WHEN Finance minister Herbert Murerwa omitted all monet
ary policy issues in his 2004 national budget statement last year, analysts said he had failed to inform the nation about what needed to be done to reverse the current economic malaise.
While the population was getting poorer, financial institutions were chalking up billion-dollar profits and taking the Zimbabwe Stock Exchange (ZSE) to new highs. Little did investors and the general public realise that the sector would be on its knees less than a year later.
There were cheers and clinking of champagne glasses when financial powerhouse Trust Holdings Ltd (Trust) announced that it had “beat market expectations” by achieving a profit after tax of $15,1 billion in historical terms during the six months to June 30. This was an increase of 150% over the performance figure for the whole of the 2002 financial year.
Compared to the six months to June 30 2002, the historical figures represented an increase of 817%. The total group balance sheet size stood at $202 billion compared to $44 billion as at June 30 2002.
Shareholders smiled all the way to the bank as they received a dividend of 700 cents per share — the highest declared by a financial institution in the history of the ZSE.
Trust immediately embarked on a diversification path culminating in the institution becoming one of the largest in the country, threatening even the government-influenced Zimbabwe Financial Holdings Ltd (Finhold) capitalised to the tune of $57 billion. Trust went into a marriage with First Mutual Ltd (FML), which meant customers could now access financial and insurance deals under one roof.
The union seemed on the roll before the entrance of new Reserve Bank of Zimbabwe (RBZ) governor Gideon Gono on December 1.
Suddenly, things turn-ed nasty.
“With effect from January 1 2004, banks in short positions will be required to provide justification for seeking overnight accommodation,” Gono told the nation on December 18.
“Spot inspections will be conducted to establish the underlying causes of the bank’s asset-liability mismatch. Where persistent and serious managerial deficiencies are detected, the banks concerned will be directed to restructure their top management and treasury operations, and if the situation persists, the Reserve Bank will insist on the restructuring of their board as a condition for accessing the liquidity support facility.”
From popping champagne bottles word quickly went round that Trust and Century Holdings Ltd (Century) were actually facing collapse!
The drama began to unfold as chief executive officer William Nyemba, executive director Chris Goromonzi and finance director Nyevero Hlupo were ousted from Trust. Century’s Jefta Mugweni also stepped down from the board.
Analysts point out that the face of Zimbabwe’s banking sector definitely needed the plastic surgery brought about by Gono and his new team.
The new monetary policy resulted in the ZSE’s industrial index taking a major knock and bankers scurrying for cover as they discovered that their institutions were facing a liquidity crunch. In fact it turned out that some banks did not have money and were being bailed out by RBZ handouts while they concentrated on speculative activities. Founding directors and board members were allegedly abusing company facilities in broad daylight — borrowing billions to buy foreign currency, luxury vehicles, residential stands, buildings, and even household goods to resell later at exorbitant prices.
“The problem with the stock exchange and the financial sector is that there was too much speculation and institutions were not concentrating on their core business,” said Century group chief economist Moses Chundu on Monday. “We can say the success of the stock exchange was because of the run by financial institutions. The counters are now, however, under-performing. We could be stuck with this for some time.”
The ZSE has been regularly voted among the best performing bourses in the world and analysts now question whether this accolade was justified given that the banking sector — now on its knees — was the major cause of this fine run.
“The major cause for the financial sector to be in such a state of affairs is the liquidity crisis,” said acting Intermarket Holdings chief executive officer Rindai Jaravaza.
Jaravaza said this at a press conference where he was at pains to explain the problems being faced by Intermarket which last week booted out its founder and CEO Nicholas Vingirai and chairman Michael Mahachi.
Like the events at Trust, the business community was taken by surprise when it was revealed that Intermarket did not have sufficient funds to cover costs and pay customers their hard-earned money with-out RBZ help. “Our discount house is a major cause for concern,” said Jaravaza. “We have now also removed the head of the discount house pending investigations and RBZ interference.”
Intermarket took the market by storm when it went on a $22 billion “shopping spree” to snap up major properties using its property vehicle — Mashonaland Holdings.
Century Discount House, now also shut, caused headaches for the Century group during preliminary investigations of the financial services sector when it was revealed that it was facing serious liquidity problems because of its exposure to ENG Asset Management Company.
Analysts said while discount houses did not necessarily need to engage in core banking activities, their banking sisters were allowing them to engage in speculative activities in collaboration with asset management houses. Regulations surrounding the operation of discount houses and asset management firms have now been tightened.
Liquidity support is one of the factors behind money supply growth and high inflation. Its transmission mechanisms are the banks. Liquidity support is meant to provide temporary relief to solvent banking institutions that have experienced temporary liquidity dislocations.
In his monetary policy statement, Gono said persistent use of the liquidity support window, however, suggested that the banking institution concerned was not making adequate efforts to address underlying fundamental challenges in their asset-liability management practices.
“It has become evident that some banks are making commercial investment decisions on the misguided assumption that the Reserve Bank will eventually cover their liquidity shortfalls,” Gono said. “In some instances, that support from the Reserve Bank is being applied towards extending loans for speculative, personal consumption or asset acquisition purposes. “Naturally as monetary authorities we frown on such balance sheets as our efforts to control inflation and achieve macroeconomic stability within the vision period are compromised. In view of the expansionary impact of liquidity support on money supply, the existing policy on liquidity support to financial institutions will be tightened.”
Gono said the new policy effective on January 1 would ensure that liquidity help was granted only to solvent and viable banks, and where there was no evidence of “imprudent behaviour”. He also said such support would be given provided the purpose of liquidity support was not to fund activities of subsidiaries, such as asset management companies, nominees or non-core activities of group companies.
Barclays Bank of Zimbabwe shareholders last year took managing director Alex Jongwe and senior management to task over what they termed a “static share price” and “poor banking practices”. So far, however, the bank, which receives directives from its headquarters in the United Kingdom, has not been ruffled by the RBZ’s probe. Others in same category are Standard Chartered Bank and Stanbic Bank — both externally-controlled.