Dumisani Muleya/Shakeman Mugari
AS Zimbabwe’s banks rushed to meet yesterday’s deadline on new capital adequacy requirements, questions lingered on the stability of the banking sector which has been buffeted on all sides by the monetary policy
regime introduced last December.
Although Reserve Bank of Zimbabwe (RBZ) officials this week denied that some banks could sink, distress signals continued to spread across the sector, with reports that some institutions were pleading to be put under curatorship to avert imminent collapse.
Analysts said the volatility in the banking sector showed that the financial system remained unstable. They said fears that nine banks could fail to meet new capital requirements were clear evidence of instability.
Out of 41 banking institutions, seven are under curatorship, two under liquidation, and four under the Troubled Banks Fund — which means 13 financial institutions are in crisis.
Banks which have been placed under curatorship include Intermarket, Barbican, Royal and Trust.
Economic analyst Eric Bloch said Zimbabwe’s banking sector was struggling to regain balance but remained shaky.
“Current RBZ measures are useful but the sector is still unstable,” Bloch said. “There is still a long way to go before the sector regains stability.”
Bloch said though it was encouraging that the central bank had licensed 31 asset management firms after receiving 58 applications. Before the licensing system was introduced, Zimbabwe had more that 70 asset management companies.
He said some banks would soon either be forced to recapitalise, merge, be put under curatorship or go into liquidation. Several mergers and closures were said to be looming despite statements to the contrary.
RBZ governor Gideon Gono, who has been assuring the nation that the banking sector is “fundamentally sound and stable as a whole”, was quoted in the state media on Tuesday as saying “no banks will collapse”.
Gono reportedly said contingency measures had been devised to save “distressed banks” threatened by a hostile economic environment and new capital requirements.
Zimbabwe’s economy, which shrank by 9% last year, is this year expected to contract by 5%, according to Gono, despite contradictory claims from his office and by President Robert Mugabe that it was recovering.
While inflation is falling, partly due to the use of a fixed exchange rate, most economic indicators — which are barometers of the nation’s economic health — still remain poor.
Notwithstanding the prevailing uncertainty in the banking sector, Gono has maintained the situation is under control. He said there would be no “free-fall Armageddon” for the banking system.
The new capital requirement for commercial banks is $10 billion; merchant banks, building societies and finance houses $7,5 million; and discount houses $5 billion.
Last week Gono told the parliamentary portfolio committee on budget, finance and economic development that “most banks were now in compliance with the new capital requirements”. He also said those banks that were not yet in a position to meet yesterday’s deadline had submitted their recapitalisation plans.
Gono’s streak of optimism, which observers say is as encouraging as it could be misleading, which ran through his quarterly monetary policy reviews in April and July, has been widely reflected in the official media.
However, analysts say despite Gono’s persistent claims that the banking sector is stable, there are serious fundamental problems and underlying risks besetting the financial system.
Analysts cited the placement of Trust Bank under curatorship last week as a clear indication that some of the banks which remained on the market were actually shells.
Zimbabwe Congress of Trade Unions economist Prosper Chitambara said Trust’s closure was indicative of the depth of the crisis in the financial sector.
“The closure of Trust has sent jitters in the financial market. It confirmed the depositors’ fears that their money is not safe in banks, especially in indigenous banks,” Chitambara said.
“There is of course the contagion effect of the closure on other banks. Already many locally-owned banks have been hit by massive panic withdrawals. The banking sector is not yet safe. Depositors don’t have peace of mind.”
Chitambara said the banking crisis was worsening Zimbabwe’s credit risk internationally when the country was already suffering from serious political and sovereign risks. “Who would want to deal with a country where banks are closed and placed under curatorship every month?” he asked.
Trust’s closure was said to be particularly worrying because the RBZ poured in $280 billion — which has now ballooned to $1,4 trillion (equivalent to the country’s domestic debt) — of taxpayers’ money in a bid to rescue the bank but that simply failed. This prompted accusations that the central bank had just plunged into the Trust crisis without adequate knowledge of the depth and extent of the problems.
The issue also raised fears that the RBZ could be acting on the basis of an ad hoc policy. If the RBZ had closely studied the banking emergency, analysts reasoned, it would have discovered that the banks it tried to save were on the skids and beyond redemption.
Trust’s bottomless pit into which the RBZ poured money was only exposed after Old Mutual did a due diligence exercise to ascertain the possibility of a merger between the bank and Nedcor of South Africa. Old Mutual has an interest in Nedcor.
Soon after the study was completed, one Old Mutual official was asked by a business colleague why they “walked away” from Trust and he replied: “We did not walk away, we ran away!”
He was dramatising the problems that Old Mutual had found at Trust which led to the collapse of the merger talks.
Trust, like other banks, was dogged by serious liquidity problems. Most of the ailing banks were also bedevilled by imprudent business practices, administrative failures, managerial limitations, structural ownership weaknesses, poor corporate governance, bad risk management, and leadership incompetence.
But the RBZ’s raison d’être of pouring money into Trust after issuing a corrective order on January 13, after discovering it was “unsafe and unsound”, was that the bank needed huge liquidity support to prevent it from a collapse which could trigger systematic risk and affect “vulnerable depositors”.
The RBZ had forced out the original bank directors, including managing director William Nyemba, on March 15 to steer the institution out of trouble. Analysts expressed scepticism as to whether the RBZ was sufficiently informed in its actions in the first place.
Hardly a month after the new team had take over at Trust, misinformation started flowing, with Gono claiming on April 4 that the bank had made “commendable progress” towards recovery when in fact it was sinking deeper into crisis.
No evidence whatsoever was provided to back the declaration which has now proved to have been wholly misleading.
Gono also expressed optimism about the positions of Metropolitan bank, which had received $23 billion, saying the changes made were expected to “give birth to a new and stronger institution with modern methods of risks management and stewardship”.
He said he was “happy” to continue supporting Royal Bank’s merger efforts. He said the money that had been sunk into Barbican and Century would be recovered. Although Century says it has repaid, it is not clear how much of the almost $500 billion in public funds put into the struggling banks would be recovered.
Gono said last week there were efforts to recover the money which now runs into trillions, including interest, through the troubled banks resolution plan although there are strong doubts this would be achieved.
Commentator Jonathan Kadzura said: “They allowed the banks to borrow for speculative reasons and to breach the Banking Act at will. The central bank must come out in the open and say who has failed the nation.”