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New bank requirements: a red herring


In the recent Mid-Term Monetary Policy statement, the central bank has proposed a 10-fold increase in bank capital adequacy requirements (CAR) to $100 million. While the chronic fragility within the Zimbabwean banking sector requires urgent redress, the proposed adjustments are empirically unjustifiable and a gigantic red herring which spectacularly misses the point.

Following the global financial crisis, there is international consensus towards the implementation of Basel III and the need to strengthen the regulatory capital frameworks of banks, building on the three pillars of the Basel II framework. The reforms raise both the quality and quantity of the regulatory capital base and enhance the risk coverage of the capital framework.

However, the central bank’s abdication of effective regulation and supervision preferring to manage banks by a yearly increase in capital requirements is patently bad policy which takes the course of least resistance while failing to address the core of a 10-year crisis. The recurrence of near identical bank crises since 2003, even after several changes in the capital requirements, could indicate that the problem is less about adequacy, but a multi-dimensional cauldron of macroeconomic challenges, corporate governance problems, poor management practices and a largely ineffective and failing regulatory framework.

An increase in CAR has to be proportionate to the size of the banking sector and country’s economic activity. At the proposed level, with one of the lowest gross domestic product (GDP) ($10,7 billion), Zimbabwe will have the highest CAR in Africa, higher than South Africa with CAR at $39 million and a GDP of $408 billion. Besides being empirically mismatched, such an increase less than six months after a previous increase to $12 million defies realism and is the type of policy inconsistency which contributes to fragility within the banking sector.

Regulation is a tricky business; the law of unintended consequences always applies. The wrong decisions may well make future crises more likely and more severe, while regulation that is too heavy-handed could stifle future financial efficiency and innovation. In this case, there is no direct evidence to suggest that a Zimbabwe-dollar-like tenfold stratospheric increase of CAR will address weaknesses within banks. There is no evidence either to support the often repeated assertion that Zimbabwe is overbanked, in a competitive market with effective regulation and supervision, weaker banks should be forced out by market forces, such as the Royal Bank’s surrender of its licence.

Over the past decade, the indigenous bankers have represented Zimbabwe’s best entrepreneurial capabilities and a successful indigenisation model anchored on opening up space for local banks in a market previously dominated by foreign banks. There has been several success stories, NMB, Kingdom Financial Holdings and TN Bank are notable examples.

The identical problems faced by indigenous banks before and after the regulatory changes introduced following the near-systemic 2003 banking crisis suggest inadequacies in the current regulatory regime, weaknesses in supervision and surveillance and chronic regulatory forbearance.

Reports on the collapsed indigenous banks past and present have uncovered a similar pattern. In almost all cases, the investigations have revealed abuse of depositor’s funds, tunnelling and a high concentration of non-performing loans, most of them to connected parties all of which is symptomatic of poor corporate governance practices.

The major problem with the Zimbabwean banking crisis has been insider ownership concentration which has resulted in corporate governance weaknesses in private indigenous banks such as insider lending, abuse of depositors’ funds and speculative activities. In almost all cases, Zimbabwean indigenous banks suffer from a high concentration of connected insider owners in which the founders of the banks have absolute control.

Addressing the weaknesses within the banking sector would require a robust regulatory approach to the problem of ownership concentration.

While the current crisis has exposed multiple cracks in the financial system, a good rule of thumb for designing effective regulation is to focus almost exclusively on the specific source of the market failures and evaluate robust ways of addressing these failures through regulatory interventions.

Even though financial crises are rare, they are recurring phenomena, just like the business cycle.

Thus it is possible to think about crises—and how to respond to them—in a systematic manner.

What are the common causes of crises across their recurrences? Are there lessons to be learned from the crises of the past that can be helpful in the future? What responses to crises have been most successful? And based on these, what can be done next to try to improve stability without unduly undermining efficiency and innovation?

The central bank has to achieve equilibrium whilst focusing on the core of the problem — ownership concentration, connected lending and addressing the problem with non-performing loans.

The Banking Act will have to be reviewed, updated and adapted to give the central bank more powers of enforcement. A constant shift in CAR is a source of instability, a bad policy which will undermine innovation and the current attempts to indigenise the economy and should be reversed.

Lance Mambondiani is an expert on the Zimbabwean banking sector and a teaching assistant in Financial Markets & Corporate Governance and International Finance for Development at the University of Manchester. He can be contacted on lancem@btinternet.com

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