The recent move to set high minimum capital requirements has no business logic and makes banks failure the only option. What makes it suspicious is its coming soon after concerted efforts to resist the indigenisation of foreign banks. Through this newspaper, I gave my opinion that instead of localising banks, the government should take a lead role in redistributing deposits by banking with local banks. That is called indigenising the banking business without indigenising the banks themselves. So let it be known that I am strongly opposed to the indigenisation of foreign banks.
Asking all banks to have the same amount of capital regardless of the nature and size of the business that they are underwriting has no chapter in the old, new and future books on risk management.
Banks already have a controlling measure called Capital Adequacy ratio (CAR) and this is set at 10% by the Reserve Bank of Zimbabwe. To non-bankers, this ratio states that a bank’s capital should at least be 10% of its assets. A bank wishing to create assets above this threshold is forced to inject additional capital first.
Asking all banks to have similar capital levels regardless of the risks they are carrying defies logic and will result in banks being over capitalised. One may want to carry a learned argument that there are various factors affecting banks’ exposure than just assets created e.g. deposits taken in and the minimum capital for any bank to function regardless of loans created. The latter would resonate well with advocates of minimum set-up costs such as IT infrastructure etc. That is all good but what we are calling for is a breakdown of how these figures have been arrived at.
If the figure is designed to protect depositors’ funds, then we need another ratio that restricts the amount of deposits than a bank can raise. A US$12,5 million capitalised bank with US$100 million in deposits is NO riskier than a US$100 million capitalised bank with US$800 million in deposits. They are both holding deposits that are eight times their capital.
If the argument is on minimum infrastructure, this must also be communicated to banks and they should be allowed to make representations and not be dictated to like school children of yesteryear (I negotiate with my kids). The cost of service provision is actually coming down with the advent of branchless banking such as mobile banking and Point of sale machines. At this rate, a bank with US$100 million will be forced to create earning assets with its own capital, thus departing from banking fundamentals of providing a platform for surplus and deficit units.