Bank failures: The underlying factors

Clive Mphambela

“THE banker man grows fat, working man grows thin.” These are Bruce Springsteen’s lyrics in his stinging track about bankers, Jack of All Trades taken off his latest album Wrecking Ball.
Springsteen, who has sold selling 65 million albums in the United States and more than 120 million worldwide, in the process picking up 21 Grammy Awards and many other accolades, recently touched a raw nerve of discontent with financiers and bankers at a Berlin concert after railing against them as “greedy thieves” and “robber barons”.

Springsteen is on a Wrecking Ball tour which began on May 13 in Spain, a country struggling with a crushing debt and banking crisis. The tour runs for about three months with 33 stops in 15 countries before concluding on July 31 in Helsinki, Finland.
Bankers are under immense pressure everywhere due to management failures and other things like paying themselves hefty bonuses even in the middle of serious financial problems and widespread suffering by their clients.
This is happening everywhere and Zimbabwe is no exception. The bottomline is that bankers are sometimes irresponsible and insensitive. They carelessly handle depositors’ funds, enrich themselves at the expense of their clients and even run down their institutions through mismanagement, poor corporate governance and greed.
The closure of Genesis Investment Bank and placing under recuperative curatorship of Interfin Banking Corporation in Zimbabwe last week have once again brought into sharp focus the debate around ownership structures and corporate governance issues within the sector.
Analysts say while bank and company collapses occur everywhere, the common thread in Zimbabwean corporate failures so far has been acts of impropriety on the part of shareholders and managers. ReNaissance Merchant Bank (RMB), Genesis and Interfin were victims of this.
Some analysts blame bank failures more on structural problems within the economy such as the chronic liquidity crunch that has dogged the sector since the advent of multicurrency, while others see this as symptomatic of poor corporate governance.
Zimbabwe experienced a chain of bank collapses in 2004 at the height of the economic meltdown and hyperinflation. The latest bank closures show that problem has not gone away although the economic environment has changed.
There is no doubt banks are partly battling for survival due to poor economic performance, low capacity utilisation by industry and depressed demand against a backdrop of low disposable incomes.
They are also struggling because of tight liquidity conditions in which they operate, mainly attributable to volatile short-term transitory deposits and limited lines of credit. There is also the problem of low savings due to low salaries and wages, as well as low interest income against high operating costs and low capitalisation.
However, there are also other reasons why banks are struggling.
Genesis was closed following its failure to meet its minimum capital requirement despite engaging more than 20 different potential inventors in the past three years. The bank, which had a negative capital of US$3,2 million and is now in liquidation, was struggling due to gross undercapitalisation, liquidity problems, small deposit base and persistent loses. Mismanagement was part of the problem.
Interfin, which had a negative capital of about US$93 million, was closed and placed under the management of a curator for six months. The bank’s closure was a result of low capitalisation, concentrated shareholding and abuse of corporate structures, high levels of non-performing insider and related party exposures and a chronic liquidity crisis.
RMB was closed last year after a looting spree at the bank which bordered on serious criminality and fraud.
University of Zimbabwe’s Professor Tony Hawkins says some of the challenges being experienced were symptomatic of the fact that the country is overbanked.
“The real question is that do we have too many banks?” said Hawkins. “I think a big part of the problem is that we have too many banks for the size of the economy. We probably have to go the South African and Nigerian route where they now have very few but strong banks.”
Hawkins said the comforting thing about Zimbabwe, however, was that the main banks, which were systemically important, were solid.
“So there is no need to panic. The situation just needs to be managed so that we have fewer, stronger, more viable banks”, he said, arguing at some point consolidation would be necessary in the banking sector.
However, one problem with consolidation was that the process would not be easy in midst of the current controversial indigenisation policy, partly targeted at banks.
“It will not be an easy path to walk as it will be met with a lot of political resistance due mainly to the fact that it is the smaller, predominantly indigenous banks that will need to come together,” he said.
Economic analyst Eric Bloch has a different view. He believes the single biggest cause of bank failures was the irresponsibility of senior management in banks, who had been lending excessive amounts to a few companies on the basis of personal relationships without paying due regard to collateral and their capacity to pay back.
Bloch also argued the legislative framework is not necessarily weak as some analysts say but the trouble was that laws were being violated.
“The laws that we have are more than adequate, but the problem lies in that they are being ignored. Regulatory authorities also need to be more proactive rather than reactive. As things stand, their actions are akin to closing the stable door when the horse has bolted,” Bloch said.
He said the latest bank collapses have dented public confidence in local banks. Bloch says he does not think Zimbabwe is overbanked.
James Msipa, Quest Financial Services MD, says the corporate governance problems faced by the local banking sector were partly caused by the tendency for bankers to pursue other interests beside their core business.
“The critical challenge for the country’s banking sector is that a lot of our bankers, shareholders and managers, have become industrialists in one form or other,” said Msipa. “This has created the temptation for insider lending, as these bankers want to promote their interests outside banking. We need to revisit corporate governance ethics and structures.”
Msipa said the structural argument that we have until last week 26 banks chasing US$3 billion certainly did give the impression the market was overbanked. Even if one were to assume there is US$2 billion circulating outside the formal channels, the means to harness that money did not lie in opening new banks, but in getting existing banks to innovate and be aggressive in coming up with new products which promoted financial inclusion.
“The classical argument is that as long as a bank can open its doors and get customers we are not overbanked and that we should open more banks to promote competition. However, it is important to note that not all competition is healthy as excessive competition may also lead to instability in the sector,” Msipa said.
In the end, banks are failing due to a combination of structural, corporate governance factors and greed which authorities need to stem to save the ailing sector from plunging into turmoil.