RESERVE Bank of Zimbabwe (RBZ) governor Gideon Gono last week stunned cabinet ministers and bankers when he announced new shock capital levels for financial institutions, triggering a storm of debate and protests within the banking sector. Gono’s new measures require commercial and merchant banks to build up their paid-up equity capital to US$100 million from US$12,5 million and US$10 million, respectively. Building societies are required to meet US$80 million new capital levels from $10 million, while discount and finance houses are to put up US$60 million compared to the current US$7,5 million to support their operations. Micro finance institutions’ minimum capital base was raised from US$1 million to US$5 million.
While Gono was announcing his new requirements at his office, cabinet ministers were rejecting the measures just across the road. This started a battle of wills between Gono and ministers before the issue was resolved by cabinet this week, but not before intense behind-the-scenes meetings and lobbying.
Despite strong opposition from ministers and critics, including his former advisor Munyaradzi Kereke, who wrote a lengthy article attacking his former boss’ initiative, Gono stood his ground. He argued the measures will help consolidate and stabilise the fragile banking sector, while his critics said the demands would actually ruin the financial system with disastrous economic consequences.
Instead of retreating after ministers rejected his proposals on Tuesday last week, the central bank chief last Friday intensified the battle through a document which not only defended his measures but also seemed to say they are fait accompli — a done deal.
In face of resistance, Gono last week said the RBZ had adopted a phased plan for the implementation.
Cabinet on Tuesday performed a volte face and endorsed Gono’s measures. Acting Finance minister Gorden Moyo said on Wednesday cabinet had approved Gono’s proposals after summoning him to explain his plan in detail.
“Cabinet and Treasury stand by and support the measures announced by the governor,” Moyo told bankers at a press briefing in Harare. “Government is satisfied that the measures that the monetary authorities announced are both necessary and good for the economy of Zimbabwe as it seeks to position itself as a key economic player in the region and beyond.”
However, Gono on Wednesday acknowledged his measures had sparked debate.
“The announcement of new minimum capital requirements for banking institutions in the July 2012 Mid-Term Monetary Policy Statement has kindled intense debate within banking circles and the business community over the past two weeks,” he said
“The constructive debates that have been generated so far are indeed perceptive and healthy and most welcome to some of us in the forefront of formulating and implementing public policy in areas of our jurisdiction as embodied in our statutory and operational mandates.”
Gono last week argued bank acquisitions, mergers and consolidations were the way to go.
“For instance, there are three banking groups holding more than one separate banking licence, namely the FBC group, ZB group, and the CBZ group. It is our considered view that consolidation of these licences within the same group, would see the resultant entities substantially compliant with the revised minimum capital requirements,” he said.
“If FBC Bank and FBC Building Society were to merge, the resultant capital base will be in excess of the capital as required at December 31 2013. Similarly, if ZB Building Society was consolidated into ZB Bank, the resultant entity will be capitalised in excess of the minimum capital requirements as at December 31 2012.
“In the same vein, if CBZ Bank and CBZ Building Society finalise their consolidation process, the capital of CBZ Bank will be compliant with the minimum capital threshold of US$100 million.”
Gono is on record as saying banks with unrealistic chances of meeting the proposed thresholds should go for acquisitions and mergers.
“Mergers and acquisitions have become a major strategic option for banking aimed at entrenching a strong, efficient and diversified financial sector that ensures the safety of depositors’ funds, plays an active developmental role in the economy, and competes effectively in the global financial system,” he said.
“A fragmented banking system characterised by numerous weak and undercapitalised banks will not only increase the vulnerability of the financial system but also of the economy as a whole. In view of the revised minimum capital requirements whose objective is to have a strong and efficient banking system that is resilient, consolidation of banking institutions, as well as mergers and acquisitions may be inevitable.”
But Gono’s proposals were met with fierce resistance and sharp criticism.
Collins Rudzuna, a research analyst at Tetrad Group, criticised Gono’s moves as unworkable.
“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,” Rudzuna said.
“Realistically, most banks 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.”
Kereke, now engaged in relentless public rows with Gono after he was forced out, also attacked the proposals, arguing they were uninformed and unrealistic.
“I unreservedly conclude that Zimbabwe is not yet ready for the high bank minimum capital levels of US$100 million. The decision by Gono and his team at the RBZ is, therefore, hazardously faulty and must be swiftly set aside before it spins the country’s financial sector into irreversible turmoil,” he said. “This will be ruinous to our economy and in the end spark avoidable socio-political states of flux. This ugly eventuality must be avoided before it is too late.”
Kereke argued the central bank was merely reacting to recent bank failures by hiking minimum capital requirements to “comic levels”.
“Gono, the RBZ board and their technocrats have also made a serious blunder by simply looking at capital levels in some countries in absolute terms to then conclude that levels of around US$100 million are plausible and sustainable,” Kereke said.
“The economic implication here is that the levels of bank minimum capital levels must be instructed by looking at an economy’s size as measured by that country’s Gross Domestic Product, population and credit risk profiles, among other aggregate considerations. The concept of bank capital must, therefore be seen relative to an economy’s size and credit risk profiling, as opposed to thump-sucked absolute numbers.
“Zimbabwe’s US$10 billion economy clearly does not warrant bank capital levels of US$100 million as forcefully argued by the RBZ team.”
However, after a bruising battle, Gono eventually prevailed even if the debate over the controversial and divisive issue will continue for some time.