The Sunday News
THE local financial system has experienced periods of distress characterised by bank failures, as well as severe deterioration of the whole financial system’s health.
In response to bank collapses, many monetary policy revisions have been done by the Reserve Bank of Zimbabwe to reduce bank failure cases. A number of banking institutions with deep-rooted structural anomalies, inadequate risk management systems, poor corporate governance practices, liquidity and solvency challenges failed to adjust to the difficult macro-economic environment obtaining in the post 2003 era and subsequently most of them closed and these have included, ENG Capital, Trust Bank, Royal Bank, Universal Merchant Bank (UMB), Interfin Bank, CFX Bank, Renaissance Bank (later Capital Bank), Barbican Bank and the rebranded and reconstituted Zimbabwe Allied Bank (ZABG), among others. The major questions is whether non-performing loans have been the major reason for the collapse of indigenously owned banks and what can be done to make sure Zimbabwe’s banking sector remains afloat in this highly volatile economic environment.
Brief Background to Banking Sector Insolvency in Zimbabwe
Banks balance sheets mainly constitute of liabilities that are usually short-term deposits and assets that take the form of both short and long-term loans to corporates, SMEs and individual consumers. When the value of bank assets falls short of the value of liabilities, banks are insolvent. Bank insolvency thus can be explained as bank distress or bank failure and stakeholders such as investors, bank managers, depositors and regulators share keen interest in knowing what causes banks to fail and also desire the ability to predict which banks will get into difficulty so as to protect themselves from negative repercussions emanating from bank failures. Bank failures normally bring dire consequences to stakeholders outside the failed banks themselves and are usually catastrophic because of domino fashioned fears that they may spread all over the banking and financial system as well as the entire economy.
Prior to 2009, extensive quasi-fiscal activities and weak corporate governance resulted in a significant deterioration of the RBZ’s balance sheet, resulting in a negative equity position of some US$1,2 billion (12 percent of 2012 GDP). Creditor actions have claimed many assets of value held by the RBZ or its subsidiaries; and in 2012, some of the commercial banks’ claims on the RBZ were exchanged by newly-issued government bonds. With its very limited income generating capacity, the RBZ’s operating costs are funded by budgetary grants and occasional asset sales. The RBZ’s impaired balance sheet has constrained its ability to undertake its core functions — including as a lender-of-last-resort, exacerbating financial sector vulnerabilities. However, the lack of fiscal space and the absence of functional debt markets limit the options for recapitalising the RBZ. With the loss of the lender of last resort position of the RBZ post 2009 the banking sector has been in a precarious position with structural weaknesses, most of which had their roots in the liberalisation of the banking sector under the Economic Structural Adjustment Programme (Esap) of 1991.
Role of Banks and effects of NPLs in Zimbabwe
Since the liberalisation of the Zimbabwean economy in the early 1990’s, there have been significant changes in the structure of the banking sector. In the 1990s following liberalisation of the financial sector, there was a credit boom in which loans were issued without proper risk assessment or appropriate valued collateral. As a tightening of monetary policy to curtail high bouts of inflation during the period there was a reduction in aggregate demand which caused a slowdown in economic activity.
In Zimbabwe, the level of NPLs is high and unevenly distributed across banks. The high levels of NPLs mainly reflect unsound lending practices, including cases of insider and related party loan exposures, weak corporate governance, and poor risk management. In August 2012, the RBZ announced a steep increase in the minimum capital requirement for banks, from US$12,5 million to US$ 100 million over a two-year period, which was expected to stimulate a consolidation and strengthening of the banking sector, which includes a large number of small weakly capitalised banks.
Fourteen banks met the December 2012, US$25 million minimum capital requirement; five banks had made significant progress towards compliance, and the remaining two banks submitted recapitalisation plans that needed improvement to be considered credible.
Banking sector vulnerability post 2003
The reduction in economic activity in Zimbabwe resulted in the poor servicing of loans which caused a spike in NPLs. NPLs/Loans ratio peaked to levels never seen before. In 2003-2005 at the crescendo of the Zimbabwean financial crisis, many commercial banks became insolvent. By end December 2004 NPLs reached a staggering 28,9 percent. The turbulence in the Zimbabwean financial sector on the back of serious liquidity shortages during the last quarter of 2003, necessitated the introduction of the Troubled Banks Fund (TBF) in December 2003 with the aim of safeguarding and minimising disruptive medium-term liquidity mismatches. The TBF served as a contingent pool from where banks that faced liquidity challenges accessed funding to stabilise their operations.
The thrust was to ensure financial stability while the affected institutions put in place corrective and remedial measures to address the liquidity challenges.
Banks that accessed the TBF were required to operate under close supervision by the RBZ and also to provide a plan of measures to resolve their liquidity challenges. The monetary policy statement issued on 18 December 2003 marked a turning point for the Zimbabwean financial services sector.
Amid fears of a deeper financial crisis to the whole banking industry through systemic risk, RBZ embarked on rigorous effort to instil discipline and bring sanity into the financial sector. Some banking institutions were found to be unsafe and unsound, such that NPLs rose from about 15 percent in 2000 to nearly 30 percent in 2004.
By the end of 2004, 10 banking institutions which included ENG Capital, Trust Bank, Royal Bank, United Merchant Bank (UMB), Interfin Bank, CFX Bank, Renaissance bank (later Capital Bank), Barbican Bank and ZABG had been placed under curatorship, two were under liquidation, and one discount house had been closed. The banking public endured tremendous psychological, emotional, social and financial ruin. Corrective action by RBZ was taken, which resulted in the merging of Barbican, Royal and Trust Bank to form ZABG in 2005 which was later disintegrated in 2010 (RBZ, 2012).
The 2007-08 financial crises saw Beverly Building Society disappear when it was acquired by CBZ. CFX which previously failed in 2004 collapsed for the second time when it was acquired by Interfin in 2010. Premier Banking Corporation was also acquired by Ecobank in the same year. Renaissance Merchant bank (later Capital Bank Corporation Ltd) partially failed in June 2011 and the bank managed to return back into the field after a period of curatorship by RBZ in March 2012. Capital Bank finally went under by 2014 even though it had attracted fresh funding from the cash rich but poorly managed National Social Security Authority. The institution failed due to gross irregularities which took the form of breakdown in corporate governance practices, abuse of group structure, technical insolvency and misuse of borrowed and depositors funds.
According to RBZ, the major cause of recent bank failures were largely stemming from gross undercapitalisation, higher non-performing loans and critical liquidity challenges that banks were facing. Banks such as Genesis and Royal bank were relenting unacceptable losses, such that Royal Bank had posted a loss of US$598 million as at 30 June 2012. In terms of capitalisation, Royal and Genesis had US$1,850 million and US$3,20 million respectively, which were far below the mandated capital levels of US$25 million. Another bank of issue is AfrAsia Kingdom Bank which recorded debacle depletion in its capital base from US$31 million in December 2012 to US$2,4 million in June 2013 and it subsequently closed.
Post 2009 banking sector vulnerabilities
Dollarisation in Zimbabwe brought with it stability and growth and people felt confident to recapitalise their businesses. How else could bank deposits grow from US$300 million in 2009 to over US$5,2 billion as of end of 2016 would be the question to be answered. Post 2009, many Zimbabweans brought in funds from abroad in order to recapitalise their businesses. Hyperinflation had decimated the balance sheets of most companies in the previous years forcing corporates to inject fresh capital into their businesses. Between 2009 and 2012, Zimbabwe’s economy grew by more than seven percent annually. Since 2013, growth has slowed significantly following the slump in commodity prices, weakening global growth, a strong US dollar — all these factors have led to a dip in economic activity in the country. The rate of NPLs increased from below two percent in March 2009 to above 20 percent by September 2014, in tandem with the decline in real economic growth from 11,4 percent recorded in 2010 to an estimate of 3,1 percent in 2014 and this trend can only further deteriorate.
In the next article one will endeavour to look closely at the post 2009 era banking sector problems and then come up with policy suggestions for reform.
-Butler Tambo is a Policy Analyst who works for the Centre for Public Engagement and can be contacted on [email protected]