HomeOpinion & AnalysisColumnistsThe case for adequate capital

The case for adequate capital


The Reserve Bank of Zimbabwe (RBZ) governors recent recapitalisation ultimatum for undercapitalised banks, which ironically expired on St Valentines Day, has once again firmly placed recapitalisation on the regulatory agenda.

As the market eagerly awaits the outcome of the flurry of recapitalisation initiatives of those banks that were yet to comply with the minimum regulatory requirements, the question uppermost in many peoples minds is how the RBZ will play the endgame.

Some, irked by the prolonged fixation on the banking sectors recapitalisation process, might be tempted to ask: Why all the foofaraw about ensuring that banks in particular are adequately capitalised?

After all, arent there enough companies in other sectors of the economy which are severely undercapitalised and chronically debt-ridden to the point of being technically insolvent?

Havent their stories been told enough for the authorities to care? There is one answer to all these questions: The banking sector plays a critical role in the realisation of the development aspirations of the country in a way that the manufacturing sector, for instance, cannot.

And what role does adequate capital play in this scheme of things? For an answer, I enlist the services of Simphiwe Tshabalala, the CEO of the Standard Bank of South Africa Ltd, who in mid-2011 wrote in contribution to the contentious nationalisation debate:

A banks capital is, almost literally, its life blood. Whereas a manufacturing concern uses capital for funding plant and machinery, a bank requires capital to shield depositors against the risks it assumes in its lending, investment and trading activities.

Accordingly, a banks ability to take deposits safely and to lend responsibly depends almost exclusively on the size and quality of its capital base and on how much it is costing it ( in returns to shareholders or interest payments to bond holders) to maintain that capital.

If a banks capital base becomes smaller and more costly depositors funds are put at risk and lending, investment and trading has to contract.

I couldnt have said it any better, Sim. In just three sentences, the fundamental difference between a bank and a manufacturing concern is condensed, while the case for adequate capitalisation is clearly articulated.

So what happens when banks do not have adequate capital? Confidence collapses, yet banking systems rely on confidence.

Such as collapse of confidence, if left unchecked, can easily cause the banks to face a liquidity crisis, which can in turn, translate to a solvency crisis with ghastly consequences on the real sector of the economy.

It is this delicacy of the financial sector which, even as we push the indigenisation agenda, we must be mindful of, lest we invoke the law of unintended consequences.

Speaking in the context of the indigenisation of the banking sector, Finance minister Tendai Biti once alluded to this delicate balance between regulation and prudence:

One thing we have made very clear is that banks are different from mines because mines sit on capital whilst banks are conveyors which means that they depend on their depositor base. A bank is as good as its deposits.

Banks that are adequately capitalised become more resilient to external shocks and because they have stronger balance sheets, they can underwrite larger and longer-dated loans therefore stimulating the kind of meaningful economic growth that Zimbabwe needs now.

Raising minimum capital levels necessarily increases the amount of money available for borrowing; so it can have the effect of bringing borrowing rates down.

A number of African countries such as Ghana, Zambia and Uganda have increased their minimum capital levels in recent memory.

It was, however, the reaction of the Ghana Association of Bankers (GAB) to this development, that intrigued me.

It is not for anybody to determine how big a bank in Ghana should be . . . lets face it; some banks want to be small, why not? There could be a bank that wants to play only in Accra, yes it has the right.

Ghanaians have been given licenses to establish banks and they are doing quite well, serving some customers who are happy.

Now you are pushing them to raise capital, do you know what that means? Most of them have to go offshore to bring foreign investors so if we are not careful before you blink all the banks in Ghana are foreign-owned because you are pushing them to raise capital which they cannot find locally, ranted Asare Akuffo, president of the GAB expressing concern about the artificial growth of banks as a result of the mandatory minimum capital requirements.

In response to Akuffos views, I would say sometimes a price just has to be paid no matter how damaging it may be to our self-esteem.

I would defend to the death the right of some banking institutions to remain small, but I would also hasten to add that for the small price of relinquishing some level of shareholding control to those who have capital regardless of whether they are foreign or local, regardless of whether it is on a temporary or permanent basis we can achieve stability.

If we do that, our chances of owning 10% of an elephant, rather than 100% of a rat, as Deputy Prime Minister Arthur Mutambara famously said in 2009, can be greatly enhanced.

Whats your take on the adequacy of the minimum capital levels at $12, 5 million for commercial banks and $10 million for merchant banks?

Should the RBZ be lenient with undercapitalised banks, given the constrained liquidity situation currently prevailing in the country?

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

Omen N Muza writes in his personal capacity.

He is a banker and Managing Director of TFC Capital (Zimbabwe) (Pvt) Ltd, a Harare based financial advisory company with interests in banking and agriculture as well as the convergence area between them.

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