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Problems with RBZ approach to bank crisis

Alex Tawanda Magaisa

IN last week’s article, “Lessons on future of banking in Zim”, I argued firstly, that the regulation and supervision of banks prior to this year had been weak and therefore caused the pr

oliferation of mismanagement and improper governance structures in some institutions within the financial sector.

Secondly, the attempts to improve the corporate governance systems by the current Reserve Bank of Zimbabwe (RBZ) team were generally steps in the right direction in the long-term. Nonetheless, it is necessary to consider the appropriateness of the approaches taken post the 2003 monetary policy, particularly in the reform of the banking sector.

It is submitted that the RBZ could have, and indeed still has, the opportunity to refine its approach in handling institutions particularly in view of the fact that despite rhetoric to the contrary, the crisis is still far from over. In my view, despite the significance of dealing with malpractices in the sector, the inconsistent ad-hoc approaches have had a negative impact on otherwise sound institutions, particularly the indigenous banks.

At the time of assuming leadership at the RBZ, the team ought to have seriously studied the situation within the sector and understood clearly why banks were, for example, engaging in non-core activities and playing an active role in the parallel market. If reports in the public and private press are anything to go by, it seems that some indigenous banks like Trust were in fact, playing a key role in sourcing foreign currency not only for the RBZ, but also for other parastatals.

The engagement with companies such as Willowvale Motor Industries was as much an attempt to assist key industries while simultaneously hedging against the risks of a hyperinflationary environment. If indeed the state and related companies were benefiting from the activities of the banks in the parallel market, it defies logic why the new team sought to apply “shock-therapy”, as RBZ governor Gideon Gono prefers to put it, without acknowledging and addressing the fact that they were led to do so in the wider interests. Many of the tales in some papers have reflected the engagement in the parallel market as having been motivated by the self-gratification needs of individuals at the helm of indigenous banks. While self-benefit may have been a factor in some cases, it was also necessary for the team to look at the bigger picture and address specific problems without destroying the entire edifice.

The engagement in non-core activities has also been presented as an indication of the bankers’ desire to pursue self-aggrandisement policies. The fact that companies in Zimbabwe have been operating in a hyper-inflationary environment which required them to take alternative steps to hedge against risks has been conveniently ignored. It may be that in a desire to protect the interests of various stakeholders including shareholders, employees, customers and the stability of the sector, etc bank managers facing the difficulties of operating along the traditional banking lines sought to place investments in what were considered long-term ventures so as to protect value.

This may have included investing in the property market which is usually a refuge in which long-term value can be preserved. Of course this was a high-risk strategy because it immediately created a mismatch between assets and liabilities of individual institutions. In light of that, what bankers did in diverting to so-called non-core activities was a measure aimed at protecting the value of their institutions but also involved certain risks. In any event, there is nothing inherently wrong with diversifying to hedge against risk as long as it is done within the restrictions as provided for under the Banking Act. Most major international banks now engage in various activities beyond the traditional banking lines, including insurance and asset-management.

Up to the end of 2003 it seemed that most institutions were doing relatively well in a difficult economic environment. Presumably if they had not pursued the so-called non-core activities, they might have folded long back due to the hyperinflationary environment.

The previous regime at the RBZ may have had its weaknesses but it was perhaps both politically and economically convenient to let banks pursue these activities including engaging in the parallel market. Having been in the sector, Gono knew what was happening and there may have been sound reasons for that diversification. The handling of institutions doing the so-called errant activities may have simply required a sober call to return to basics, giving allowance for withdrawals without causing severe hardships to all stakeholders.

In my view, having taken the reins, the new team ought to have recognised the existing situation and understood why things had taken that course in the sector. The realisation of the problems attendant upon engagement in the non-core activities and the problems of poor corporate governance would then have called for well-considered and sober measures.

Some analysts argue that instead, the RBZ took a heavy-handed approach that has all but destroyed all semblance of stability in banking. The RBZ recently issued corporate governance guidelines for the financial sector. It is such measures that needed to be put in place in December 2003, combined with a programme to allow institutions that had been engaged in the parallel market and non-core activities to gradually withdraw.

Those alleged to have externalised money could have been asked to repatriate it without causing further doubts about the credibility of the sector.

As it is, institutions such NMB bank have for some time been cast in bad light as a result of the allegations of externalisation by executives which may in fact have nothing to do with the soundness of the bank itself.

A co-ordinated approach would have given banks time to restructure and re-align their businesses back to the traditional lines of banking while simultaneously reducing the risks of closures that have since engulfed the sector in the last 10 months. It may be true that some may not have survived anyway. But it is equally true that others might have successfully managed to establish stability. Simultaneously, the criminal prosecutions if any, could have been pursued within the limits of the law, not by enacting legislation which is contrary to fundamental rights.

In my view, the problems of the ad-hoc “shock-therapy” approach are epitomised by the RBZ’s poor management of information regarding banks in trouble which has inevitably also affected the otherwise sound banks especially in the indigenous sector.

I wrote in this paper in January 2003 that it was counter-productive in bank-rescue plans to release information on banks that were receiving RBZ support precisely because it would alert the market that the institution was facing hardships. Consequently, despite the support to institutions like Trust, they and other indigenous banks suffered massive withdrawals by depositors indicating a severe bank-run scenario which ironically the RBZ sought to avoid in the first place. They do not seem to have learnt anything from that grave error because only a few weeks ago, prior to the September 30 deadline for mandatory minimum capital requirements, the market once again received information that at least nine banks would not meet the requirements.

In addition, the information was vague because there was no identification of the institutions. That led to uncertainty and inevitably caused depositors to increase massive withdrawals from banks. Due to the tarnished image of indigenous banks portrayed during the last few months, they suffered the worst as depositors transferred funds to the foreign multinational banks. This has not only affected the troubled banks but also the sound banks as depositors could not make proper and informed distinctions. Instead of being occupied in the productive business of the bank, managers have been forced to continually engage in public relations work to re-assure customers.

In conclusion, although the measures to address corporate governance are significant steps, they have come rather late in view of the scale of the crisis in the sector. More sober measures and policies ought to have been taken at the beginning, giving time to the banks to withdraw from non-core work and enabling them to restore balance in a new regulatory environment.

*Alex Tawanda Magaisa is Baker & McKenzie Lecturer in Corporate & Commercial Law at the University of Nottingham Contact: alex.magaisa@nottingham.ac.uk

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