There has been a storm of controversy of late surrounding the Reserve Bank of Zimbabwe (RBZ)’s dramatic raising of bank’s minimum capital requirements, exorbitant fees, charges and commissions many financial institutions are charging, while making millions at the expense of their struggling clients.
Zimbabwe Independent News Editor Faith Zaba (FZ) interviewed RBZ governor Gideon Gono (GG) on Wednesday on these issues causing serious debate in the country. Find below the excerpts:
FZ: Dr Gono after raising minimum capital requirements by what some critics described as disproportionate magnitudes, you have presented arguments in respect of the correlation between capital levels and various facets of bank performances. Can you please explain to us these linkages.
GG: Capital is an essential element in banking as it serves as a buffer against losses and consequently ensures the going concern of a banking institution. Capital is thus the final absorbent of losses regardless of how they are occasioned.
A number of banking institutions are registering persistent losses due to inadequate business volumes, which in turn is emanating from low capitalisation. In contrast, banking institutions with low capital levels, as well as those with illiquid capital have higher incidences of reporting losses. A low capital base restricts a banking institution’s capacity to underwrite sufficient business and generate enough revenues to meet its operational costs. The higher the capital base the greater the loss-absorption capacity and therefore the resilience of the institution to adverse endogenous and exogenous shocks.
FZ: Still on that, what is the link between bank capital and lending rates?
GG: Insolvent banking institutions and those with low capital bases have high propensity to indulge in adverse selection as they gamble for survival. These institutions may be compelled by circumstances to extend credit at usurious lending rates to borrowers with no realistic prospects of honouring their obligations.
FZ: You also criticised banks for high bank charges, fees and commissions. Is there is link between bank capital and the fees they charge?
GG: Reserve Bank on-site examination findings indicate that marginally capitalised institutions often resort to charging higher fees to compensate for low levels of business. These high bank charges erode confidence in the banking system leading to financial disintermediation, where economic agents keep their money outside the banking system. An estimated US$2 billion to US$3 billion is considered to be circulating outside the banking system.
It has been noted that high bank charges and high lending rates charged by some lowly-capitalised banks are a form of “tax” levied by the institutions on the vulnerable members of the public in order to supplement their meagre capital levels. The undercapitalised banks usually depend heavily on non-interest income, which constitute the bulk of their gross income. It is the Reserve Bank’s considered view that only profitable banks can positively impact on economic activity in our country via low bank charges, low interest rates and sound credit extension.
FZ: What about the link with credit extension?
GG: As per international practice, banking regulations impose restrictions on credit extension based on a banking institution’s capital base. The higher the capital base, the more business a banking institution is able to underwrite. It follows that robust capitalisation enhances the financial intermediation role of banking institutions, which is key to the economic recovery process. Institutions with high capital levels such as CBZ Bank, BancABC and CABS had loans and advances amounting to US$752,5 million, US$332,7 million and US$243,7 million, respectively, compared to Royal Bank and ZABG with $1,6 million and $5,4 million, respectively as at June 30, 2012. At the current levels of capitalisation, banking institutions are finding it extremely difficult to satisfy the funding requirements of large corporate clients. For instance, the 2011 ADB report on infrastructural requirements of Zimbabwe indicates that the country would need about US$1,6 billion per year by 2015. The total infrastructural requirements were estimated at US$14,2 billion by 2020, of which US$7,1 billion may be raised from external sources while the balance should be from internal sources.
FZ: It seems there is rampant poor corporate governance, indiscipline and mismanagement in some banks. What your comment on that?
GG: The Reserve Bank has determined that challenges associated with lowly-capitalised banks largely emanate from individual shareholders with overbearing influence on management. This results in poor corporate governance and risk management practices.
The individual shareholders lack capacity to adequately capitalise their institutions on an on-going basis, and they instead engage in gross insider-lending and other abuses. Such fraudulent activities by shareholders expose depositors and are thus detrimental to the financial system and economic stability. The demise of United Merchant Bank is one such well known example.
FZ: Is there a link between bank capitalisation levels in banks and political and economic stability?
GG: A strong and resilient banking system is the foundation for sustainable economic growth as the banking system is at the centre of the financial intermediation process. Cascading banking sector defaults due to inadequate capitalisation have a potential to trigger economic and political unrest. Similarly, the inability of banks to play an effective financial intermediation role results in economic stagnation and attendant socio-economic challenges. Financial instability is detrimental to political and economic stability.
FZ: What is the plan for the implementation of the recently announced new capital requirements for banks?
GG: Every banking institution is required to submit a detailed recapitalisation plan to the Reserve Bank by September 30, 2012 to facilitate central bank assessment of the recapitalisation prospects. The plan should clearly indicate the source and amounts to be raised as well as the timeframes. We have adopted a phased plan but full compliance is due by June 30, 2014.
FZ: Do banks have a realistic chance of meeting these requirements?
GG: The Reserve Bank sees scope for banking sector consolidations as a viable way of not only complying with the new thresholds, but also strengthening the capacity of banks in other respects including skills, technology, and financial intermediation.
FZ: What is the case for banking sector mergers and acquisitions?
GG: The Reserve Bank is on record for advocating banking institutions with unrealistic chances of meeting the proposed new capital requirements to opt for merger and/or acquisitions by a healthy bank. 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. 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.
FZ: Finally, can you clarify this once and for all. What’s your view on the indigenisation of the banking sector?
GG: The Reserve Bank has a long history of empowerment programmes involving a number of empowerment programmes such as the productive sector facility, agricultural sector productivity enhancement facility and the farm mechanisation programme.
This shows our commitment to mass economic empowerment. The new minimum capital requirements are designed to strengthen the banking institutions, particularly indigenous-owned banks, to enable them to effectively compete both locally and internationally. They provide a framework to enable local banks to merge and benefit from economies of scale and scope.