Small Banks Saved By Rights Issue

LESS-ESTABLISHED banks could have embarked on a rights issue in an effort to raise funds after missing last Sunday’s capital requirement deadline set by the Reserve Bank of Zimbabwe, businessdigest learnt this week.

 

The capital requirement is a bank regulation, which sets framework on how banks and depository institutions must handle their capital. These requirements measure a bank’s financial health in comparison to its capital/asset ratio, which is required to be above a prescribed minimum.

Bankers Association of Zimbabwe president, John Mangudya confirmed to businessdigest that banks could meet the US$12,5 million threshold adding that some banks had made a rights issue to raise the required capital.

“From the look of things, most will meet the new requirement,” Mangudya said.

“We understand that some banks have engaged in a rights issue although I’m not privileged to disclose details onthat.”

Mangudya added that despite the possibility of meeting the capital requirements, foreign exchange movements and hyperinflation posed a challenge on banks to preserve shareholders’ capital.

The Reserve Bank prohibits banks from investing in foreign currency, equities and properties for speculative purposes.

An observation by this paper indicates that although most banks have since last week disclosed their position on the capital threshold, some banks did not out rightly state their position except FBC Financial Holdings and CBZ Limited.

CFX Financial Limited in its mid-year financial results said it had submitted a plan to the Reserve Bank on how it would comply with the new regulation.

The upward revision minimum capital to US$12,5 million from US$10 million previously stipulated could have been a challenge for some banks reeling from runaway inflation and a rapidly depreciating local currency.

“The group remains committed to ensuring compliance with all regulatory requirements and statutes as given and amended from time to time.

“The Reserve Bank of Zimbabwe has directed Financial Institutions to increase their minimum capital requirements to new levels from US$10 million to US$12,5 million converted at the inter-bank rate by the end of August 2008,” said CFX in a statement.

“The bank has already submitted its plan to the Reserve Bank of how it is going to meet the required levels and remain committed to compliance.”

A follow up on the statement with CFX managing director, Onesimo Mukumba were in vain as he was said to be out of office.

Analysts however, said more challenges lied ahead of banks despite them being ultimately capable of meeting the capital requirements.

Small banks, analysts said do not have the option of selling new stock since most are not publicly listed.

Another option for struggling banks would be seeking a merger with a stronger bank.

After extending the deadline from end of July to last week, the central bank advised weaker banks to merge with established financial institutions.

“As monetary authorities, we urge those institutions whose shareholders have no realistic chances of meeting the requisite capital threshold to actively consider mergers and amalgamations with other institutions,” said the RBZ in the half-year monetary policy statement.

“If a bank fails to increase its equity, it can reduce its assets to improve the capital ratio. However, shrinking balance sheets is not attractive because it hurts profitably,” said a financial investment analyst who requested anonymity.

In 2006, some of the then 18 registered banks expressed outcry over capital requirements.

The banking sector currently has 15 registered with reports saying newly established TN Bank will next month open its doors to the public.

By Bernard Mpofu