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Bank had only one internal auditor
Recorded average monthly losses of US$344 000
Re-opened with only US$444 000
Authorities mull pursuing directors
Darlington Musarurwa and Tinashe Farawo
AS experts continue to sift through the ruins of Royal Bank, which the Reserve Bank of Zimbabwe closed on July 27, 2012, disturbing details of how management led the institution to its collapse – via gratuitous abuse of depositors funds, gross undercapitalisation, high volumes of non-performing loans, massaging of the company’s financial books and poor management systems – continue to emerge.
There are indications that authorities will pursue the directors for criminal negligence and violating Section 318 of the Companies Act (Chapter 24:03).
The revelations have re-opened debate on the RBZ’s oversight role and corporate governance practices in banks.
Sources say the sheer scale of infractions, which range from fudging financial statements and using bank deposits to support operational costs, is worrying.
Royal Bank was first issued a banking licence on May 8, 2002 and began operating after acquiring branches from Barclays Bank and Standard Chartered Bank.
Its branch network was wide as it also inherited all the commercial banking assets and infrastructure of the two entities.
Two years later, the bank was placed under curatorship for the same reasons that resulted in its recent closure; and its assets were transferred to Zimbabwe Allied Banking Group – an amalgamation of failed banks such as Barbican and Trust.
But after being fatigued by continuos litigation by bankers who felt that their licences were withdrawn unlawfully, the RBZ decided to unbundle ZABG.
Royal Bank subsequently re-registered as a commercial bank on September 1, 2010. And it immediately started down the path towards another closure.
The drama begins
On February 21, 2011, Royal Bank opened its doors to the public – with a mere US$443 529 in liquid capital.
The bulk of its cumulative US$1,93 million capital base was mainly from revaluation reserves from land and buildings.
At the time, the minimum capital requirement for commercial banks was US$12,5 million.
Though the bank courted potential investors, its efforts came to naught and so it had liquidity challenges from the very start.
People familiar with goings-on at the bank claim that although the RBZ could be held responsible for relicensing and allowing the bank to re-open without due diligent stress checks, management at Royal is ultimately culpable for its collapse as they made the imprudent decision to re-open when they had neither the wherewithal to offer sustainable services nor recoup investments in small towns such as Nyanga, Gwanda, Karoi and Hwange.
In the first five months of operation, the bank had raked up more than US$1,85 million in losses, with pre-opening expenses chewing US$1,8 million.
A negative return on equity and assets of -40 percent and -24 percent, respectively, was recorded during the period.
The bank was largely sustained by interest from overdraft accounts and interbank loans.
Staff costs gobbled up US$613 000, pre-opening expenses, stationery and security took up US$584 888 and more than US$27 000 was spent on rentals.
The haemorrhage continued.
In the five months to May 31, 2012, losses widened to US$2,69 million and aggregate losses after Royal Bank’s first 15 months in operation had soared to US$5,16 million.
This translates to average losses of US$344 000 monthly.
By May 31, 2012, total loans and advances at US$1,4 million were 0,06 percent of those extended by banks, while deposits at US$4,66 million were 0,17 percent of the market.
It occupied the basement of performance indices.
Management sought the easy way out and went for depositors’ funds.
“Well, information provided by management showed that the bank was funding its operational expenses using depositors funds, resulting in the continued deterioration of the treasury funding gap. Apparently, this position was also corroborated by the bank’s external auditors Deloitte and Touche who noted that the bank’s continued use of depositor’s funds to cover operational expenses was a serious breach of trust,” said a source who refused to be named for professional reasons.
Skewed shareholding
While recourse to depositors’ funds is a serious infraction in itself, it is believed that the paralysis in the management system can be traced to shareholders, overbearing and overlapping roles as they also occupied key managerial positions.
Mr Jeffrey Mzwimbi, who was the CEO, held 25 percent of the business; while Mr Durajaji Simba – the executive director – had 20 percent.
Mr Hardy Pemhiwa similarly owned 20 percent of the bank and Mr Victor Chando had five percent.
In essence, the top four individual shareholders owned 70 percent of the financial institution.
According to experts, Mr Mzwimbi and Mr Simba’s shareholding thresholds violated corporate governance rules requiring separation of ownership and management.
Reports also indicate that the board of directors was incapacitated and became dysfunctional resulting in the concentration of power in the offices of the CEO and executive director “along fellowship lines”.
“The bank was torn through the middle as the two powerful executive directors belonged to different fellowships.
“Accordingly, management and employee relations were also based on the same fellowships.
“The governance committees such as the audit and finance, legal and risk, and research and development were compromised as there were not independent, resulting in the centralisation of the decision making process in the offices of the two executive directors,” said sources.
The bank’s internal control systems were further weakened by the fact that it only had one internal auditor, Ms Evelyn Machaka, who resigned in February 2012 under unclear circumstances.
She was never replaced.
It was thus unsurprising that Royal Bank was not submitting internal audit reports to the RBZ.
Fudging Accounts
Information gathered by The Sunday Mail Business indicates that as Royal Bank’s financial position deteriorated, the situation became desperate.
To give a semblance of a bank that was still solid, some directors allegedly hatched a plan to record some liabilities as shareholder loans.
Fudging records this way could have had the ultimate effect of understating liabilities.
A curious case in point was that of Mr Andreas Kloppers whose US$736 000 worth of investments were recorded as shareholder loans.
Investigations by authorities later revealed that all deals pertaining to Mr Kloppers could realistically be traced to Mr Mzwimbi’s office.
They were never part of the dealers closing or opening position and no other person was authorised to sign the deal notes, except the chief executive officer.
Mr Kloppers, in a letter dated March 15, 2013, actually claimed he was never a shareholder.
Naturally, such an occurrence raised eyebrows as to the extent of similar “cosmetic management” incidences.
Curious lending
For a bank whose total loans and advances stood at US$1,41 million at March 31, 2012, Royal Bank’s loan exposure at US$1,3 million was nothing short of jaw-dropping.
And the biggest portion of the loan book fell under related parties.
Even though the issue of non-performing loans was generally considered to be a sector-wide problem, it is the casual nature through which loans were parcelled out by Royal Bank that raises concern.
Against this exposure, the bank held no meaningful tangible security.
Again, there were two curious cases where companies had access to the bank’s funds before registration and regularisation of their security papers.
Edgerose, a local firm, was granted a US$100 000 facility and by the time the bank closed, their account was overdrawn to US$171 000.
Likewise, Alvan Fuels, which had a facility limit of US$40 000, had overdrawn its account to US$50 000.
Commercial bank with building society systems
Most bizarrely, it is believed that the banking information system that was supplied to Royal Bank by Afropack did not have the capacity to support commercial banking activity.
Instead, it was only suited for building society operations.
Inevitably, this had the adverse effect of delaying the bank’s audit work.
Royal Bank’s external auditors complained interminably, and sources told us:
“Loans were being calculated manually and the figures would then be incorporated into the main account. The result was that loan figures were susceptible to manipulation and some clients being cleared before settlement of their loan accounts.”
It was a huge mess.
Issues came to a head five months before the bank surrendered its licence when it became increasingly difficult for the institution to either pay maturing deposits or effect Real Time Gross Settlement payments on time.
Rollovers to investments made by institutions such as the National Social Security Authority, CBZ and Sedco attracted punitive interest rates.
Furthermore, depositors’ accounts were debited various amounts and transferred into the bank’s RTGS suspense account.
Depending on the prevailing bank liquidity position, the bank had to do part payments in some RTGS transactions.
By the time the bank was closed, total outstanding payments stood at US$172 000.
Also, various service providers were owed more than US$1,3 million as at June 30, 2012.
The sunset
Creditors were beginning to make a run for the bank’s assets.
On July 27, 2012, Royal Bank surrendered its licence after failing to meet the prudential minimum capital requirements.
After a grace period of seven months to find investors, the central bank applied for liquidation.
It was closed that same day.
RBZ began winding down the business of January 23, 2013 in terms of the Section 57(a)(i) of the Banking Act.
It was placed under provisional liquidation on February 20, 2013 and the DPC was appointed provisional liquidator, while Dr Cecil Madondo was appointed liquidation agent.
Some experts believe Royal Bank’s directors violated Section 318 of the Companies Act (Chapter 24:03) in neglecting their fiduciary duties.
And it is the contention of the responsible authorities that this makes them personally responsible, without limitation of liability, for all or any of the debts or liabilities.
Possible violations
◆ Shareholding thresholds of Mr Mzwimbi and Mr Simba were against corporate governance conventions separating ownership and management
◆ Failure to submit internal audit reports to the RBZ
◆ The board audit committee, which had two members rather than the stipulated three independent members, was in violation of Section 40(1) of the Banking Act
◆ The bank did not have a board loans review committee, which was against Section 20 of Part IV of the Banking Regulations (Statutory Instrument 205 of 2000)
◆ The bank failed to publish its financial statements for the year ended December 31, 2011 by March 2012 in violation of Paragraph 9 of the Third Schedule of the Banking Regulations (SI 205 of 2000)
◆ The board did not meet since January 2012. Boards should meet at least once per quarter
◆ Reporting incorrect information on the BSD return of March 31, 2012. Adversely Classified Loans to Total Loans ratio (ACL/TL) was reported as nil instead of 81 perecent. More than US$1,28 million in loans and advances were reported as notes and coins; thereby, inflating the liquidity ratio as at March 2012.
This was in violation of Section 75(1) (a) of the Banking Act (Chapter 24:20)
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