Curse of the troubled banks

banks have collapsed, one after the other, and have left many questioning the competence of the Reserve Bank of Zimbabwe’s supervisory abilities, but the problems have an ostensible delinquency as their main causative feature.
The root cause of corporate delinquency by most local banks appears to have been overbearing founding shareholder influence and complete disregard for the basic tenets of good corporate governance and moral decay.
But the curse of most failed banks appears to be the failure by founding directors to distinguish between owners’ equity, profits and depositors’ funds, as a liability.
In the recent past, it all started with Renaissance Merchant Bank and like a disease with a contagion effect, rubbed off to Interfin Banking Corporation, then Genesis Investment Bank got entangled while Royal Bank took after its fellow delinquent banks.
A common thread runs through problems identified at most of the troubled banks, which were largely owner-managed or controlled.
Delinquency and good corporate governance among local banks seem to be inseparable opposites. Reserve Bank Governor Dr Gideon Gono would say, “there are some people who think we can talk about hell without talking about heaven”.
In the Renaissance (renamed Capital Bank), Interfin and Royal cases an ominous and chilling streak can be observed in the form of insider loans, related part advances, huge portfolios of non-performing loans, abuse of depositor funds and the overbearing influence of founding directors.
Harare economist Mr James Wadi said the problems that have claimed the scalps of a number of indigenous banks were manifold, but weak corporate governance structures and liquidity constraints in most cases appear to be the root cause.
“It is a result of a number of issues. If you combine issues of weak corporate governance and issues of institutions trapped in liquidity problems you will realise that there is no mechanism to unwind,” said Mr Wadi.
He also pointed out that small indigenous banks were easily hard hit by negative market news, which easily drives investors to drift to the so-called “safe havens”.
Mr Wadi also noted that the local financial market had no mechanism to support troubled banks due to the absence of the lender of last resort function of the RBZ.
Generally, all banks, which have failed so far, had challenges with meeting the central bank’s regulatory minimum capital apart from weak corporate governance structures.
Most of the unsavoury misdemeanours have been discovered when things reach the tipping point, but while regulatory authorities surely need to tighten the screws creative accounting and misrepresentation of facts has made it difficult for regulators to maintain track of real happenings.
While only Royal, Interfin, Genesis and Renaissance cases have come out in the open there could be similar cases yet to be exposed. RBZ senior division chief (bank licensing, supervision and surveillance) Mr Norman Mataruka just over two weeks back said 5 percent of indigenous banks were using depositors funds to support day-to-day operations.
And in light of problems the local financial institutions have faced and potential consequences of financial crisis of larger proportion authorities need a second look into the practice of directorship by founders.
Banking should not be left to the poor. In the spirit of economic empowerment, Government has over the years promoted the formation of indigenous banks, but most of them have fallen by the wayside.
Examples of failed indigenous financial institutions include the Roger Boka-founded United Merchant Bank, Samson Ruturi and Nicholas Musona-owned First National Building Society, Mthuli Ncube-led Barbican Bank and Century Bank co-started by Gilbert Muponda and Nyasha Watyoka. All these failed cases seemingly point to a curse of some sort. But the over-arching reality remains the fact that at one point or the other these banks lacked self-discipline and good corporate governance systems and had very weak balance sheets.
The move taken by the central bank to hike minimum capital requirements by up to 900 percent over the next two years provides the building blocks for strong and disciplined banks.
It then means only serious and well-resourced indigenous people will be able to pursue their entrepreneurial goals in the banking line of business.
Bank failures have the potential to cause financial and economic instability of major proportions and the amount of effort, time and resources required to repair the damage must never be underestimated.
The US financial crisis of 2008-2009 left indelible economic scars that eventually led to an economic recession whose effects continue to be felt today while ordinary taxpayers had to shoulder the cost of bailing out the troubled banks.