Government has moved to stem bank failures by making executives and directors of collapsed institutions liable to legal suits if they acted recklessly or negligently.
BY NDAMU SANDU
In addition, directors of banking institutions and controlling companies will be compelled to disclose their assets and business activities on an annual basis. If they fail to do so, they will not be allowed to carry out any valid act as directors.
The Registrar of banks will be required to keep a register of controlling companies — their names and the banking institutions they control. The register shall be open to inspection by members of the public at all reasonable times and by the office of the Registrar on payment of the prescribed fee, if any.
The far-reaching reforms are contained in the Banking Amendment Bill 2015, which seeks to improve corporate governance of banking institutions, make institutions more responsive to customer needs and encourage the resolution of disputes between banks and their clients. It will foster greater transparency in the shareholding and operation of banking institutions.
Since the deregulation of the financial services sector in the 90s, the banking industry has witnessed close to a dozen bank failures — all of them affecting indigenous-owned institutions, a throwback to the indigenisation programme.
Banks that have been closed include Barbican, Royal, Trust, Allied, AfrAsia, Interfin, First National Building Society, ReNaissance Merchant Bank (RMB), CFX and Genesis Investment Bank, among others.
The causes of collapse have been the same — undercapitalisation, poor corporate governance, insider non-performing loans and abuse of depositors’ funds akin to declaration of dividend to shareholders. Regulators have on a number of occasions been caught napping, only to respond when the crisis had engulfed a banking institution.
The collapse of local banks dovetails with William Black’s book, The Best Way to Rob a Bank is to Own One: How Corporate Executives and Politicians Looted the S&L Industry. In the book, Black noted how executives used their positions to defraud institutions.
In a report after the collapse of RMB, the Reserve Bank of Zimbabwe (RBZ) accused the bank’s co-founders Patterson Timba and Dunmore Kundishora of operating as de facto executive directors and signatories of the bank, with the board in the dark on activities at the institution.
RBZ also noted that there was a high credit risk at RMB “as evidenced by a high level of non-performing loans of 38% of the total loan book of $53,1 million as at March 31 2011”.
It further said that total insider borrowings of $12,4 million, which include exposure to ReNaissance Financial Holdings (RFHL), Timba and his relatives exceeded 25% of the bank’s capital base in violation of Section 16(2)(a) of the Banking Regulations.
It said on several instances, Timba, RFHL and Bethel Trust “converted to their own use deposits negotiated and received by RMB as part of the bank’s money market operations”.
In a forensic report on Interfin Bank, audit firm KPMG said the bank’s liquidity crunch was caused by its failure to fund related party loans from capital as stipulated by law due to its weak capitalisation. As a result, KPMG said the bank resorted to using depositors’ funds to the tune of $62,06 million, resulting in a capital deficit of more than $59,07 million as at March 31 2012.
Bankers told Standardbusiness that borrowings by senior central bank officials must be disclosed to the governor so that he won’t assign them to supervise banks where they are borrowers.
“Depositors and creditors of collapsed banks must be told that RBZ officials and directors borrowed to this extent. Their borrowings should be on the list of insider borrowing because they are part of the decision-making process,” a banker said.
He said, under normal circumstances, central bank staffers should borrow from the top bank and an exception should be made under the current dispensation “only if they can be considered as related-insider party loans also subjected to the same stringent limits like those that apply to directors and shareholders of the said commercial banks”.
In March, the Zimbabwe Banks and Allied Workers’ Union (Zibawu) petitioned RBZ and Parliament to investigate bank failures, alleging that some senior RBZ officials were working in tandem with bank executives to conceal non-performing loans.
“If allegations that senior RBZ officials are amongst the list of clients not servicing their loans in the failed banks are correct, then this must be corrected and stopped,” Zibawu said.
The union urged the central bank to step up its monitoring and surveillance efforts to stop further bank failures and make public all reports on failed institutions.
Zibawu also said MPs should “enquire into the causes of bank failures in Zimbabwe, publicise the findings and prescribe measures of bringing to book those responsible, including tracing and recovering the depositors’ funds”.
Another banker said the legislation must compel curators to hold meetings of creditors and depositors briefing them on the status of the troubled bank they would be supervising, like what liquidators were doing.
“Where are the curators’ reports going? To RBZ, where they are borrowers, some of them who do not repay. This will be improper and depositors and creditors have to know the bank’s debtors,” an investment banker said.
Analysts say the absence of a supervisory framework to rein in errant bankers created moral hazard (adverse incentives) among bank owners whereby they act contrary to the interests of their creditors, mainly depositors or government, especially where deposits are implicitly insured.
“In this regard, banks gamble with depositors’ funds through lending at high interest rates to high-risk borrowers, which, if unsuccessful, will adversely affect the solvency of the bank. Bank owners have an incentive to undertake such strategies if they have limited liability,” the Zimbabwe Economic Policy Analysis and Research Unit said in a report titled, Financial Liberalisation and Crisis: Experience and Lessons for Zimbabwe.