Overview of Zimbabwean Banking Sector (Part One)
Entrepreneurs build their business within the context of an ecosystem which they sometimes may not be able to control. The robustness of an entrepreneurial venture is tried and tested by the vicissitudes of the ecosystem. Within the ecosystem are forces that may serve as great opportunities or menacing threats to the survival of the entrepreneurial venture. Entrepreneurs need to understand the ecosystem within which they function so as to adventure emerging opportunities and mitigate against possible threats.
This article serves to create an understanding of the forces at play and their effect on banking entrepreneurs in Zimbabwe. A fleeting historical overview of banking in Zimbabwe is carried out. The impact of the regulatory and economic ecosystem on the sector is assessed. An examination of the structure of the banking sector facilitates an appreciation of the inner forces in the industry.
At independence (1980) Zimbabwe had a complex banking and financial market, with commercial edges mostly foreign owned. The country had a central bank inherited from the Central Bank of Rhodesia and Nyasaland at the winding up of the Federation.
For the first few years of independence, the government of Zimbabwe did not interfere with the banking industry. There was neither nationalisation of foreign edges nor restrictive legislative interference on which sectors to fund or the interest rates to charge, despite the socialistic national ideology. However, the government purchased some shareholding in two edges. It acquired Nedbank’s 62% of Rhobank at a fair price when the bank withdrew from the country. The decision may have been motivated by the desire to stabilise the banking system. The bank was re-branded as Zimbank. The state did not interfere much in the operations of the bank. The State in 1981 also partnered with Bank of Credit and Commerce International (BCCI) as a 49% shareholder in a new commercial bank, Bank of Credit and Commerce Zimbabwe (BCCZ). This was taken over and converted to Commercial Bank of Zimbabwe (CBZ) when BCCI collapsed in 1991 over allegations of unethical business practices.
This should not be viewed as nationalisation but in line with state policy to prevent company closures. The shareholdings in both Zimbank and CBZ were later diluted to below 25% each.
In the first decade, no native bank was licensed and there is no evidence that the government had any financial reform plan. Harvey (n.d., page 6) cites the following as evidence of without of a logical financial reform plan in those years:
– In 1981 the government stated that it would encourage rural banking sets, but the plan was not implemented.
– In 1982 and 1983 a Money and Finance Commission was hypothesizedv but never constituted.
– By 1986 there was no mention of any financial reform agenda in the Five Year National Development Plan.
Harvey argues that the reticence of government to intervene in the financial sector could be explained by the fact that it did not want to jeopardise the interests of the white population, of which banking was an integral part. The country was unprotected to this sector of the population as it controlled agriculture and manufacturing, which were the mainstay of the economy. The State adopted a conservative approach to indigenisation as it had learnt a lesson from other African countries, whose economies nearly collapsed due to forceful eviction of the white community without first developing a mechanism of skills move and capacity building into the black community. The economic cost of inappropriate intervention was deemed to be too high. Another plausible reason for the non- intervention policy was that the State, at independence, inherited a highly controlled economic policy, with tight exchange control mechanisms, from its predecessor. Since control of foreign money affected control of credit, the government by default, had a strong control of the sector for both economic and political purposes; hence it did not need to interfere.
However, after 1987 the government, at the behest of multilateral lenders, embarked on an Economic and Structural Adjustment Programme (ESAP). As part of this programme the save Bank of Zimbabwe (RBZ) started recommending financial reforms by liberalisation and deregulation. It contended that the oligopoly in banking and without of competition, deprived the sector of choice and quality in service, innovation and efficiency. consequently, as early as 1994 the RBZ Annual Report indicates the desire for greater competition and efficiency in the banking sector, leading to banking reforms and new legislation that would:
– allow for the conduct of prudential supervision of edges along international best practice
– allow for both off-and on-site bank inspections to increase RBZ’s Banking Supervision function and
– enhance competition, innovation and enhance service to the public from edges.
afterward the Registrar of edges in the Ministry of Finance, in liaison with the RBZ, started issuing licences to new players as the financial sector opened up. From the mid-1990s up to December 2003, there was a flurry of entrepreneurial activity in the financial sector as native owned edges were set up. The graph below depicts the trend in the numbers of financial institutions by category, operating since 1994. The trend shows an initial increase in merchant edges and discount houses, followed by decline. The increase in commercial edges was initially slow, gathering momentum around 1999. The decline in merchant edges and discount houses was due to their conversion, mostly into commercial edges.
Source: RBZ Reports
Different entrepreneurs used varied methods to penetrate the financial sets sector. Some started advisory sets and then upgraded into merchant edges, while others started stockbroking firms, which were elevated into discount houses.
From the beginning of the liberalisation of the financial sets up to about 1997 there was a notable absence of locally owned commercial edges. Some of the reasons for this were:
– Conservative licensing policy by the Registrar of Financial Institutions since it was risky to licence native owned commercial edges without an enabling legislature and banking supervision experience.
– Banking entrepreneurs opted for non-banking financial institutions as these were less costly in terms of both initial capital requirements and working capital. For example a merchant bank would require less staff, would not need banking halls, and would have no need to deal in costly small retail deposits, which would reduce overheads and reduce the time to register profits. There was consequently a rapid increase in non-banking financial institutions at this time, e.g. by 1995 five of the ten merchant edges had commenced within the past two years. This became an entry route of choice into commercial banking for some, e.g. Kingdom Bank, NMB Bank and Trust Bank.
It was expected that some foreign edges would also go into the market after the financial reforms but this did not occur, probably due to the restriction of having a minimum 30% local shareholding. The stringent foreign money controls could also have played a part, in addition as the careful approach adopted by the licensing authorities. Existing foreign edges were not required to discarded part of their shareholding although Barclay’s Bank did, by listing on the local stock exchange.
Harvey argues that financial liberalisation assumes that removing direction on lending presupposes that edges would automatically be able to lend on commercial grounds. But he contends that edges may not have this capacity as they are affected by the borrowers’ inability to service loans due to foreign exchange or price control restrictions. Similarly, having positive real interest rates would typically increase bank deposits and increase financial intermediation but this logic falsely assumes that edges will always lend more efficiently. He further argues that licensing new edges does not imply increased competition as it assumes that the new edges will be able to attract competent management and that legislation and bank supervision will be adequate to prevent fraud and consequently prevent bank collapse and the resultant financial crisis. Sadly his concerns do not seem to have been addressed within the Zimbabwean financial sector reform, to the unhealthy of the national economy.
The Operating ecosystem
Any entrepreneurial activity is constrained or aided by its operating ecosystem. This section analyses the prevailing ecosystem in Zimbabwe that could have an effect on the banking sector.
The political ecosystem in the 1990s was stable but turned volatile after 1998, mainly due to the following factors:
– an unbudgeted pay out to war veterans after they mounted an assault on the State in November 1997. This exerted a heavy strain on the economy, resulting in a run on the dollar. Resultantly the Zimbabwean dollar depreciated by 75% as the market foresaw the consequences of the government’s decision. That day has been recognised as the beginning of harsh decline of the country’s economy and has been dubbed “Black Friday”. This depreciation became a catalyst for further inflation. It was followed a month later by violent food riots.
– a poorly planned Agrarian Land Reform launched in 1998, where white commercial farmers were ostensibly evicted and replaced by blacks without due regard to land rights or compensation systems. This resulted in a meaningful reduction in the productivity of the country, which is mostly dependent on agriculture. The way the land redistribution was handled angered the international community, that alleges it is racially and politically motivated. International donors withdrew sustain for the programme.
– an ill- advised military incursion, named Operation Sovereign Legitimacy, to defend the Democratic Republic of Congo in 1998, saw the country incur enormous costs with no apparent assistance to itself and
– elections which the international community alleged were rigged in 2000,2003 and 2008.
These factors led to international isolation, considerably reducing foreign money and foreign direct investment flow into the country. Investor confidence was severely deteriorated. Agriculture and tourism, which traditionally, are huge foreign money earners crumbled.
For the first post independence decade the Banking Act (1965) was the main legislative framework. Since this was enacted when most commercial edges where foreign owned, there were no directions on prudential lending, insider loans, proportion of shareholder funds that could be lent to one borrower, definition of risk assets, and no provision for bank inspection.
The Banking Act (24:01), which came into effect in September 1999, was the culmination of the RBZ’s desire to liberalise and deregulate the financial sets. This Act regulates commercial edges, merchant edges, and discount houses. Entry barriers were removed leading to increased competition. The deregulation also allowed edges some latitude to function in non-chief sets. It appears that this latitude was not well delimited and hence presented opportunities for risk taking entrepreneurs. The RBZ advocated this deregulation as a way to de-part the financial sector in addition as enhance efficiencies. (RBZ, 2000:4.) These two factors presented opportunities to enterprising native bankers to establish their own businesses in the industry. The Act was further revised and reissued as Chapter 24:20 in August 2000. The increased competition resulted in the introduction of new products and sets e.g. e-banking and in-store banking. This entrepreneurial activity resulted in the “deepening and sophistication of the financial sector” (RBZ, 2000:5).
As part of the financial reforms excursion, the save Bank Act (22:15) was enacted in September 1999.
Its main purpose was to strengthen the supervisory role of the Bank by:
– setting prudential standards within which edges function
– conducting both on and off-site surveillance of edges
– enforcing sanctions and where necessary placement under curatorship and
– investigating banking institutions wherever necessary.
This Act nevertheless had deficiencies as Dr Tsumba, the then RBZ governor, argued that there was need for the RBZ to be responsible for both licensing and supervision as “the ultimate sanction obtainable to a banking supervisor is the knowledge by the banking sector that the license issued will be cancelled for flagrant violation of operating rules”. However the government seemed to have resisted this until January 2004. It can be argued that this deficiency could have given some bankers the impression that nothing would happen to their licences. Dr Tsumba, in observing the role of the RBZ in holding bank management, directors and shareholders responsible for edges viability, stated that it was neither the role nor intention of the RBZ to “micromanage edges and direct their day to day operations. “
It appears though as if the view of his successor differed considerably from this orthodox view, hence the evidence of micromanaging that has been observed in the sector since December 2003.
In November 2001 the Troubled and Insolvent edges Policy, which had been drafted over the past few years, became operational. One of its intended goals was that, “the policy enhances regulatory transparency, accountability and ensures that regulatory responses will be applied in a fair and consistent manner” The prevailing view on the market is that this policy when it was implemented post 2003 is definitely deficient as measured against these ideals. It is contestable how transparent the inclusion and exclusion of unprotected edges into ZABG was.
A new governor of the RBZ was appointed in December 2003 when the economy was on a free-fall. He made meaningful changes to the monetary policy, which caused tremors in the banking sector. The RBZ was finally authorised to act as both the licensing and regulatory authority for financial institutions in January 2004. The regulatory ecosystem was reviewed and meaningful amendments were made to the laws governing the financial sector.
The Troubled Financial Institutions Resolution Act, (2004) was enacted. As a consequence of the new regulatory ecosystem, a number of financial institutions were distressed. The RBZ placed seven institutions under curatorship while one was closed and another was placed under liquidation.
In January 2005 three of the distressed edges were amalgamated on the authority of the Troubled Financial Institutions Act to form a new institution, Zimbabwe Allied Banking Group (ZABG). These edges allegedly failed to repay funds progressive to them by the RBZ. The affected institutions were Trust Bank, Royal Bank and Barbican Bank. The shareholders appealed and won the allurement against the seizure of their assets with the Supreme Court ruling that ZABG was trading in illegally acquired assets. These bankers appealed to the Minister of Finance and lost their allurement. afterward in late 2006 they appealed to the Courts as provided by the law. Finally as at April 2010 the RBZ finally agreed to return the “stolen assets”.
Another measure taken by the new governor was to force management changes in the financial sector, which resulted in most entrepreneurial bank founders being forced out of their own companies under varying pretexts. Some ultimately fled the country under threat of arrest. Boards of Directors of edges were restructured.
Economically, the country was stable up to the mid 1990s, but a downturn started around 1997-1998, mostly due to political decisions taken at that time, as already discussed. Economic policy was pushed by political considerations. consequently, there was a withdrawal of multi- national donors and the country was secluded. At the same time, a drought hit the country in the season 2001-2002, exacerbating the injurious effect of farm evictions on crop production. This reduced production had an negative impact on edges that funded agriculture. The interruptions in commercial farming and the concomitant reduction in food production resulted in a precarious food security position. In the last twelve years the country has been forced to import maize, further straining the tenuous foreign money resources of the country.
Another impact of the agrarian reform programme was that most farmers who had borrowed money from edges could not service the loans however the government, which took over their businesses, refused to assume responsibility for the loans. By concurrently failing to recompense the farmers promptly and fairly, it became impractical for the farmers to service the loans. edges were consequently exposed to these bad loans.
The net consequence was spiralling inflation, company closures resulting in high unemployment, foreign money shortages as international supplies of funds dried up, and food shortages. The foreign money shortages led to fuel shortages, which in turn reduced industrial production. consequently, the Gross Domestic Product (GDP) has been on the decline since 1997. This negative economic ecosystem meant reduced banking activity as industrial activity declined and banking sets were pushed onto the similar instead of the formal market.
As presented in the graph below, inflation spiralled and reached a peak of 630% in January 2003. After a fleeting reprieve the upward trend continued rising to 1729% by February 2007. Thereafter the country entered a period of hyperinflation unheard of in a peace time period. Inflation stresses edges. Some argue that the rate of inflation rose because the devaluation of the money had not been accompanied by a reduction in the budget deficit. Hyperinflation causes interest rates to soar while the value of collateral security falls, resulting in asset-liability mismatches. It also increases non-performing loans as more people fail to service their loans.
Effectively, by 2001 most edges had adopted a conservative lending strategy e.g. with total advances for the banking sector being only 21.7% of total industry assets compared to 31.1% in the past year. edges resorted to volatile non- interest income. Some began to trade in the similar foreign money market, at times colluding with the RBZ.
In the last half of 2003 there was a harsh cash shortage. People stopped using edges as intermediaries as they were not sure they would be able to access their cash whenever they needed it. This reduced the place base for edges. Due to the short term maturity profile of the place base, edges are typically not able to invest meaningful portions of their funds in longer term assets and consequently were highly liquid up to mid-2003. However in 2003, because of the need by clients to have returns matching inflation, most native edges resorted to speculative investments, which yielded higher returns.
These speculative activities, mostly on non-chief banking activities, drove an exponential growth within the financial sector. For example one bank had its asset base grow from Z$200 billion (USD50 million) to Z$800 billion (USD200 million) within one year.
However bankers have argued that what the governor calls speculative non-chief business is considered best practice in most progressive banking systems worldwide. They argue that it is not uncommon for edges to take equity locaiongs in non-banking institutions they have loaned money to safeguard their investments. Examples were given of edges like Nedbank (RSA) and J P Morgan (USA) which control great real estate investments in their portfolios. Bankers argue convincingly that these investments are sometimes used to hedge against inflation.
The instruction by the new governor of the RBZ for edges to unwind their locaiongs overnight, and the immediate withdrawal of an overnight accommodation sustain for edges by the RBZ, stimulated a crisis which led to meaningful asset-liability mismatches and a liquidity crunch for most edges. The prices of similarities and the Zimbabwe Stock Exchange collapsed simultaneously, due to the enormous selling by edges that were trying to cover their locaiongs. The loss of value on the equities market meant loss of value of the collateral, which most edges held in lieu of the loans they had progressive.
During this period Zimbabwe remained in a debt crunch as most of its foreign debts were either un-serviced or under-serviced. The consequent worsening of the balance of payments (BOP) put pressure on the foreign exchange reserves and the overvalued money. Total government domestic debt rose from Z$7.2 billion (1990) to Z$2.8 trillion (2004). This growth in domestic debt emanates from high budgetary deficits and decline in international funding.
Due to the volatile economy after the 1990s, the population became fairly mobile with a meaningful number of professionals emigrating for economic reasons. The Internet and Satellite television made the world truly a global village. Customers demanded the same level of service excellence they were exposed to globally. This made service quality a differential advantage. There was also a need for edges to invest heavily in technological systems.
The increasing cost of doing business in a hyperinflationary ecosystem led to high unemployment and a concomitant collapse of real income. As the Zimbabwe Independent (2005:B14) so keenly observed, a direct outcome of hyperinflationary ecosystem is, “that money substitution is rife, implying that the Zimbabwe dollar is relinquishing its function as a store of value, unit of account and medium of exchange” to more stable foreign currencies.
During this period an affluent native part of society emerged, which was cash high but avoided patronising edges. The emerging similar market for foreign money and for cash during the cash crisis strengthened this. Effectively, this reduced the customer base for edges while more edges were coming onto the market. There was consequently aggressive competition within a dwindling market.
Socio-economic costs associated with hyperinflation include: erosion of purchasing strength parity, increased uncertainty in business planning and budgeting, reduced disposable income, speculative activities that divert resources from productive activities, pressure on the domestic exchange rate due to increased import need and poor returns on savings. During this period, to augment income there was increased cross border trading in addition as commodity broking by people who imported from China, Malaysia and Dubai. This effectively meant that imported substitutes for local products intensified competition, adversely affecting local industries.
As more edges entered the market, which had suffered a major brain drain for economic reasons, it stood to reason that many inexperienced bankers were thrown into the thorough end. For example the founding directors of ENG Asset Management had less than five years experience in financial sets and however ENG was the fastest growing financial institution by 2003. It has been suggested that its failure in December 2003 was due to youthful zeal, greed and without of experience. The collapse of ENG affected some financial institutions that were financially exposed to it, in addition as eliciting depositor flight leading to the collapse of some native edges.