Further squeeze on banks

Collins Rudzuna
THE Mid-term Fiscal Policy statement recently presented by the Minister of Finance Tendai Biti was largely taken as negative. In it the minister took on a less bullish tone than usual, cutting his initial economic growth forecasts. There were no shocks and surprises as the market had to a large extent anticipated a downbeat statement anyway.

 
With the bad news from that end confirmed, all attention shifted to the  mid-term monetary policy statement from the central bank. Expectations were not high as an economy that operates without a functional currency of its own is greatly incapacitated from implementing monetary policy tools.
Usually a central bank will try to influence interest rates and inflation by controlling the money circulating in the economy. For example central banks will usually increase money supply to kick-start an ailing economy. Most Zimbabweans will remember this as ‘printing money’ from the days of hyperinflation or more recently ‘quantitative easing’, which is being effected in the United States. Whatever name or mechanism is employed, it is essentially a central bank creating more money to oil the wheels of the economy.

 

The Reserve Bank of Zimbabwe (RBZ) is not in a position to do this as Zimbabwe uses foreign currencies — we cannot legally print other people’s money!
Memories of the hyperinflationary effects of overdoing this are still fresh in our minds so maybe it is a good thing that the RBZ currently has no power to print money. To increase liquidity, we have to attract more money from outside through higher exports, increased borrowing and attracting investment or soliciting aid. Another function of the RBZ would be to act as lender of last resort thus giving confidence to participants in the inter-bank market. Again, no known meaningful progress has been made towards making this function operational. So far, government has not been able to attract investors for the proposed US$150 million fund for this purpose.

 
With the RBZ hamstrung from doing most of its normal functions, the governor’s statement concentrated more on giving the banking industry a tongue-lashing. Given the weaknesses recently exposed at some banking institutions the governor is right to chastise the industry for practices such as insider loans, concentrated shareholding and neglect of fiduciary duty to lenders and depositors.

 

The governor decried the existence of what he described as “a fragmented banking system characterised by numerous weak and undercapitalised banks”. Mergers and acquisitions were put forward as the RBZ’s proposed solution. In line with this proposal, minimum capital requirements for banking institutions were increased to levels that have been received as ‘shocking’ within the banking community.
The RBZ raised the minimum capital requirements for banks as depicted in the table above.
The raising of minimum capital requirements for banks is a shocker on many counts. Firstly, it comes as a surprise to most bankers especially when taken within the context of current liquidity challenges which the RBZ itself acknowledges. Effectively, the banking industry is being asked to come up with capital in excess of US$2,5 billion in an economy that is reeling from a lack of liquidity. There are many potential problems associated with this.
Most banks are already compliant with the current requirements shown in the table above. Realistically, most of them will not be able to meet the new requirements. Locally owned banks, for example, are especially unable to comply because their shareholders do not have the capacity. Effectively most locally owned banks will become undercapitalised, which will likely lead to customers deserting them for foreign owned banks. This reverses the indigenisation drive government has been working on.
On the other hand, parent companies of foreign banks may well have the financial muscle required to come up with the additional capital but are likely to be reluctant to put up more money especially given the recent drive to indigenise banks. This leaves the whole sector unable or unwilling to comply. In the end, the RBZ may have to either revise the new requirements downwards or do away with them altogether. If this were to happen, the banking sector would breathe a sigh of relief.
Ironically, in the same statement the governor specifically fingered policy reversals as damaging to the investor community.
Another option would be for banks to merge. Banks that have gone this route before are Century and CFX and later CFX and Interfin. Interfin is currently under curatorship so the precedent is not all that encouraging. Even the Kingdom/Meikles merger ended in a bad way. It is widely believed that there is a lot of undisclosed rot in banks especially in their loan books and this would make it difficult to convince banks to merge.
Even if the industry is able to comply, the new levels would still be problematic. Money put forward as capital will normally not earn a significant return. More than US$2,5 billion, equivalent to about a quarter of Zimbabwe’s GDP, is required from the banking industry.
To be profitable, banks would have to make a very high return on their deposits which currently stand at US$4,02 billion. This would likely involve very high risk-taking which defeats the whole objective of trying to make banks safer.
The whole idea of minimum capital requirements is to ensure these institutions are not holding investments that increase risk of default and that they have enough capital to sustain operating losses while still honouring withdrawals. It would make sense therefore to have the capital requirements set in relation to the size of the economy or the depositor base. This seems to be the trend in the region.
The new capital requirements are way higher than comparable countries like Kenya, Namibia and Zambia which all have higher GDP’s than Zimbabwe, but have lower capital requirements of US$13 million, US$1,2 million and US$20 million, respectively. In Zambia they have a two-tier system where foreign owned banks are required to have US$100 million.
For the sake of the industry we hope sanity will prevail and that the RBZ will reconsider its stance. Sadly, even if this is done, it would just be another case of policy reversal. Since dollarisation Zimbabwe has attracted about US$350 million in FDI compared to over US$2,3 billion by Zambia. Policy inconsistency is just another reason for investors to avoid Zimbabwe and go elsewhere in the region.

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