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Concern over unethical practice in banking sector

THE Reserve Bank of Zimbabwe (RBZ)needs to take stern measures against delinquent banks and stop misconduct in the financial services sector and protect depositors’ funds, analysts say.

Taurai Mangudhla

This comes after RBZ governor John Mangudya recently said in his mid-term monetary policy that the central bank was concerned with unethical practices and indiscipline in the sector which range from falsification of records, deliberate misclassification of loans, camouflaging the level of nonperforming loans (NPLs) resulting in under provision and control overrides to imprudent lending practices.

Mangudya said the malpractices cast doubt on the fitness and probity of the banking officials involved, adding the business of banking is about trust and calls for high levels of honesty and integrity on the part of bankers.

“The Reserve Bank calls upon banking institutions to uphold ethical conduct in their dealings with members of the public in order to maintain confidence in the financial sector,” said the Mangudya.

However, economist feel tough actions, including closure of banks that are found wanting, is required to end malpractices in the sector.

Economic analyst John Robertson said announcements and warnings alone were not enough to deter bad practices that could threaten credibility of the banking sector.

“Disciplinary measures should go far beyond just reprimanding so that individuals are protected. The governor should be bringing those banks to a close if they have behaved that badly,” Robertson said.

“Why should the rest of the population assume the risk of banks that are misbehaving?”

Econometer Global Capital head of research Takunda Mugaga, also said action was long overdue as falsification and distortion of records is slowly spreading even beyond the banking sector.

He said some companies are either avoiding media and analysts briefings, or at least reporting last minute or deliberately ensuring their events clash to avoid scrutiny.

He also said the central bank should be tough and ensure that there are no sacred cows when dealing with issues of misconduct.
“If one flouts regulations and corporate governance policies, they should be punished as a way of ensuring good behavior instead of limiting focus to capital compliance,” said Mugaga.

Mugaga said owner-managed banks tend to be the biggest culprits of misrepresenting loan books.

“Failure to deal with the issue of owners managing their banks means we will continue to have these same problems because there is normally a huge chunk of non performing insider loans and or loans that can be somehow linked to owners,” he said.

Robertson said corrective action gives the RBZ a chance to trim down the number of banks from 18 to at least half.

Robertson said the country requires a less number of banks, but stronger institutions.

“Even in Britain about five banks control 95% of the market, what we need is less number of banks that are stronger.”

The debate on reporting of NPLs also come after Econometer argued in its 2014 first half year Zimbabwe economic report that the reported average NPL rate of 16% is an underestimation of reality on the ground.

Econometer said its estimates project a 25% NPL for some institutions which is well above the prudential regional benchmark of 5%. “With the liquidity crunch hitting on the property market of late, a number of collateral securities cannot realise a benefit to lenders once a default occurs hence justification of a 25% NPL average,” said Econometer.

According to latest RBZ figures, NPLs have been rising from 1,6% in 2009 to 18,5% or US$705 million as at June 2014.

The central bank said the NPLs are now continuously growing even without new lending by banks because of interest accruing on the unpaid loan balances.

To curb this, cabinet has approved the establishment of a National Special Purpose Vehicle known as Zimbabwe Asset Management Corporation (Pvt) Ltd to acquire NPLs from banks to clean up and strengthen their balance sheets and provide them with the liquidity to fund valuable projects for the economy to rebound and to mitigate loss of confidence.

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