We cannot afford a repeat of 2004 banking crisis

banks running into solvency problems.
The sector has largely boasted a clean bill of health except “some isolated cases of magnified vulnerability due to near-fraudulent behaviour by some errant bank management”, to borrow the good governor’s words.
When it emerged last Friday that six banks had failed to meet the new minimum capitalisation deadline, it got us thinking of what their fate could be. Where we about to see more banks being closed and depositors mourning again?
Only time will tell. Reserve Bank Governor Dr Gideon Gono, in his Mid-Year Monetary Policy Statement released last Friday said he would not mind having his licences back from those that could have been playing cat-and-mouse game with the authorities. We are informed that a few of the banks that failed to meet the deadline have been dishonest, presenting fictitious equity partners to camouflage their exact position.
The names of these were not given in the MPS but we certainly hope that the mice will not run forever but will have to be answerable to the monetary authorities. For Kingdom, Royal and ZABG, the seven to 14 months reprieve should do the trick. Their reca-pitalisation plans also appear to be concrete and the banks have eno-ugh time on their hands to solidify them.
Dr Gono has also scheduled m-eetings with the all the undercapitalised banks anytime soon to map the way forward. We sincerely hope that the meetings will be fruitful in terms of reca-pitalisation strategies that will put the concerned banks back on solid ground. Mergers and acquisitions were widely expected before the June 30 deadline but we did not witness any such. But for those banks struggling for equity partners, I am sure there are enough hungry investors with an appetite that could extend to the banking sector.
Other banks could also consolidate their operations by merging with those that are finding the going tough. There are times when certain institutions need to swallow their pride to remain afloat, by allowing themselves to be swallowed by bigger institutions with the financial muscle to keep them alive.
Dr Gono did not mince his words when he said he would have the licences back in cases where raising required capital remained a challenge. He also bemoaned the fact that despite advice to merge or adopt other measures to raise capital, some banks had not taken heed and had thus found themselves in murky waters.
We are confident that ways and means will be sought to regularise the situation at the affected banks. Will we see some licences being withdrawn? This was implied in the MPS but the respective banks and the governor could have the answer after the proposed meetings.
The financial sector is very sensitive to any news of bank failures given the experiences in 2004 and we have seen, as stated in the monetary policy, at least US$1,2 billion shifting from indigenous banks to the bigger and “safer” banks since the debacle at Renaissance Merchant Bank.
This movement of funds alone speaks volumes of the sensitive nature of depositors. They had their fingers burnt once and no one would want a repeat, especially in this US dollar era.
This calls for the banking sector to always be at its best behaviour all the time. Depositors are always watching and when something goes wrong they react by taking their funds away.
In this instance, the need for tighter regulation by the central bank to deal with errant behaviour while causing minimal damage to the entire sector cannot be overemphasised.
Discipline is of essence in the banking sector, now more than ever. Measures announced by the central bank to tighten its grip on banks should yield results. The establishment of a Multidisci-plinary Financial Stability Committee comprised of local supervisory agencies and other stakeholders to facilitate early identification of potential sources of risk to stability and to promote the adoption of preventive and timely remedial policies should go a long way in safeguarding the sector.
A Memorandum of Understanding signed between the central bank and financial sector supervisory agencies – the Deposit Protection Board, the Insurance and Pension Commission and the Securities Exchange Commission should aid supervision and give depositors sound sleep.
Furthermore, the central bank, in liaison with the International Monetary Fund, has enhanced the Troubled and Insolvent Banks Policy to facilitate timely identification, rehabilitation and resolution of problem banks.
This is supposed to ensure that non-compliant banks exit the market with minimum disruption to the banking sector and very little inconvenience to the banking public. This sounds good.
Every dollar counts and depositors would want to be guaranteed that their funds are safe so that they don’t find their pillows and mattresses as better custodians of their money. There is real need for the banking sector to go out in full force to entice depositors and reassure them that their hard-earned money is safe.
On the other hand, the issue of growing disparity between lending and deposit rates also comes to the fore in this instance. Dr Gono dealt with it at length in his document and we can only hope that the banks have taken heed. They don’t have much of a choice if they intend to remain in business!
Zimbabwe’s financial sector is generally regarded as solid and we want to keep it that way. Any errant behaviour should not be tolerated by the banks themselves and their superintendent.
The economy needs a sound banking sector that will respond timeously and adequately to demands hence the need to ensure all is in place in this key sector of the economy.
The issue of the meaning of minimum capital in banking institutions has elicited much discussion in the sector. Below is the meaning as incorporated through the amendment of the Banking Act:
“Minimum capital shall mean capital representing a permanent commitment of funds by the shareholders of the banking institution (net of any loans and advances given to an insider and borrowed capital) which is available to meet losses incurred without imposing a fixed unavoidable charge on the institution’s earnings and includes such of the following elements as are available to the institution after making any required deductions;
a. Issued and fully paid up ordinary shares or common stock;
b. Paid up non-cumulative irredeemable preference shares;
c. Reserves consisting of –
i. Non-repayable share premiums;
ii. Disclosed reserves created by a charge to net income in the financial year immediately preceding the current one;
iii. Published retained earnings for the current year including interim earnings, where these have been verified by external auditors; and
iv. Such other elements as may be prescribed from time to time.
In God I Trust!
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