HomeOpinion & AnalysisColumnistsBank regulation: exploring the case for intrusion

Bank regulation: exploring the case for intrusion


Recently, I came across an article in the October edition of Euromoney Magazine which relentlessly pushes the hard line on bank regulation.

It indicated that banks in Singapore had lately adopted a new moderation in lending because the Ministry of Finance and the Monetary Authority of Singapore ordered them to do so in order to ensure a stable and sustainable property market where prices move in line with economic fundamentals.

Another Asian regulator, the Hong Kong Monetary Authority was similarly bold and curtly reminded banks of its guidelines on how they should set mortgage rates at sustainable long-term levels with reasonable margin for credit and other costs.

These initiatives have been touted as hands-on, interventionist regulation that muscles its way into competitive markets and dictates pricing and other terms, and are credited with having saved the banking sector in many countries from the worst effects of the global financial crisis.

Banks in South Africa, for instance, largely escaped the worst of the global crisis, thanks to tough regulation and a cautious approach to borrowing which limited the country’s exposure to foreign assets and protected South African banks from the toxic US mortgage-related securities.

Having administered them myself for several years as head of trade finance and exchange control for a local bank, I was hardly a fan of exchange controls and sometimes felt like a hatchet man, but in retrospect and with the benefit of hindsight, I realise that under the right circumstances, in the right mix and for the appropriate reasons, even exchange controls can be a force of good.

In South Africa where they were often criticised as too restrictive, exchange controls forced life insurers, companies and individuals to keep their money in local banks, making them less dependent on the foreign funding that was soon to dry up as investors started fleeing risk, hurting many a peer in other emerging markets.

Despite the salutary effects of tight regulation, many market players still however argue that there is a thin line between effective regulation and its ever-intrusive tendencies.

The case of the Mauritian banking sector however reinforces the argument for tight regulation of the financial sector.

Despite the country’s banking sector being tightly regulated, it was described by the World Bank as “outstanding” and Mauritius in fact provides its citizens with the best access to banking in Africa.

In 2008 it had the highest density of accounts at 2010 per 1000 adults. Addressing the World Bank, the governor of the Mauritian Central Bank once said: “You have recognised that there is a case for close regulation and supervision of the banking sector. If there is one thing that had brought markets tumbling down, it is a lack of supervision in countries which should have known better.”

While regulators such as those in Singapore, Hong Kong and Mauritius are manifestly looming large over financial markets and exerting their influence imposingly, it would appear that the opposite is true in Zimbabwe, if recent pronouncements by several experts are anything to go by. Speaking at the launch of the Banks and Banking Survey 2010, Sam Muradzikwa, the chief economist of the Development Bank of Southern Africa, said that the current role of the Reserve Bank is too narrow and does not resonate with the challenges of a developing country.

This is perhaps what Euromoney meant when they asserted that some “policy makers seem to be still bogged down in irrelevance”.

Muradzikwa characterises central banking in Zimbabwe as having “almost lost its relevance and completely lost its innocence.” In an article titled “Who needs a central bank or printing press?” Admire Mavolwane describes the central bank as being “nominally disempowered and left with a reduced or very little role to play in the economy”.

If one scratched this discourse a little more, the underlying issue that emerges is not only of loss of the levers of control but also of loss of moral high ground, without which the ability of the regulator to influence events becomes diminished and the regulatory may in fact find itself being influenced by events.

Muradzikwa attributes the Reserve Bank’s woes to the fact that it can no longer act as an effective lender of last resort (something that government has begun to address through the recent injection of
$7 million into the RBZ’s coffers), has lost the ability to influence money supply and is saddled with a debt burden of up to $1,3 billion which makes the institution
a burden to, rather than a facilitator of, economic growth.

It must, however, be noted the Reserve Bank cannot be accused of not carrying out regulatory activities akin to those seen in Singapore and Hong Kong.

In late 2009 the bank “urged” banking institutions to re-orient their lending portfolios to achieve thresholds for lending activities as follows: agriculture – 30%, manufacturing – 25%, mining – 25% and other – 20%.

Earlier in 2009, Reserve Bank governor Gideon Gono had said that he was “under pressure to crack the whip” on banks that chose to hoard liquidity instead of lending, and for good measure added that he believed such errant banks should carry out self-introspection to assess their relevance in the national economic matrix.

This cannot exactly be called flexing muscles, but it amounts to what would be called moral suasion. The question one must ask is, does moral suasion really work when the institution that seeks to apply it has “almost lost its relevance and completely lost its innocence”?

Under those circumstances, will market players voluntarily step up to the plate and take steps to correct real or perceived market imbalances and irregularities without being pushed to do so?

More recently, the Reserve Bank directed banks to publish their conditions of service, but how many have done so consistently, if at all?

Interrogating the role of the central bank, Mavolwane recently said that the question begging for an answer is what will be the role or more appropriately, the objectives, of the central bank in future.

“A recent trend elsewhere”, he said, “has been to move towards specifying objectives, rather than only assigning functions. These objectives have to be clearly stated in the statutes. Thus the first step is to amend the legislation establishing the bank, moving from functions to objectives.”

Around mid-August, I wrote in an article titled “Unintended Consequences” about Sij Biyam, the executive director of the Bankers’ Association of Zimbabwe warning “the Authorities” that they should “avoid falling into the pitfalls of yesteryear, where the financial markets were heavily regulated and controlled”.

His views could not have been any further from those expressed by Euromoney, which bankers in Zimbabwe may find inflammatory if not downright derogatory.

“Banks have shown themselves incapable of safeguarding the system in which they operate.

Intrusive, interventionist, expert, powerful, independent regulatory authorities are the answer. Bankers can avoid tax, overpay themselves, and find their way around every rule and ratio. They must learn to fear the regulator’s letter that begins politely: ‘It has come to our notice that. . .’” said the monthly publication.

I must admit that I was kind of floored by the intensity of the article’s bank-bashing sentiments.

Omen N. Muza is a banker and Managing Director of TFC Capital (Zimbabwe) (Pvt) Ltd. He writes in his personal capacity. Feedback: omen.muza@gmail.com

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