Banks: What’s there to indigenise?

Linda Tsarwe

THE indigenisation requirements gazetted by the government last year have been received with mixed feelings within various sectors of the economy. Debate has been mainly on how the policy should be implemented, with some arguing on the appropriateness of the policy in the current environment. Despite all the schools of debate, government has remained adamant on its legislation, and the mining sector was the first to experience it.
Currently, most operations have somehow complied with the requirements of the policy. With that almost dealt with, the Ministry of Youth Development, Empowerment and Indigenisation recently shifted its focus to foreign banks. Clashes have however occurred between the ministry and the RBZ, as both seem to have a different understanding of what the indigenisation of banks should entail.
Reserve Bank governor Gideon Gono argues the sensitive nature of the banking sector makes it a special case to deal with as far as indigenisation is concerned. In his recent document on ‘Industry supply-chain based economic empowerment…’, the central bank governor favours the supply-side approach over the equity approach to indigenisation.

 

For a bank especially, the equity approach does not seem to add any value. According to the central bank’s figures, as at December 31 2011, total banking sector revenue amounted to US$870 million, while total expenses were US$800 million. This resulted in aggregate net profit of US$70 million, of which foreign banks accounted for 52% of total profitability, which is US$37 million.

 

Based on profitability alone, under the equity approach, indigenous investors would be entitled to 51% of US$37million, which is US$19million. An investor getting 51% would be acquiring that portion in equity and not deposits. Deposits are liabilities of the bank and do not belong to shareholders, contrary to what seems to be the general belief.  In fact, banks have a fiduciary responsibility to their depositors to safe-keep deposits entrusted with them.
Suppose, however, that the supply side participation is used as a methodology for empowerment, indigenous people would be sole suppliers of various services that make up non-interest expenses of banks, like advertising, security, repairs and so on.  As at December 31 2011, non-interest expenses of the banking sector amounted to US$320 million. This is way better than the US$19 million attainable under the equity approach, as it is likely to produce a higher profit.
However, the Empowerment and Indigenisation ministry does not seem to concur. Their main argument is foreign banks are sitting on huge deposits, yet they are the most conservative when it comes to lending.  As at December 2011, total deposits in the banking sector were US$3,1billion, of which 30% of these were being held by the four foreign banks, leaving indigenous banks with a far greater share of 70%.  The average loan to deposit ratio for these banks was 50%, against 80% for the whole market.

 

There is a view that most foreign banks usually get instructions from their head offices abroad, and can therefore not make any strategic decisions as local branches. Government hence believes that if the shareholding structure is made up mainly of local investors, then decisions can be made locally and some stringent policies, such as conservative lending, can be relaxed.
Although the government puts forward a somewhat valid concern in terms of lending, there are other market aspects at play. There has been a huge appetite for credit post dollarisation, and it was inevitable that soon enough most borrowers would become over-extended. Most foreign banks seemed to have taken this long-sighted view and decided to shield themselves in good time before credit deterioration started to pull other players under. Evidently, it was not long before the apple started to rot.

 

Although there has been a strong defence on the quality of the assets on the market, the situation on the ground now seems to suggest otherwise. Interfin is a recent case of a bank gone bad, with over-lending as one of the causes of its downfall. The 2003-2004 banking crisis was also sparked by imprudent lending practices, with depositors having to suffer the most.
With all this in mind, it seems justified that these banks chose not to be recklessly aggressive lenders with depositors’ money. Ironically, because of their conservative lending, foreign banks have been dubbed the ‘safe banks’, an attribute which has earned them the level of deposits they currently have. To coerce them to aggressively lend funds will only remove their status of ‘safe banks’, which is the attractive feature that has drawn deposits to them.

 

Indigenisation of banks with the intent of turning them into aggressive lenders removes that attractive feature of safety as perceived by depositors. Should it occur, it would not be surprising to witness a run on deposits, defeating the whole objective of indigenising these banks in the first place. Furthermore, the affiliation of these foreign banks with their internationally-recognised parents has been one of the reasons why depositors are confident of banking with them. If that appeal is taken away, then it takes the confidence of depositors with it, and the liquidity situation could worsen.
Another school of thought argues that the banking sector is made up mainly of indigenous banks, so why indigenise the only four foreign banks out of 27 banks and building societies that are there. From a sectoral point of view, more than 51% are indigenous anyway.

 

The RBZ governor has even publicly announced that deserving new applicants can get licences from the central bank if they so wish. Therefore the issue is not so much of which banks have foreign majority equity holding and which ones are local. Rather, what should be of concern is the concentration of the deposits among the foreign banks and how these can be more evenly distributed.

 

Although indigenous banks are applauded for being active lenders, it has come back to haunt them, clearly indicating that such a lending culture is not the way to go in this environment.

 

Most of them have already slowed down  on issuing loans, as it is not sustainable to continue putting depositors’ funds at risk when your current credit portfolio is deteriorating. Only when indigenous banks can ensure safety of  depositors funds, can the banking public start believing in the ‘safe’ custodial duty of a bank.
As a recommendation, and in concurrence with the RBZ, it would produce more value if indigenous banks are put at the forefront of developmental banking. Already, government has channelled some of the youth development funds through these banks for disbursement, a move which boosts income and increases interface of the bank with the public.

 

The RBZ mentioned that most banks have their branches concentrated in the urban areas. If there is a drive to decentralise to the rural areas, specialised business can be sought and the unbanked population become financially included. Most non-profit organisations that fund rural development can always use such banks with remote branches for their financial disbursements.
The major question is whether the equity approach is the right indigenisation method for banks. If Zimbabwean nationals acquired 51% of the bank’s capital, how does that benefit the stakeholders involved? Banking is about attracting deposits and lending them out. Market environment has to be conducive to be able to mobilise deposits, and responsibility lies with the bank to ensure that they are safe. It would be unfair to penalise banks on conservative lending when it is more prudent and to the benefit of depositors to do so.
It seems worth considering what other stakeholders are proposing, instead of a blanket approach on other business models that do not seem to fit such a methodology. A simple acquisition of equity does not guarantee an increase in deposits.

 

The banking sector is sensitive and if depositors are sceptical of the safety of their funds, they can always move  elsewhere, or, in worst cases, cease to put money in banks. Moreover, the contagion effect in the banking sector could be damaging for the economy. More careful consideration of indigenisation therefore seems warranted.