THE closure of Interfin and Genesis Investment Bank in the last couple of weeks makes for grim reading. The collapse of the two private indigenous banks due to recurring liquidity challenges raises serious questions regarding the fragility of the Zimbabwean banking sector and the role played (or not played) by the central bank in a near systemic banking crisis in slow motion since 2004.
The identical problems faced by indigenous banks before and after the regulatory changes introduced in 2005 suggest inadequacies in the current regulatory regime, weaknesses in supervision and surveillance and chronic regulatory forbearance. It seems rather difficult to justify how, after almost ten years, Interfin or Genesis would collapse in circumstances not dissimilar to Roger Boka’s United Merchant Bank, Trust Bank, Royal Bank or RMB a year ago.
With an average of one bank crisis every year since 2003, this is a crisis that has gone on for too long turning banks into a form of ‘legalised theft’.
A preliminary RBZ report on Interfin indicates poor corporate governance practices, abuse of depositors’ funds, loans to subsidiaries within the group and a high concentration of loans to connected insiders reportedly valued at US$60 million. Current valuations suggest that the bank has a negative capital of approximately $106 million and is possibly heading for liquidation.
About a year ago, ReNaissance Merchant Bank (RMB) was also placed under curatorship under similar circumstances. Allegations against the bank ranged from abuse of depositors’ funds, insider loans and fraudulent transactions symptomatic of poor corporate governance practices. According to a central bank’s report, RMB was the biggest ‘pillaging scandal yet within the banking sector in which the bank owners working in cahoots with a pliant management, looted the bank to a shell’.
The reasons for the collapse of all indigenous banks (Trust, Royal, Intermarket, Barbican, Time Bank, Century, RMB, Genesis and Interfin) are similar. In almost all cases, reports suggest abuse of depositors’ funds, tunneling, poor corporate governance practices and a high concentration of non-performing loans to connected parties.
The bank suffers a liquidity crisis, it is placed under curatorship or closed, the RBZ will swoop in for preliminary investigations and allegations of impropriety are made against the bank’s directors. Often the allegations don’t amount to any real punishment or arrests – hardly a deterrent for would be perpetrators.
A serious concern is the prejudice suffered by thousands of depositors who have to wait years to recover crumbs from their deposits without protection from the regulators or the deposit protection board. It is thus unsurprising that confidence in private indigenous banks is at an all time low.
The regulatory approach has been predictably reactionary, insipid and at worst – a case of ‘wilful blindness’. Questions need to be asked whether the current regulatory framework is ‘fit for purpose’ and whether the central bank is adequately resourced to supervise and detect rather than react to fragility.
The perpetual weaknesses within the private indigenous banks highlight a number of issues. First, the root cause of the 2003 banking sector crisis was regulatory forbearance and a weak and lax enforcement of the rules. Sadly, there is no evidence which suggests that the current regulatory environment has addressed these regulatory weaknesses.
Second, the major problem with the Zimbabwean banking crisis has been insider ownership concentration which has resulted in corporate governance weaknesses in private indigenous banks such as insider lending, abuse of depositors’ funds and speculative activities. In almost all cases, Zimbabwean indigenous banks suffer from a high concentration of connected insider owners in which the founders of the banks have absolute control.
Third, the idea that an increase in the capital adequacy requirements of banks to $12,5 million will create healthy banks and solve the problem may be minimalistic. Without addressing the latent issues regarding effective regulatory enforcement and supervision an increase in capital requirements on its own will be insufficient.
In their current format, the regulatory mechanisms introduced by the central bank to curtail ownership concentration and stem corporate governance weaknesses have proved inadequate to address the weaknesses in the sector. The regulations are porous and are unable to tackle the pervasive agency problems at the core of the banking crisis.
Addressing weaknesses in the sector will require an overhaul of the regulatory framework.
Dr Lance Mambondiani is an Investment Executive at Coronation Financial and teaches Financial Markets & Corporate Governance at the University of Manchester. He can be contacted on firstname.lastname@example.org
The view expressed in this articles are personal and do not necessarily reflect the position of Coronation Financial