summary of Zimbabwean Banking Sector (Part One)

Pen Thru Dollar Magic Trick - summary of Zimbabwean Banking Sector (Part One)

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Entrepreneurs build their company within the context of an environment which they sometimes may not be able to control. The robustness of an entrepreneurial investment 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 control so as to exploit emerging opportunities and mitigate against possible threats.

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This narrative serves to create an comprehension of the forces at play and their result on banking entrepreneurs in Zimbabwe. A brief historical overview of banking in Zimbabwe is carried out. The impact of the regulatory and economic environment on the sector is assessed. An pathology of the buildings of the banking sector facilitates an appreciation of the underlying forces in the industry.
Historical Background

At independence (1980) Zimbabwe had a sophisticated banking and financial market, with industrial banks mostly foreign owned. The country had a central bank inherited from the Central 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 nationalisation of foreign banks nor restrictive legislative interference on which sectors to fund or the interest rates to charge, despite the socialistic national 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 country. 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 industry International (Bcci) as a 49% shareholder in a new industrial bank, Bank of credit and industry Zimbabwe (Bccz). This was taken over and converted to industrial Bank of Zimbabwe (Cbz) when Bcci collapsed in 1991 over allegations of unethical company practices.

This should not be viewed as nationalisation but in line with state course to preclude 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 plan. Harvey (n.d., page 6) cites the following as evidence of lack of a coherent financial reform plan in those years:

- In 1981 the government stated that it would encourage rural banking services, but the plan was not implemented.
- In 1982 and 1983 a Money and Finance Commission was proposed but never constituted.
- By 1986 there was no mention of any financial reform program in the Five Year National improvement Plan.

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 population, of which banking was an integral part. The country was vulnerable to this sector of the habitancy as it controlled agriculture and manufacturing, which were the mainstay of the economy. The State adopted a conservative coming to indigenisation as it had learnt a part 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 construction into the black community. The economic cost of inappropriate intervention was deemed to be too high. Another plausible calculate for the non- intervention course was that the State, at independence, inherited a highly controlled economic policy, with tight transfer 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.

Financial Reforms

However, after 1987 the government, at the behest of multilateral lenders, embarked on an Economic and Structural Adjustment Programme (Esap). As part of this programme the maintain 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 option and potential in service, innovation and efficiency. Consequently, as early as 1994 the Rbz yearly narrative indicates the desire for greater competition and efficiency in the banking sector, prominent to banking reforms and new legislation that would:

- allow for the conduct of prudential administration of banks along international best practice
- allow for both off-and on-site bank inspections to growth Rbz's Banking administration function and
- improve competition, innovation and improve service to the collective from banks.

Subsequently the Registrar of Banks in the Ministry of Finance, in liaison 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 initial growth in merchant banks and reduction houses, followed by decline. The growth in industrial banks was initially slow, gathering momentum colse to 1999. The decline in merchant banks and reduction houses was due to their conversion, mostly into industrial banks.

Source: Rbz Reports

Different entrepreneurs used varied methods to penetrate the financial services sector. Some started advisory services and then upgraded into merchant banks, while others started stockbroking firms, which were elevated into reduction houses.

From the starting of the liberalisation of the financial services up to about 1997 there was a predominant absence of locally owned industrial banks. Some of the reasons for this were:

- Conservative licensing course by the Registrar of Financial Institutions since it was risky to licence indigenous owned industrial banks without an enabling legislature and banking administration experience.
- Banking entrepreneurs opted for non-banking financial institutions as these were less high-priced in terms of both initial capital requirements and working capital. For example a merchant bank would require less staff, would not need banking halls, and would have no need to deal in high-priced small retail deposits, which would reduce overheads and reduce the time to register profits. There was thus a rapid growth in non-banking financial institutions at this time, e.g. By 1995 five of the ten merchant banks had commenced within the old two years. This became an entry route of option into industrial banking for some, e.g. Kingdom Bank, Nmb Bank and Trust Bank.

It was unbelievable that some foreign banks would also enter the shop after the financial reforms but this did not occur, probably due to the restriction of having a minimum 30% local shareholding. The stringent foreign currency controls could also have played a part, as well as the cautious coming adopted by the licensing authorities. Existing foreign banks were not required to shed part of their shareholding although Barclay's Bank did, through listing on the local stock exchange.

Harvey argues that financial liberalisation assumes that removing direction on lending presupposes that banks would automatically be able to lend on industrial grounds. But he contends that banks may not have this capacity as they are affected by the borrowers' inability to service loans due to foreign transfer or price control restrictions. Similarly, having unavoidable real interest rates would ordinarily growth bank deposits and growth financial intermediation but this logic falsely assumes that banks will all the time lend more efficiently. He additional argues that licensing new banks does not imply increased competition as it assumes that the new banks will be able to attract competent administration and that legislation and bank administration will be sufficient to preclude fraud and thus preclude 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 national economy.

The Operating Environment

Any entrepreneurial activity is constrained or aided by its operating environment. This section analyses the prevailing environment in Zimbabwe that could have an result on the banking sector.

Politico-legislative

The political environment in the 1990s was garage but turned volatile 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 shop foresaw the consequences of the government's decision. That day has been recognised as the starting of severe decline of the country's cheaper and has been dubbed "Black Friday". This depreciation became a catalyst for additional inflation. It was followed a month later by violent food riots.
- a poorly planned Agrarian Land Reform launched in 1998, where white industrial farmers were ostensibly evicted and supplanted by blacks without due regard to land ownership or recompense systems. This resulted in a valuable reduction in the productivity of the country, which is mostly dependent on agriculture. The way the land redistribution was handled angered the international community, that alleges it is racially and politically motivated. International donors withdrew maintain for the programme.
- an ill- advised forces incursion, named doing Sovereign Legitimacy, to defend the Democratic Republic of Congo in 1998, saw the country incur heavy costs with no apparent benefit to itself and
- elections which the international community alleged were rigged in 2000,2003 and 2008.

These factors led to international isolation, significantly reducing foreign currency and foreign direct investment flow into the country. Investor confidence was severely eroded. Agriculture and tourism, which traditionally, are huge foreign currency earners crumbled.

For the first post independence decade the Banking Act (1965) was the main legislative framework. Since this was enacted when most industrial banks where foreign owned, there were no directions on prudential lending, insider loans, proportion of shareholder funds that could be lent to one borrower, definition of risk assets, and no provision for bank inspection.

The Banking Act (24:01), which came into result in September 1999, was the culmination of the Rbz's desire to liberalise and deregulate the financial services. This Act regulates industrial banks, merchant banks, and reduction houses. Entry barriers were removed prominent to increased competition. The deregulation also allowed banks some latitude to control in non-core services. It appears that this latitude 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 build their own businesses in the industry. The Act was additional revised and reissued as part 24:20 in August 2000. The increased competition resulted in the introduction of new products and services e.g. E-banking and in-store banking. This entrepreneurial activity resulted in the "deepening and sophistication of the financial sector" (Rbz, 2000:5).

As part of the financial reforms drive, the maintain Bank Act (22:15) was enacted in September 1999.

Its main purpose was to improve the supervisory role of the Bank through:
- setting prudential standards within which banks operate
- conducting both on and off-site lookout of banks
- enforcing sanctions and where valuable placement 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 administration as "the ultimate sanction ready to a banking supervisor is the knowledge by the banking sector that the license issued will be cancelled for flagrant violation of operating rules". However the government seemed to have resisted this until January 2004. It can be argued that this scantness could have given some bankers the impression that nothing would happen to their licences. Dr Tsumba, in observing the role of the Rbz in retention bank management, directors and shareholders responsible for banks viability, stated that it was neither the role nor intention of the Rbz to "micromanage banks and direct 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 old few years, became operational. One of its intended goals was that, "the course enhances regulatory transparency, responsibility and ensures that regulatory responses will be applied in a fair and consistent manner" The prevailing view on the shop is that this course when it was implemented post 2003 is by all means; of course deficient as measured against these ideals. It is contestable how transparent the inclusion and exclusion of vulnerable banks into Zabg was.

A new governor of the Rbz was appointed in December 2003 when the cheaper was on a free-fall. He made valuable 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 valuable 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 whole of financial institutions were distressed. The Rbz placed seven institutions under curatorship while one was done and Another was placed under liquidation.

In January 2005 three of the distressed banks were amalgamated on the authority of the Troubled Financial Institutions Act to form a new institution, Zimbabwe Allied Banking Group (Zabg). These banks assertedly failed to repay funds developed to them by the Rbz. The affected institutions were Trust Bank, Royal Bank and Barbican Bank. The shareholders appealed and won the appeal against the seizure of their assets with the consummate Court ruling that Zabg was trading in illegally acquired assets. These bankers appealed to the priest of Finance and lost their appeal. Subsequently in late 2006 they appealed to the Courts as in case,granted 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 force administration changes in the financial sector, which resulted in most entrepreneurial bank founders being forced out of their own associates under varying pretexts. Some eventually fled the country under threat of arrest. Boards of Directors of banks were restructured.

Economic Environment

Economically, the country was garage up to the mid 1990s, but a downturn started colse to 1997-1998, mostly due to political decisions taken at that time, as already discussed. Economic course was driven by political considerations. Consequently, there was a resignation of multi- national donors and the country was isolated. At the same time, a drought hit the country in the season 2001-2002, exacerbating the injurious result of farm evictions on crop production. This reduced output had an adverse impact on banks that funded agriculture. The interruptions in industrial farming and the concomitant reduction in food output resulted in a precarious food protection position. In the last twelve years the country has been forced to import maize, additional straining the tenuous foreign currency resources of the country.

Another impact of the agrarian reform programme was that most farmers who had borrowed money from banks could not service the loans yet the government, which took over their businesses, refused to assume responsibility for the loans. By concurrently failing to bonus the farmers promptly and fairly, it became impractical for the farmers to service the loans. Banks were thus exposed to these bad loans.

The net result was spiralling inflation, company closures resulting in high unemployment, foreign currency shortages as international sources of funds dried up, and food shortages. The foreign currency shortages led to fuel shortages, which in turn reduced industrial production. Consequently, the Gross Domestic stock (Gdp) has been on the decline since 1997. This negative economic environment meant reduced banking activity as industrial activity declined and banking services were driven onto the parallel rather than the formal market.

As depicted in the graph below, inflation 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 country entered a duration of hyperinflation unheard of in a peace time period. Inflation stresses banks. Some argue that the rate of inflation rose because the devaluation of the currency had not been accompanied by a reduction in the budget deficit. Hyperinflation causes interest rates to soar while the value of collateral protection falls, resulting in asset-liability mismatches. It also increases non-performing loans as more habitancy fail to service their loans.

Effectively, by 2001 most banks had adopted a conservative lending strategy e.g. With total advances for the banking sector being only 21.7% of total industry assets compared to 31.1% in the old year. Banks resorted to volatile 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. habitancy stopped using banks as intermediaries as they were not sure they would be able to entrance their cash whenever they needed it. This reduced the deposit base for banks. Due to the short term maturity profile of the deposit base, banks are ordinarily not able to spend valuable portions of their funds in longer term assets and thus were highly liquid up to mid-2003. However in 2003, because of the request by clients to have returns matching inflation, 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 base grow from Z0 billion (Usd50 million) to Z0 billion (Usd200 million) within one year.

However bankers have argued that what the governor calls speculative non-core company is carefully best convention in most developed 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 inflation.

The study by the new governor of the Rbz for banks to unwind their positions overnight, and the immediate resignation of an overnight chamber maintain for banks by the Rbz, stimulated a crisis which led to valuable asset-liability mismatches and a liquidity crunch for most banks. The prices of properties and the Zimbabwe Stock transfer collapsed simultaneously, due to the heavy selling by banks that were trying to cover their positions. The loss of value on the equities shop meant loss of value of the collateral, which most banks held in lieu of the loans they had advanced.

During this duration Zimbabwe remained in a debt crunch as most of its foreign debts were whether un-serviced or under-serviced. The result worsening of the equilibrium of payments (Bop) put pressure on the foreign transfer reserves and the overvalued currency. Total government domestic debt rose from Z.2 billion (1990) to Z.8 trillion (2004). This growth in domestic debt emanates from high budgetary deficits and decline in international funding.

Socio-cultural

Due to the volatile cheaper after the 1990s, the habitancy became fairly mobile with a valuable whole of professionals emigrating for economic reasons. The Internet and Satellite television made the world truly a global village. Customers demanded the same level of service excellence they were exposed to globally. This made service potential a differential advantage. There was also a request for banks to spend heavily in technological systems.

The addition cost of doing company in a hyperinflationary environment led to high unemployment and a concomitant collapse of real income. As the Zimbabwe Independent (2005:B14) so keenly observed, a direct outcome of hyperinflationary environment is, "that currency substitution is rife, implying that the Zimbabwe dollar is relinquishing its function as a store of value, unit of list and medium of exchange" to more garage foreign currencies.

During this duration an affluent indigenous segment of community emerged, which was cash rich but avoided patronising banks. The emerging parallel shop for foreign currency and for cash while the cash crisis reinforced this. Effectively, this reduced the customer base for banks while more banks were coming onto the market. There was thus aggressive competition within a dwindling market.

Socio-economic costs linked with hyperinflation include: erosion of purchasing power parity, increased uncertainty in company planning and budgeting, reduced disposable income, speculative activities that divert resources from effective activities, pressure on the domestic transfer rate due to increased import request and poor returns on savings. while this period, to augment income there was increased cross border trading as well as commodity broking by habitancy who imported from China, Malaysia and Dubai. This effectively meant that imported substitutes for local products intensified competition, adversely affecting local industries.

As more banks entered the market, which had suffered a major brain drain for economic reasons, it stood to calculate that many fresh bankers were thrown into the deep end. For example the founding directors of Eng Asset administration had less than five years feel in financial services and yet Eng was the fastest growing financial convention by 2003. It has been recommend that its failure in December 2003 was due to juvenile 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 prominent to the collapse of some indigenous banks.

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