AfrAsia Bank Zimbabwe closed on Tuesday after its shareholders retreated due to the bank’s huge liabilities of more than US$100 million, low capitalisation levels and a damaged reputation stemming from a costly legal wrangle.
The Reserve Bank of Zimbabwe (RBZ) on Tuesday cancelled AfrAsia Bank Zimbabwe’s operating licence after determining that the financial institution was no longer in a sound financial condition.
Informed sources said this week that the bank was saddled with liabilities of over US$100 million at a time it had failed to meet the RBZ’s current prescribed capital requirements of US$25 million. The central bank requires that commercial banks have a minimum capital base of US$100 million by 2020.
CBZ Bank has already surpassed the US$100 million mark with a core capital of US$ 109,81 million. In stark contrast, AfrAsia had core capital of just US$6 million.
“The shareholder was wary of continuing to throw money down a black hole,” a banking source said. “The shareholder would have had to pour money for the bank to meet the current capital requirement of US$25 million, and then work towards the US$100 million mark by 2020 from a low base of only US$6 million.”
Sources added that the shareholder was also discouraged by the messy court wrangle the bank is embroiled in pitting it against local tycoon Zachary Wazara.
The bank was sued for about US$79 million by Wazara and his firm Spiritage Zimbabwe Ltd for allegedly breaching its obligations in Valley Technologies (Pvt) Ltd, a liquidated telecoms company which was jointly owned by the businessman and the financial institution.
Spiritage Telecoms, VNet, Wazara, Spiritage Zimbabwe and Spiritage Business Solutions are the applicants in the case in which they are jointly claiming damages amounting to US$78 541 707.
In the court papers, AfrAsia faces accusations of diverting US$3,2 million from the US$10 million provided by Afreximbank for Spiritage’s Valley Technologies to Tetrad Investment Bank for the benefit of its directors and managers.
The bank executives allegedly dipped into the facility through a round-tripping financial arrangement which is basically a strategy in which an asset is sold to another business with the agreement that it will be repurchased by the original owner at some point in future.
“The Spiritage lawsuit, the shareholders felt, will create a legacy problem for them as the contingent liabilities will simply not go away,” another source said. “The shareholders were not keen to suffer from reputational damage resulting from such disputes.
“In addition to these challenges haunting the doomed financial institution were poor corporate governance practices and mismanagement issues. These were the major reasons why the Mauritius- based bank decided to pull out after having taken a 62,5% stake in the bank in April last year,” the source said.
In an announcement on AfrAsia Bank’s closure the RBZ said: “Members of the public are advised that on February 24 2015, the Registrar of Banking Institutions cancelled AfrAsia Bank Zimbabwe Ltd’s licence in terms of section 14 (4) of the Banking Act [Chapter 24:20].
“The cancellation followed board resolutions by AfrAsia Zimbabwe Holdings Ltd (the shareholder) and AfrAsia Bank Zimbabwe Ltd (the bank) to voluntarily surrender the banking licence.”
The problems the bank faced were compounded by Zimbabwe’s harsh economic climate characterised by a debilitating liquidity crunch and high non-performing loan books.
In his recent monetary policy statement, RBZ governor John Mangudya said the central bank’s objective is to ensure that the financial sector is free from distressed banks by June 30 this year. This is in line with the International Monetary Fund recommendations that the central bank must deal with vulnerable banks to limit systemic risk.
The RBZ, in an attempt to ease the burden on struggling banks, has proposed a three-tier system for banks in complying with the minimum capital threshold as the current operating environment presents challenges to banks’ ability to grow capital organically, or raise it from investors.
Mangudya has proposed three segments for banks —Tier I, Tier II and Tier III — which have different capital thresholds and functions.
Banks in the Tier I strategic segment would be required to have a minimum core capital requirement of US$100 million by 2020. Mangudya said the capital would enable the Tier I banks to absorb the risk associated with the scope and complexity of their activities.
The Tier II segment comprises of commercial banks, merchant banks, building societies, development banks, finance houses and discount houses that would only conduct their core banking activities.
Tier II banking institutions should maintain minimum capital requirements of US$25 million.
Mangudya said banks, other than foreign-owned ones, that choose not to increase their capital to US$100 million threshold would automatically fall in the Tier II category offering the limited product range.
Since 2000, a number of banks have been shut down in Zimbabwe due to viability problems. These include Time Bank, Trust Bank, Genesis Bank, ReNaissance Merchnat Bank, Interfin, Royal Bank and most recently, Capital Bank and Allied Bank.