Bank capital: A cautionary note

commercial banks as an example, albeit on a phased basis through to 2014.
Dr Gono, obviously took this controversial decision after carefully examining options viewed from his own universe of psyche and his experience and conceptualisation of banking, advised by his team at the RBZ, along with the RBZ Board.

On the day Dr Gono made this groundbreaking announcement, which made Zimbabwe the first US$10 billion economy to have such levels of bank capital, shell-shocked bankers were firmly warned that some of them faced the risk of “going before Dr Gono himself goes” on completion of his non-renewable contract next year, demonstrating the very important and high stakes around this critical subject. There are visible strong objections to this policy position by others, including the bankers themselves and some quarters in Government, industry and commerce and general pedestrians I have heard browsing and conversing on this issue.

In any discourse of life, be it in history, politics, medicine, religion, rocket science, raising of chickens, customary norms and so forth, there are times when society must defer to those that are qualified in respective areas to clear certain hurdles of the intellect.
This is a statement of fact which yields fruity dividends to those societies that observe it.

The trinity of Government (The Executive, Legislature and Judiciary) should draw from diverse discourse to make their decisions on this issue, informed by balanced empirical facts that are buttressed by expert opinions. Banks in Zimbabwe operate under the umbrella of statues primarily under The Banking Act, Chapter 24:20; banking Regulations, 2000 and the Reserve Bank of Zimbabwe Act, Chapter 22:15. Other players in the financial sector such as building societies, insurance companies and financial co-operative schemes are covered under specific statutes of law as well.

Section 6 of the Banking Act articulates 5 specific classes of banking business (commercial banks, accepting houses, discount houses, finance houses, and micro-finance entities). Section 7 of the same Banking Act then goes on to lay out the lawful activities that these banking clusters can do. The Reserve Bank of Zimbabwe Act then assigns the licensing, supervision and regulatory function of overseeing the banking sector to the Reserve Bank, under ministerial supervision and directions from the Minister of Finance who in turn accounts to The Executive in Cabinet, the Judiciary and Parliament. The judicial arm serves the purpose of then ensuring that justice is served in strict observance of the various statutes governing the banking sector.

The decision to set banks’ minimum capital levels, therefore, lies in RBZ’s score-card of deliverables, among other statutory outputs, guided by the relevant arms of Government under the checks and balances framework of Government under the checks and balances framework of governance. As is spelt out in the founding laws that create the banking sector, banks’ main roles are to serve as the catalysts for savings mobilisation in the economy on the one hand and financing of investment and economic activity on the other, as well as being the platform of transmission of financial impulses across and among internal sectors, and propelling Zimbabwe’s interface with the rest of the world’s economic and financial systems.

Stability in the banking sector is, therefore, an indispensable necessary condition for macro-economic stability, rapid economic growth and broad-based social development. Conversely, troubles in the banking sector have the direct capacity to cause shockwaves and havoc in the entire economy, which would in turn set in motion other centrifugal forces in society. It is for this reason that the Central Bank should act very objectively, carefully and free of emotions and vindictive knee-jerk impulses to ensure that the country has a vibrant, safe, secure and reliable banking sector that has the peoples’ trust in it.

The recent bank collapses clearly show that there is a serious problem that has to be addressed without any further delays so that our economy can recover and thrust onto a high steady state growth path.

Is Zimbabwe ready for US$100 million bank capital thresholds? I unreservedly conclude that Zimbabwe is not yet ready for the high bank minimum capital levels of US$100 million. The decision by Dr Gono and his team at the RBZ is, therefore hazardously faulty and must be swiftly set aside before it spins the country’s financial sector into irreversible turmoil. This will be ruinous to our economy and in the end spark avoidable socio-political states of flux. This ugly eventuality must be avoided before it is too late.

To any Zimbabwean, it is now a common secret that the RBZ Governor’s vehemently repeated statement is that bank capital levels were raised from US$12.5 million to US$100 million so as to create financial sector stability.

Dr Gono further argues that a bank’s capital “is its final line of defence” against inherent threats towards collapsing and that the US$100 million capital mark is “a precast wall” and hence a non-negotiable must for banks to comply with. But a close professional dissection of what bank stability means shows that this line of thinking suffers from what economists call the pitfalls of the fallacy of composition (FoC).

Simply put, the fallacy of composition is where a policy proposition is anchored on the inverted logic that “if sugar is sweet, then eating more and more of it is good”. Medical doctors and dieticians know that eating too much sugar can be the most perilous thing to do, sweet as it is. Having capital in a bank is good. More and more capital, especially if imposed drastically in a haphazard, panicky, after thought fashion can be as poisonous to the economy as too much sugar is to the human body.

Even when a bank has super rich shareholders who inject a trillion dollars in it for capital every month, it is a very simple and straight forward statement of fact that that banks can still collapse even in a matter of hours.
The second strand of irrefutable facts on banking sector stability is in the area of the texture of banks’ asset books. A 100 year old bank may have had its shareholders inject adequate capital far back then at inception, such that its capital could be locked up sitting in the form of that bank’s owner-occupied buildings.

In such a very practical scenario, no amount of miracles can lead to such assets being swiftly converted into liquid cash to then act as a viable “last line of defence” when the bank is in trouble. Equally fundamental, a bank can have all the trillion dollars of hard currency capital but if that money is locked up in non-performing, unproductive loans, then that bank would still have high risks of collapsing. A bank’s core line of defence which is both plausible and sustainable, therefore, lies in accurate calibration of resources across asset classes in a way that guarantees a fine balance between earning assets and liquidity for meeting depositors’ needs on demand.

Sound corporate governance practices in a bank will also ensure that the institution grows itself through greater customer loyalty lured by that bank’s track record of meeting withdrawals when needed. Dr Gono, the RBZ Board and their technocrats have also made a serious blunder by simply looking at capital levels in some countries in absolute terms to then conclude that levels of around US$100 million are plausible and sustainable.

The levels of bank minimum capital levels must be instructed by looking at an economy’s size as measured by that country’s GDP, population and credit risk profiles, among other aggregate considerations. The concept of bank capital must therefore be seen relative to an economy’s size and credit risk profiling, as opposed to thumb-sucked absolute numbers. Zimbabwe’s US$10 billion economy clearly does not warrant bank capital levels of US$100 million as forcefully argued by the RBZ team. Below I present hard facts showing why the RBZ has made a serious error of judgement with potentially costly effects to the entire economy and generations to come if this policy is miraculously allowed to stay.

South Africa: GDP is around US$408 billion; population is around 50 million; and amount needed as capital to start a commercial bank is US$39 million as at end of 2011;

Angola: GDP is around US$101 billion; population is around 19 million; and amount needed as capital to start a commercial bank is US$4 million as at end of 2011;

Botswana: GDP is around US$18 billion; population is around 2 million; and amount needed as capital to start a commercial bank is US$0.8 million as at end of 2011;

Malawi: GDP is around US$6 billion; population is around 15 million; and amount needed as capital to start a commercial bank is US$5 million as at end of 2011;

Zambia: GDP is around US$17 billion; population is around 13 million; and amount needed as capital to start a commercial bank is US$0.5 million as at end of 2011;

Mauritius: GDP is around US$11 billion; population is around 1.2 million; and amount needed as capital to start as capital to start a commercial bank is US$6.5 million as at end of 2011;

Mozambique: GDP is around US$13 billion; population is around 23 million; and amount needed as capital to start a commercial bank is US$3 million as at end of 2011;

Namibia: GDP is around US$12 billion; population is around 2 million; and amount needed as capital to start a commercial bank is US$1,2 million as at end of 2011;

China: GDP is around US$7 trillion; population is around 1.3 billion; and amount needed as capital to start a commercial bank is US$10.5 million for a bank with total risk assets of US$100 million as at end of 2011. Chinese banks have been given up to December 31, 2018 to comply with Basle 111. This contrasts sharply with Dr Gono’s blind snappy decision.

Brazil: GDP is around US$2.5 trillion; population is around 196 million; and amount needed as capital to start a commercial bank is US$6.6 million as at end of 2011;

USA: GDP is around US$15 trillion; population is around 312 million; The amount needed to start a commercial bank is US$8 million for a bank with total risk assets of US$100 million as at end of 2011;

UK: GDP is around US$2.4 trillion; population is around 62 million; The amount needed to start a commercial bank is US$7 million for a bank with total risk assets of US$100 million as at end of 2011;

Canada: GDP is around US$1.7 trillion; population is around 34 million; The amount needed to start a commercial bank is US$7 million for a bank with total risk assets of US$100 million as at end of 2011;

Russia: GDP is around US$1.9 trillion; population is around 142 million; and amount needed as capital to start a commercial bank is US$10 million as at end of 2011;

From the above hard facts, it is very clear that the decision by Dr Gono and the RBZ Board to hike capital levels for banks from US$12.5 million to US$100million is a clear unacceptable error of judgement which flies way out of line with any other country in the world.
As a US$10 billion economy, Zimbabwe has opened a new record of being the most expensive economy to start a bank. This is a very dangerous world record.