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DPC warns of bank failures

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THE Depositors Protection Board has warned that several banks may go under following a steep rise in minimum capital requirements for banking institutions.
Report by Bernard Mpofu Chief Business Reporter

The Reserve Bank of Zimbabwe in August announced an eight-fold increase in minimum capital requirements for commercial banks to $100 million.

DPC legal counsel Vusi Vuma yesterday told the Parliamentary Portfolio Committee on Budget and Finance at a pre-budget consultative meeting in Harare that the country could face bank failures, adding that the corporation was undercapitalised to refund depositors in the event this happens.

“Raising of capital levels by the central bank causes challenges because most of these banks won’t be able to comply with the capital levels. We are likely to see failure of banks and we do not have funds to compensate depositors,” said Vuma.

He said lack of confidence in the financial sector remained a major concern due to the government’s failure to compensate depositors for Zimbabwe dollar accounts that became redundant after the introduction of multiple currencies in 2009.

Failure by treasury to restore the central bank’s lender-of-last-resort function, according to the DPC, has also affected confidence in the fragile financial services sector.

The DPC, Vuma said, requires $10 million to minimise and absorb shocks from bank failures. The acting DPC chief executive officer said banks were paying low premiums to the corporation due to viability problems.

“We are faced with a situation where we are supposed to be drivers of instilling public confidence in the banking system, but we find ourselves in a Catch 22 situation in that premiums come from the banks and the banks are not operating at optimal levels. As a result, the premiums that they have paid to the DPC are very, very low,” said Vuma

“Investigations show that $3,8 billion is circulating outside the formal banking system. This shows that confidence is low and there is need for more final inclusion.

“We propose that the ministry of Finance takes seriously into account the implementation and recapitalisation of the central bank.”

The DPC also proposed that Finance Minister Tendai Biti come up with “incentives” for banks to reduce the cost of borrowing in a bid to finance undercapitalised firms.

In a bid to ensure compliance to the new capital requirements, the central bank announced a phased recapitalisation exercise for the financial services sector, which is expected to be concluded by 2015.

This means that shareholders of commercial banks operating in the country are now expected to raise $100 million as minimum capital from the current $12,5 million.

Merchant banks, whose current capital requirements stand at $10 million, are now expected to also raise $100 million in capital.

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