Esap) in the early 1990s was based on the dominant norms of liberalisation and deregulation of the economy. Simultaneously, the wave of indigenisation was gathering force with many black Zimbabweans clamouring to enter the mainstream economic sectors. The banking sector became one of the major areas which the indigenous persons penetrated in large numbers. The opening up of the banking sector saw the entry of new indigenous banks into commercial and merchant banking.

From a small sector that comprised no more than five banks in 1990, Zimbabwe had at least 17 commercial banks by the end of 2003. The erstwhile landscape of the banking sector characterised by multinational banks had dramatically changed in the new millennium.

Nonetheless, fundamental mistakes were made at the time. Firstly, the state failed to recognise the sensitivity of the banking sector and the consequent need for a strong regulatory regime. The concept of deregulation was misapplied leading to an almost free-for-all scenario in the banking sector. This was coupled by the division between the licencing and regulatory authorities. The Ministry of Finance was in charge of licencing whilst the RBZ was responsible for regulation and supervision.

It meant that the regulatory authority had no control over who was entering the sector and left this decision to the whims of politicians at the ministry. In addition, the RBZ itself had limited capacity to carry out effective regulation and supervision. As a result, key issues that have become part of the supervisory regime, such as corporate governance were left to take a downward spiral. While it is true that the economic downturn of the new millennium forced banks to engage in the parallel market, the environment also led to the proliferation of bad practice and speculation which in turn has contributed to greater exposure to risk.

As banks drifted from the non-core banking services, depositors’ money was put at risk in relationships and transactions with over-exposed entities.

Some of the results of the weak regulatory regime are that weak and under-capitalised entities were allowed into the sector. They continued to operate benefiting from political patronage even when the capital adequacy ratios were poor. It also resulted in the increase in poor corporate governance practices particularly in the case of owner-managed banks where the largest shareholders were also the executive directors of the companies.

The phenomenon of insider loans is a symptom of the poor governance and risk control practices in these banks. In one bank alone, the insider is alleged to owe more than $100 billion. One of the major mistakes was the practice of bank bailouts by the central banking authority. This cover produced a moral hazard because under-capitalised and illiquid institutions were given life support behind the curtains and therefore gave licence to management of these banks to persist with their risky activities. It was a cushion on which both the genuine and the unscrupulous elements found comfort. Indeed it is alleged that some of the banks accessed the RBZ facility simply to fund their speculative activities on the parallel market. The fact that all this went on without restraint shows some weaknesses in the regulatory and supervisory regime.

Given these problems and the harsh operating environment, it is hardly surprising that the failing banks have been the under-capitalised and poorly managed indigenous ones. Some of the executives set up banks, but with the mentality and approach of running a tuck-shop. The fact that the key failures have been the indigenous banks has also caused reputational damage to the rest of the indigenous banking sector. The bank runs characterised by depositors withdrawing their funds en masse from the banks has left many of them exposed and engaged in fire-fighting rather than building value. The troubles in the indigenous banking sector have benefited and strengthened the multinational banks such as Barclays and Standard Chartered to whom most depositors are now returning in large numbers.

The idea of liberalisation of the sector was to increase the number of bankers and promote competition by removing the monopoly held by foreign multinational banks. The irony is that poor planning of the liberalisation and indigenisation processes has led to a return to almost the situation from which Zimbabwe was trying to escape. This ought to serve as a lesson to present and future efforts in other sectors but given the poor planning in the agricultural sector it seems that we have learnt nothing. Things might seem to be good and promising in the near future but at some point, without proper plans and strategies, the half-measures will lead to collapse.

Of course the story is not all so bad. Some indigenous owned banks seem to have done well despite the general hardships. It is therefore not that blacks cannot manage banks it is just a pity that most of those who got in first have not been exemplary. The survival of institutions such as KFHL and CBZ demonstrates that sound governance and reasonably conservative policy are necessary in a traditionally conservative sector. Of course institutions like CBZ and Zimbank benefit from having the government as a shareholder and also having access to parastatals’ funds.

But the CBZ in particular can be lauded for recognising its limitations long before the crisis and marrying foreign partners who brought not only more capital but and sound governance practices. Most owner-managed indigenous banks chose to go it alone, enjoying the veil of secrecy that allowed them to engage in non-core and extra-legal activities.

In truth, every country needs a strong local banking sector and to reduce dependence on foreign multinationals whose key interest is to reap profits and remit them to their home countries. One major multinational bank has the bulk of its operations in emerging markets and only its head office in London. It collects and stores the wealth in London. It cannot be healthy for most of these nations in the long run.

However, indigenous banks can learn a few more things from these foreign institutions which have been well-established for a long time. They generally have proper and superior governance systems. They recognise the risks involved in banking and pursue relatively conservative policies in consonance with the needs of the industry. The new banks thought this was archaic and took the fast forward risk averse route – but good old banking as an industry had not. The new regulatory mechanism by the RBZ is a welcome move. To be sure, the authorities have made some mistakes and one hopes they will learn from them, but the general direction is the correct one.

In the coming weeks, we shall analyse the RBZ’s corporate governance guidelines.

*Alex Tawanda Magaisa is Baker & McKenzie lecturer in corporate and commercial law at the University of Nottingham.