Shareholders to be held liable for bank collapses

TREASURY is finalising sweeping amendments to the Banking Act which will, among other things, see shareholders being held responsible for bank failures.

Report by Paidamoyo Muzulu/Clive Mphambela

The amendments will compel impromptu and mandatory stress tests, limit the number of shares an individual can hold in a bank as well as outlaw multiple directorships for banking institutions.

Finance minister Tendai Biti is spearheading the amendments to the Banking Act to bring lasting stability to the financial services sector after two banks –– Interfin Banking Corporation and Renaissance Merchant Bank –– collapsed this year and last year respectively, owing to poor corporate governance and lack of periodic stress tests on banking institutions. Genesis Investment Bank also collapsed.

“We are working on comprehensive amendments to the Banking Act which are now with the principals,” Biti told parliamentarians at the pre-budget seminar in Victoria Falls last week.

“The amendments will address the failing corporate governance we witnessed at Interfin and Renaissance, where shareholders were more powerful than the board and management,” said Biti.

If the amendments are incorporated into law, a bank’s shareholders will become liable for its collapse.

“We will lift the corporate veil so that the shareholders will also feel the pain of the collapse of their banks, just like depositors,” Biti said.

“We will put a limit to the number of shares an individual can control in a banking institution and a banker would only be allowed to sit on not more than two boards of a financial institution,” he added.
The proposed Banking Bill will also introduce a banking ombudsman who will look into issues such as interest rates and would have the same powers as provided under the Consumer Protection Act.

The banking ombudsman will adjudicate matters relating to fair trade practices.

There will be mandatory and random stress tests on a bank’s financial position to protect depositors, Biti said.

He said the amendments would also create synergies among the three financial regulatory bodies –– the Securities Commission of Zimbabwe, the Insurance and Pensions Commission and the Reserve Bank of Zimbabwe.

Stakeholders have called on the regulatory authorities to improve the governance structures within the local banking sector.

Biti’s proposals also come soon after the International Monetary Fund staff team, in its concluding report following Article IV consultations in June, identified the reduction of financial sector vulnerabilities as a key objective for government.

“The IMF welcomed that the financial regulatory framework was being strengthened after a long period of forbearance. In July 2012, the RBZ announced steep capital requirement increases, to be phased over two years. The announced increases in minimum capital requirements is expected to speed up consolidation in the banking system. The RBZ will need to monitor closely banks’ efforts to comply with the new requirements, which will undoubtedly alter the banking system structures,” the IMF said.

The frequent and unannounced spot checks and stress tests on banks’ balance sheets will help detect trouble early, enabling authorities to take timely corrective action.

The IMF strongly advocated for a more proactive approach to banking supervision, noting that a significant number of banks remained inadequately capitalised and relatively weak despite meeting minimum capital requirements.

The team raised concern credit risks were unacceptably high, particularly for smaller banks that have low capital buffers, adding asset quality had deteriorated due to unsound lending practices, poor risk management and weak corporate governance.

The IMF said it would also be essential to ensure tight and transparent governance in the banking sector.

Analysts have attributed the breakdown of corporate governance structures in banks and public listed companies to the overbearing influence and power of some shareholder managers as well as multiple directorships blamed for diluting board member effectiveness and compromising their independence.

“Staff welcomes planned amendments to the Banking Act to improve oversight and surveillance. The authorities plan to strengthen the Troubled and Insolvent Bank Resolution Framework to incorporate prompt corrective actions, and improve corporate governance,” the IMF team said in its report.

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