Financial Sector Spotlight: Rightsizing is banking’s new black

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The phrasal template “ . . . is the new black” denotes the sudden popularity or versatility of an idea.

Over the past two or so years rightsizing, part of which is necessarily staff rationalisation, has become the buzzword and assumed an integral role in banks’ survival strategies, so it could be described as banking’s new black.

This trend is however expected to enter the downward mode as recovery gradually takes hold in the sector.

When the economy was dollarised in February 2009 and cost structures hardened into a lump in the throat of banks, the bitter pill of retrenchment could not immediately be swallowed due to regulatory prohibitions.

Resultantly, banks were forced to institute measures such as “hot-seating” under which employees generally worked for two weeks in a month and went on unpaid leave for the other two weeks.

In some cases employees had to go on unpaid leave for up to six months. Apparently, even this wasn’t enough against the backdrop of a slow and cautious recovery which made retrenchment a matter of when, not if.

In June 2010, one year into dollarisation, it was feared that as many as 1 000 jobs would be lost by the end of the year, but by January 2011 when 1 455 employees left the central bank in one fell swoop, the tally easily rose to well over 2 000 in a sector which is estimated to employ about 10 000 people.

Banks which retrenched during the transitional period from early 2009 to date include CFX, which retrenched as it prepared to merge with Interfin Merchant Bank, Kindgom Financial Holdings Limited (183), ZB Bank (122), POSB (165), Metropolitan Bank (100), Standard Chartered Bank (98), Barclays Bank (206), NMB Bank (110), MBCA Bank Limited (38), Agribank (160) Premier Banking Corporation (now Ecobank) (42), CABS (90) and First Banking Corporation(a 30% reduction in head count). Since the process has been on-going for some banks, these statistics may have changed already by now.

While banks view retrenchment as a necessary evil meant to ensure long-term survival, the Zimbabwe Banks and Allied Workers’ Union (Zibawu) has tended to treat it as “short-termist” and unwarranted – the equivalence of killing the patient to cure the disease or throwing away the baby with the bath water.

They say banks should pay due regard to the difficulties employees went through from 2007 to 2009.

“Almost 75% of banks are retrenching. We have witnessed retrenchments, which are unjustifiable if considered against any economic factor. It has just become fashionable for banks to retrench,” said Zibawu president Peter Mutasa in mid-2010 when rationalisation headwinds were blowing ominously through the sector in mid-2010.

The stark reality is that despite the massive job losses so far, the threat of further job losses has not subsided as some banks are contemplating further downsizing postures even as you read this.

In part two of this article, we will count the social and economic costs of retrenchment, pay due regard to its positive spin-offs as it apparently is not without its saving graces and look into the FSS crystal ball for future trends.

But first things first, this installment seeks an understanding of the reasons why banks needed to retrench in the first place.

Changing operation environment: One of the immediate results of the transition to the multi-currency regime was the significant rise, in real terms, of staff costs to unsustainable levels against the background of constrained revenue generation capacity.

Naturally, this called for the streamlining of operations, especially as the environment changed overnight and banks literally had to start from scratch.

The financial sector was virtually the last to be allowed to charge fees and commissions in foreign currency under the short-lived forerunner of dollarization, the foreign exchange licenced warehouses and retail shops (Foliwars) system.

l Re-alignment of operational structures to reduced volumes of business: Structure follows strategy, as they say, and strategies have changed vastly in line with the new operating environment characterized by significant financial disintermediation and liquidity challenges.

From a high of 5 million active bank accounts around 2006-2007, the number was said to have plunged to under 1 million accounts by end of 2010.

During the era of hyperinflation, most banks
enlarged their staff complements in order to cope with increased activity in the banking halls where people frantically chased the illusion of money which occasionally showed up in one’s hands as worthless bearer cheques.

For instance, the Reserve Bank would normally require a staff complement of about 500 but at the height of its quasi-fiscal activities, had a 2000 strong workforce.

l Competitive/market share issues: In the wake of dollarisation, about 50% of total bank deposits where in the hands of only three banks namely CBZ Bank Limited, Stanbic Bank and Standard Chartered Bank.

This meant that more than twenty other banks had to share the remaining 50%, which intensified and bloodied the competitive ocean, hence the need for cost-efficient, leaner and meaner, operating structures.

Sadly, this lop-sided market share has persisted to this day and as at June 30, 2011 60% of deposits were still in the hands of the top five banks namely CBZ Bank Limited, Stanbic Bank, BancABC, Standard Chartered Bank and Barclays.

l Unsustainable remuneration models: Over the years, remuneration models in the banking sector become quite generous to the point of being considered extravagant or opulent by outsiders.

Such remuneration models had their origins in the liberalisation of the financial services sector in the early 1990s which saw the formation of locally owned banks such as Trust Bank and NMB Bank which had to up the ante in terms of their remuneration packages if they entertained any thoughts of attracting experienced staff from the established or so-called traditional banks.

Weigh in with your insights on omen.muza@gmail.com.

Omen N. Muza is a banker and Managing Director of TFC Capital (Zimbabwe) (Pvt) Ltd who writes in his personal capacity.