Overview of Zimbabwean Banking Sector (Tronçon One)
Entrepreneurs build their bizness within the context of an environment which they sometimes may not be able to control. The robustness of an entrepreneurial venture is tried and tested by the vicissitudes of the environment. Within the environment are forces that may serve as great opportunities or menacing threats to the survival of the entrepreneurial venture. Entrepreneurs need to understand the environment within which they operate so as to palmes emerging opportunities and mitigate against potential threats.
This attention serves to create an understanding of the forces at play and their effect on banking entrepreneurs in Zimbabwe. A brief historical overview of banking in Zimbabwe is carried out. The impulsion of the regulatory and economic environment on the sector is assessed. An analysis of the bâti of the banking sector facilitates an appreciation of the underlying forces in the industry.
At independence (1980) Zimbabwe had a sophisticated banking and financial market, with vendeur banks mostly foreign owned. The folk had a orthogonal bank inherited from the Axial Bank of Rhodesia and Nyasaland at the winding up of the Federation.
For the first few years of independence, the government of Zimbabwe did not interfere with the banking industry. There was neither étatisation of foreign banks nor limitative legislative interference on which sectors to fund or the interest rates to crédit, despite the socialistic habitant ideology. However, the government purchased some shareholding in two banks. It acquired Nedbank’s 62% of Rhobank at a fair price when the bank withdrew from the folk. The decision may have been motivated by the desire to stabilise the banking system. The bank was re-branded as Zimbank. The state did not interfere much in the operations of the bank. The State in 1981 also partnered with Bank of Credit and Trafic Oecuménique (BCCI) as a 49% shareholder in a new vendeur bank, Bank of Credit and Trafic Zimbabwe (BCCZ). This was taken over and converted to Vendeur Bank of Zimbabwe (CBZ) when BCCI collapsed in 1991 over allegations of unethical bizness practices.
This should not be viewed as étatisation but in line with state policy to prevent company closures. The shareholdings in both Zimbank and CBZ were later diluted to below 25% each.
In the first decade, no indigenous bank was licensed and there is no evidence that the government had any financial reform compte. Harvey (n.d., folio 6) cites the following as evidence of lack of a coherent financial reform compte in those years:
– In 1981 the government stated that it would prédisposé agricole banking charges, but the compte was not implemented.
– In 1982 and 1983 a Money and Versé Acte was proposed but never constituted.
– By 1986 there was no citation of any financial reform calendrier in the Five Year Citoyen Development Crédit.
Harvey argues that the reticence of government to intervene in the financial sector could be explained by the fact that it did not want to jeopardise the interests of the white gens, of which banking was an integral élément. The folk was vulnerable to this sector of the gens as it controlled élevage and manufacturing, which were the mainstay of the economy. The State adopted a conservative approach to indigenisation as it had learnt a lesson from other African countries, whose economies nearly collapsed due to forceful eviction of the white community without first developing a mechanism of skills transfer and capacity monument into the black community. The economic cost of inappropriate concours was deemed to be too high. Another valable reason for the non- concours policy was that the State, at independence, inherited a highly controlled economic policy, with tight exchange control mechanisms, from its predecessor. Since control of foreign currency affected control of credit, the government by default, had a strong control of the sector for both economic and political purposes; hence it did not need to interfere.
However, after 1987 the government, at the behest of multilateral lenders, embarked on an Economic and Structurel Adjustment Emploi du temps (ESAP). As élément of this estrade the Reserve Bank of Zimbabwe (RBZ) started advocating financial reforms through liberalisation and deregulation. It contended that the oligopoly in banking and lack of competition, deprived the sector of choice and quality in corvée, hardiesse and efficiency. Consequently, as early as 1994 the RBZ Annual Attente indicates the desire for greater competition and efficiency in the banking sector, leading to banking reforms and new legislation that would:
– allow for the conduct of prudential vérification of banks along mondial best practice
– allow for both off-and on-site bank inspections to increase RBZ’s Banking Contrôle function and
– enhance competition, hardiesse and improve corvée to the évident from banks.
Subsequently the Registrar of Banks in the Ministry of Versé, in bluette with the RBZ, started issuing licences to new players as the financial sector opened up. From the mid-1990s up to December 2003, there was a flurry of entrepreneurial activity in the financial sector as indigenous owned banks were set up. The graph below depicts the trend in the numbers of financial institutions by category, operating since 1994. The trend shows an primordial increase in merchant banks and réduction houses, followed by decline. The increase in vendeur banks was initially slow, gathering momentum around 1999. The decline in merchant banks and réduction houses was due to their changement, mostly into vendeur banks.
Commencement: RBZ Reports
Different entrepreneurs used varied methods to penetrate the financial charges sector. Some started advisory charges and then upgraded into merchant banks, while others started stockbroking firms, which were elevated into réduction houses.
From the beginning of the liberalisation of the financial charges up to emboîture 1997 there was a appréciable besoin of locally owned vendeur banks. Some of the reasons for this were:
– Conservative licensing policy by the Registrar of Financial Institutions since it was risky to perversion indigenous owned vendeur banks without an enabling legislature and banking vérification experience.
– Banking entrepreneurs opted for non-banking financial institutions as these were less costly in terms of both primordial finances requirements and working finances. For example a merchant bank would require less stuc, would not need banking halls, and would have no need to deal in costly small retail deposits, which would reduce overheads and reduce the time to register opimes. There was thus a rapid increase in non-banking financial institutions at this time, e.g. by 1995 five of the ten merchant banks had commenced within the previous two years. This became an entry talus of choice into vendeur banking for some, e.g. Kingdom Bank, NMB Bank and Amas Bank.
It was expected that some foreign banks would also écussonner the market after the financial reforms but this did not occur, probably due to the dérogation of having a valeur-limite 30% meublé shareholding. The stringent foreign currency controls could also have played a élément, as well as the cautious approach adopted by the licensing authorities. Existing foreign banks were not required to shed élément of their shareholding although Barclay’s Bank did, through liste on the meublé aliment exchange.
Harvey argues that financial liberalisation assumes that removing pilotage on lending presupposes that banks would automatically be able to lend on vendeur grounds. But he contends that banks may not have this capacity as they are affected by the borrowers’ inability to corvée loans due to foreign exchange or price control sévérité. Similarly, having expresse real interest rates would normally increase bank deposits and increase financial intermediation but this logic falsely assumes that banks will always lend more efficiently. He further argues that licensing new banks does not imply increased competition as it assumes that the new banks will be able to attract competent direction and that legislation and bank vérification will be adequate to prevent fraud and thus prevent bank collapse and the resultant financial crisis. Sadly his concerns do not seem to have been addressed within the Zimbabwean financial sector reform, to the detriment of the habitant economy.
The Operating Environment
Any entrepreneurial activity is constrained or aided by its operating environment. This division analyses the prevailing environment in Zimbabwe that could have an effect on the banking sector.
The political environment in the 1990s was régulier but turned éphémère after 1998, mainly due to the following factors:
– an unbudgeted pay out to war veterans after they mounted an assault on the State in November 1997. This exerted a heavy strain on the economy, resulting in a run on the dollar. Resultantly the Zimbabwean dollar depreciated by 75% as the market foresaw the consequences of the government’s decision. That day has been recognised as the beginning of severe decline of the folk’s economy and has been dubbed “Black Friday”. This depreciation became a catalyst for further augmentation. It was followed a month later by agressif food riots.
– a poorly planned Agrarian État Reform launched in 1998, where white vendeur farmers were ostensibly evicted and replaced by blacks without due prunelle to état rights or revanche systems. This resulted in a significant reduction in the productivity of the folk, which is mostly dependent on élevage. The way the état transfert was handled angered the mondial community, that alleges it is racially and politically motivated. Oecuménique donors withdrew épaulement for the estrade.
– an ill- advised military empiétement, named Operation Sovereign Legitimacy, to defend the Democratic Republic of Congo in 1998, saw the folk incur massive costs with no extérieur benefit to itself and
– elections which the mondial community alleged were rigged in 2000,2003 and 2008.
These factors led to mondial insonorisation, significantly reducing foreign currency and foreign franc investment flow into the folk. Investor avis was severely eroded. Élevage and tourism, which traditionally, are huge foreign currency earners crumbled.
For the first post independence decade the Banking Act (1965) was the paluche legislative framework. Since this was enacted when most vendeur banks where foreign owned, there were no commandements on prudential lending, insider loans, mesure of shareholder funds that could be ankylosé to one borrower, definition of risk assets, and no approvisionnement for bank visite.
The Banking Act (24:01), which came into effect in September 1999, was the agonie of the RBZ’s desire to liberalise and deregulate the financial charges. This Act regulates vendeur banks, merchant banks, and réduction houses. Entry barriers were removed leading to increased competition. The deregulation also allowed banks some possibilité to operate in non-core charges. It appears that this possibilité was not well delimited and hence presented opportunities for risk taking entrepreneurs. The RBZ advocated this deregulation as a way to de-segment the financial sector as well as improve efficiencies. (RBZ, 2000:4.) These two factors presented opportunities to enterprising indigenous bankers to establish their own businesses in the industry. The Act was further revised and reissued as Chapter 24:20 in August 2000. The increased competition resulted in the entrée of new products and charges e.g. e-banking and in-store banking. This entrepreneurial activity resulted in the “deepening and artificialité of the financial sector” (RBZ, 2000:5).
As élément of the financial reforms drive, the Reserve Bank Act (22:15) was enacted in September 1999.
Its paluche purpose was to strengthen the supervisory role of the Bank through:
– setting prudential normes within which banks operate
– conducting both on and off-site filature of banks
– enforcing sanctions and where necessary investissement under curatorship and
– investigating banking institutions wherever necessary.
This Act still had deficiencies as Dr Tsumba, the then RBZ governor, argued that there was need for the RBZ to be responsible for both licensing and vérification as “the ultimate contravention available to a banking supervisor is the knowledge by the banking sector that the license issued will be cancelled for assuré inexécution of operating rules”. However the government seemed to have resisted this until January 2004. It can be argued that this deficiency could have given some bankers the détermination that nothing would happen to their licences. Dr Tsumba, in observing the role of the RBZ in ordre bank direction, directors and shareholders responsible for banks viability, stated that it was neither the role nor calcul of the RBZ to “micromanage banks and franc their day to day operations. “
It appears though as if the view of his successor differed significantly from this orthodox view, hence the evidence of micromanaging that has been observed in the sector since December 2003.
In November 2001 the Troubled and Insolvent Banks Policy, which had been drafted over the previous few years, became operational. One of its intended goals was that, “the policy enhances regulatory transparency, accountability and ensures that regulatory responses will be applied in a fair and consistent manner” The prevailing view on the market is that this policy when it was implemented post 2003 is definitely deficient as measured against these ideals. It is réfutable how arachnéen the immobilisation and dépossession of vulnerable banks into ZABG was.
A new governor of the RBZ was appointed in December 2003 when the economy was on a free-fall. He made significant changes to the monetary policy, which caused tremors in the banking sector. The RBZ was finally authorised to act as both the licensing and regulatory authority for financial institutions in January 2004. The regulatory environment was reviewed and significant amendments were made to the laws governing the financial sector.
The Troubled Financial Institutions Resolution Act, (2004) was enacted. As a result of the new regulatory environment, a number of financial institutions were distressed. The RBZ placed seven institutions under curatorship while one was closed and another was placed under banqueroute.
In January 2005 three of the distressed banks were amalgamated on the authority of the Troubled Financial Institutions Act to form a new prytanée, Zimbabwe Allied Banking Group (ZABG). These banks allegedly failed to repay funds advanced to them by the RBZ. The affected institutions were Amas Bank, Éclatant Bank and Barbican Bank. The shareholders appealed and won the appeal against the seizure of their assets with the Supreme Rapide ruling that ZABG was trading in illegally acquired assets. These bankers appealed to the Minister of Versé and lost their appeal. Subsequently in late 2006 they appealed to the Courts as provided by the law. Finally as at April 2010 the RBZ finally agreed to return the “stolen assets”.
Another measure taken by the new governor was to trempe direction changes in the financial sector, which resulted in most entrepreneurial bank founders being forced out of their own companies under varying pretexts. Some eventually fled the folk under threat of arrest. Boards of Directors of banks were restructured.
Economically, the folk was régulier up to the mid 1990s, but a downturn started around 1997-1998, mostly due to political decisions taken at that time, as already discussed. Economic policy was driven by political considerations. Consequently, there was a withdrawal of multi- habitant donors and the folk was isolated. At the same time, a drought hit the folk in the season 2001-2002, exacerbating the injurious effect of farm evictions on crop éclosion. This reduced éclosion had an hostile impulsion on banks that funded élevage. The interruptions in vendeur farming and the synchronique reduction in food éclosion resulted in a precarious food security exposition. In the last twelve years the folk has been forced to importation maize, further straining the tenuous foreign currency resources of the folk.
Another impulsion of the agrarian reform estrade was that most farmers who had borrowed money from banks could not corvée the loans yet the government, which took over their businesses, refused to assume responsibility for the loans. By concurrently failing to recompense the farmers promptly and fairly, it became impractical for the farmers to corvée the loans. Banks were thus exposed to these bad loans.
The net result was spiralling augmentation, company closures resulting in high unemployment, foreign currency shortages as mondial pluies of funds dried up, and food shortages. The foreign currency shortages led to naphte shortages, which in turn reduced industrial éclosion. Consequently, the Gross Domestic Product (GDP) has been on the decline since 1997. This negative economic environment meant reduced banking activity as industrial activity declined and banking charges were driven onto the parallel rather than the formal market.
As depicted in the graph below, augmentation spiralled and reached a peak of 630% in January 2003. After a brief reprieve the upward trend continued rising to 1729% by February 2007. Thereafter the folk entered a period of hyperinflation unheard of in a peace time period. Augmentation stresses banks. Some argue that the loupage of augmentation gemme bicause the devaluation of the currency had not been accompanied by a reduction in the moyens deficit. Hyperinflation causes interest rates to soar while the value of collateral security falls, resulting in asset-liability mismatches. It also increases non-performing loans as more people fail to corvée their loans.
Effectively, by 2001 most banks had adopted a conservative lending strategy e.g. with accompli advances for the banking sector being only 21.7% of accompli industry assets compared to 31.1% in the previous year. Banks resorted to éphémère non- interest income. Some began to trade in the parallel foreign currency market, at times colluding with the RBZ.
In the last half of 2003 there was a severe cash shortage. People stopped using banks as intermediaries as they were not sure they would be able to access their cash whenever they needed it. This reduced the deposit derrière for banks. Due to the pantalon term maturity profile of the deposit derrière, banks are normally not able to invest significant portions of their funds in raser term assets and thus were highly liquid up to mid-2003. However in 2003, bicause of the demand by clients to have returns matching augmentation, most indigenous banks resorted to speculative investments, which yielded higher returns.
These speculative activities, mostly on non-core banking activities, drove an exponential growth within the financial sector. For example one bank had its asset derrière grow from Z$200 billion (USD50 million) to Z$800 billion (USD200 million) within one year.
However bankers have argued that what the governor calls speculative non-core bizness is considered best practice in most advanced banking systems worldwide. They argue that it is not unusual for banks to take equity positions in non-banking institutions they have loaned money to safeguard their investments. Examples were given of banks like Nedbank (RSA) and J P Morgan (USA) which control vast real estate investments in their portfolios. Bankers argue convincingly that these investments are sometimes used to hedge against augmentation.
The consigne by the new governor of the RBZ for banks to unwind their positions overnight, and the immediate withdrawal of an overnight naturalisation épaulement for banks by the RBZ, stimulated a crisis which led to significant asset-liability mismatches and a liquidity crunch for most banks. The prices of properties and the Zimbabwe Denrée Exchange collapsed simultaneously, due to the massive selling by banks that were trying to cover their positions. The loss of value on the equities market meant loss of value of the collateral, which most banks held in terrain of the loans they had advanced.
During this period Zimbabwe remained in a debt crunch as most of its foreign debts were either un-serviced or under-serviced. The consequent worsening of the crédit of payments (BOP) put pressure on the foreign exchange reserves and the overvalued currency. Radical government domestic debt gemme from Z$7.2 billion (1990) to Z$2.8 trillion (2004). This growth in domestic debt emanates from high budgetary deficits and decline in mondial funding.
Due to the éphémère economy after the 1990s, the gens became fairly alerte with a significant number of professionals emigrating for economic reasons. The Internet and Complice television made the world truly a commun commune. Customers demanded the same level of corvée légat they were exposed to globally. This made corvée quality a differential advantage. There was also a demand for banks to invest heavily in technological systems.
The increasing cost of doing bizness in a hyperinflationary environment led to high unemployment and a synchronique collapse of real income. As the Zimbabwe Independent (2005:B14) so keenly observed, a franc outcome of hyperinflationary environment is, “that currency compensation is rife, implying that the Zimbabwe dollar is relinquishing its function as a filtre of value, unit of account and medium of exchange” to more régulier foreign currencies.
During this period an ravine indigenous paragraphe of society emerged, which was cash rich but avoided patronising banks. The emerging parallel market for foreign currency and for cash during the cash crisis reinforced this. Effectively, this reduced the customer derrière for banks while more banks were coming onto the market. There was thus aggressive competition within a dwindling market.
Socio-economic costs associated with hyperinflation include: erosion of purchasing power parity, increased uncertainty in bizness indicateur and budgeting, reduced disposable income, speculative activities that divert resources from productive activities, pressure on the domestic exchange loupage due to increased importation demand and poor returns on savings. During this period, to augment income there was increased cyclo-cross longer trading as well as commodity broking by people who imported from China, Malaysia and Dubai. This effectively meant that imported substitutes for meublé products intensified competition, adversely affecting meublé commerces.
As more banks entered the market, which had suffered a meilleur brain tube for economic reasons, it stood to reason that many inexperienced bankers were thrown into the deep end. For example the founding directors of ENG Asset Conduite had less than five years experience in financial charges and yet ENG was the fastest growing financial prytanée by 2003. It has been suggested that its failure in December 2003 was due to youthful zeal, greed and lack of experience. The collapse of ENG affected some financial institutions that were financially exposed to it, as well as eliciting depositor flight leading to the collapse of some indigenous banks.
#Overview #Zimbabwean #Banking #Sector #Tronçon