Plan to rescue troubled banks

A document sent to government recently and seen by businessdigest shows that a leading global fund manager has urged government to come up with a plan that would, among other things, see the existence of fewer but consolidated, larger banks.

This comes against the backdrop of a struggle by many indigenous banks to raise the US$12,5 minimum capital requirement and the imminent collapse of banks such as Interfin and Genesis. A number of local banks are struggling.

According to the proposal, reduction inthe number  of banks would be achieved through consolidation and increasing minimum capital requirements to US$50 million.

As part of the proposal, a corporation owned by the Ministry of Finance would be established as a close-ended domestic special purpose vehicle.

This corporation would be managed by an independent management company, established by the consultant and staffed with dedicated professionals with the appropriate credit skills.

It would then charge a management fee based on total assets under management and a performance fee based on recoveries, with all other returns accruing to the company channelled towards building a capital buffer.

The corporation would have a board of directors chaired by the Minister of Finance, two members from the Ministry of Finance and three independent non-executive directors.

Although the Government of Zimbabwe would facilitate this solution, the cost of bailing out the banking industry would be borne by the industry itself through the payment of a levy on banking assets.

In order to raise funding, government would impose a levy on all licensed banks, based on total risk-weighted assets for 10 years.
The sinking fund’s assets would be managed by the consultant.

The proposed management company would be managed on a best practice basis through allocations to third party asset managers.

The levy would be 2% of total risk-weighted assets but this level would reduce to 150 basis points over five years to take into account the expected growth of the banking sector, the proposal says.

“It is likely that the growth of assets in the banking industry will be significant, and the sinking fund may be over-­funded. Such surplus capital could, in time, be deployed to support lending for SMEs, or other targeted industries,” the proposal says.

The architects of the proposal are targeting investors such as Afreximbank and the Development Bank of Southern Africa to chip in with US$350 million, international organisations such as sovereign wealth funds to invest US$150 million, while others such as the National Social Security Authority and domestic banks would be expected to come in with US$150 million each. Domestic depositors were expected to come in with US$50 million, according to the proposal.

The financial experts also noted that while most domestic banks faced a liquidity crisis, many were technically insolvent and probably trading with negative capital if they were to write-off or provide for bad and doubtful debts.

More importantly, such banks as remained out of such consolidation would have to be governed by persons truly “fit and proper” for this purpose. 

“One way to achieve this is to identify those banks that have such high calibre persons in place and encourage them to be the consolidators, with the ones with less good governance becoming the consolidated,” the proposal reads. “Such a process can only follow or be combined with a restructuring of the banking system by creating a Resolution Vehicle capable of taking over the bad and doubtful debts from the banks and thus returning liquidity and capital back to the banks.”

The consultant said the principal beneficiary of this would be the economy as a whole, as the banking system would once again be able to start issuing loans based on the true cost of funds and not the opportunistic undisciplined lending that charecterised the past few years. 

Such a Resolution Vehicle will need to be funded by placing 10-year tax free bonds with investors.  Such bonds would be serviced and retired from the recoveries on the loans taken over as well as the tax to be levied on all banks, equal to 2% of Gross Banking Assets over a 10-year period.

The 2% charge, according to the plan, would be reviewed downwards as banking assets grew in size.  “With current banking assets of the size they are being carried at (after write-offs and provisions that should be made), the income would be $30-50mm annually, but should grow rapidly,” reads the proposal.