HomeOpinion & AnalysisColumnistsNew capital measures: What’s the rationale?

New capital measures: What’s the rationale?

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The recent announcement of new capital rules for banks by the Reserve Bank of Zimbabwe (RBZ) has generated a lot of heat. When all is said and done, hopefully, it will have shed some light as well. Just like other major issues before it — land reform and indigenisation — the debate is not about whether the recapitalisation of banks is necessary or not, it is about how best to go about it for optimal benefit. In an attempt to put the matter into perspective, this two-part article first outlines my views on the rationale of the new capital measures, before part two considers the pros and cons of this regulatory move which — well-meaning as it is — has turned out to be quite contentious.

• Strengthening of the banking sector: Despite the many conspiracy theories stakeholders might wish to advance as the basis of the new capital levels, it is undeniable that if the capital levels are implemented successfully — as they are likely to be — the result will be a stronger, more adequately capitalised banking sector which can better serve the development needs of the country. The creation of a strong banking sector is reportedly one of International Monetary Fund’s conditions for securing a staff monitored programme seen as critical in unlocking the country’s liquidity logjam and improving access to much-needed longer term financing.

• Fortifying barriers to entry: The view that some bank licences were applied for solely for the purpose of making a quick buck for their owners has gained much currency in recent times, especially in the wake of recent bank failures. “The best way to rob a bank is to own one,” is a song well-sung these days. This view needs to be quickly dispelled before it does irreparable damage to public confidence in the banking sector. The new capital rules are seen as the regulator’s way of dealing with the resurgent problem of moral hazard by fortifying capital levels as a barrier to entry into the banking sector in order to weed out “opportunists” and keep “aspiring malcontents” at bay.

• Preservation of legacy: Some
analysts argue that with the RBZ governor(Gideon Gono) now approaching the tail end of his last term of office, the small matter of legacy assumes significant proportions. Naturally the legacy he would want to leave is one of a strong, adequately capitalised banking sector. Seen in that light, restoration of discipline and fostering stability in the banking sector becomes a huge priority, and with not very much time left to do the job, the market can expect vigorous pursuit of the recapitalisation agenda to its very logical conclusion. The governor wants to walk peacefully into the sunset with no one poking holes at his legacy and from the look of things, no one will be allowed to stand in his way. “I have 16 months to go to the end of my term. Any nonsense in the financial sector, believe me, you will go before I go . . .

I will make sure that before I go the banking sector will be as strong as at no other point in its history,” he said.

• Regional and international trends: Since end of January 2011 when the rewriting of the capital rules was hinted at during presentation of the Monetary Policy Statement, Gono has placed recapitalisation firmly and squarely in the context of current regional and international trends of improving not only the quantity but the quality of capital. The new rules therefore fit snugly into the Basel III agenda, with its stricter qualifying criteria and definition of bank capital. The regulator sees adequate capital not only as a necessary precondition for stability, but also as a source of competitive advantage.

• A subplot of the indigenisation saga: Given the well-documented and public turf wars between the governor of the RBZ and the Youth Development, Indigenisation and Empowerment minister, some people have been quick to cast the new capital rules as the former’s gambit in the indigenisation chess game. Proponents of this view contend that the new rules put bank licences firmly beyond the reach of those indigenous players who might want to use the veil of indigenisation to grab banks. The governor appeared not to help matters, judging by comments attributed to him during announcement of the new measures. “Capital is your precast wall that protects depositors’ funds. The higher the precast walls, the more, hopefully, you will expect that deposits are protected. The lower it is, the higher the risk my brother (Joseph) Chinotimba can just jump over,” he is reported to have said.

What are your views on the rationale of the new capital rules? Weigh in on
omen.muza@gmail.com

Omen 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, technology and agriculture, as well as the convergence area among them.

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