Addressing weaknesses in the banking sector will require the central bank to reform its supervision and surveillance capabilities. LANCE MAMBONDIANI
On January 31, Reserve Bank governor Gideon Gono quietly delivered his first Monetary Policy Statement (MPS) for 2013 with fewer stakeholders anticipating any real impact or purpose to it.
In the “good old days”, like Prophet Makandiwa, the governor was the first purveyor of quintillions of “miracle money”.
His policy statement was the centre of economic power and could pulverise people’s fortunes like a game of monopoly and send others into self- imposed exile.
In the wake of dollarisation, the MPS has perhaps become less relevant in setting the economic agenda. The latest MPS is no different.
Gono’s non-renewable eight-year-term will come to an end later this year.
In all respects, until then, he could be a “lame duck” and his policies inconsequential.
The latest MPS betrays this reality — it was an insipid update on developments to which the governor appears to have no absolute control.
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It certainly lacked his past venomous sting.
The only real shocker was the governor’s spectacular, (but politically correct) somersault on his previous opposition to the indigenisation of the banking sector. Although patently bad policy, every indication suggests foreign banks will capitulate and the banking sector will be indigenised.
Key issues in the policy statement To its credit, the policy statement focuses on the core functions of a central bank, management of the banking sector, interest rate policy, inflation targeting and an efficient payment system, something we wish the governor had been doing since taking office in 2003.
Significantly, amendments to the Banking Act (Chapter 24:20), largely credited to the Minister of Finance, are expected to come into effect in March 2013.
The amendments will seek to address the long-term challenges of ownership concentration within banks, corporate governance weaknesses and the monitoring and regulation of bank holding companies.
To increase protection of depositors and consumers of banking products, the Act will introduce the office of a Banking Ombudsman whilst a financial Development Council will be established to improve collaboration between different financial regulatory bodies.
Another welcome development is the proposal to establish a framework for credit rating bureaus. This is essential to reduce information asymmetries between lenders and borrowers and curtail problems with non-performing loans.
The RBZ has also proposed updates to its largely ineffective Corporate Governance Guideline (Guideline No. 01–2004/BSD). Since they were enacted in 2004, the guidelines have been woefully inadequate in curbing corporate governance weaknesses, abuse of depositors’ funds, asset stripping and managerial fraud. Corporate governance weaknesses within have contributed to fragility and persistent weaknesses within the sector.
The Sticking Points On the whole, the proposed changes have the potential to improve financial sector stability.
There are, however, a number of sticking points. The most damaging being the disproportionate increase in Capital Adequacy Requirements (CAR) which is the RBZ’s solution to the perennial banking crises.
It clearly is not. The current capitalisation levels of the banks suggest that the sector is increasingly becoming oligopolistic with a few banks at the top whilst the rest are at the bottom of the pyramid.
CBZ, with a market capitalisation of $111,79 million, has become the country’s largest bank (by capitalisation).
A majority of the other banks average a fifth of CBZ’s capitalisation levels.
The result is a concentration of approximately 75% of the deposits in the top 5 banks.
To pay their rent, the smaller banks have to hike their rates and depositors suffer. Whether you can achieve bank stability by reducing or eliminating competition is questionable.
Plurality and diversity are generally sources of stability — in banking as in nature.
The RBZ’s current approach means a liquidity crisis and weaknesses within lower-tier banks are inevitable and further collapses very likely.
Addressing weaknesses in the banking sector will require the central bank to reform its supervision and surveillance capabilities.
A bank is only as compliant as its regulator.
It can only be as good as the legal system that stands behind it.
Whilst it is admitted that almost anywhere in the world, some frauds in the banking sector are inevitable, in a functioning system it must be rare.
When fraud or the theft of depositors’ funds dominates, the effectiveness of the supervisor and the regulations themselves must be questionable so long as it fails to curb or respond to perpetual bank failures with the appropriate force. Given a licence to steal, thieves get busy, regardless of how high the CAR is.
Another aberration is the central bank’s failure to make up its mind on how to regulate the problems of ownership concentration through discretionary exemptions. The takeover of ZABG Bank by Honourable Minister Obert Mpofu is a case in point.
Allowing a single investor to own 99, 9% of a banking institution, even for two years, suggests we have not learnt anything from Roger Boka and his total ownership of United Merchant Bank — it often ends with some depositors in tears.
The collapse of indigenous banks in the past decade is inextricably linked to the excessive ownership concentration.
Basel requirements should be applied in context The Zimbabwean banking sector has not been short of regulation. In fact, throughout the current governor’s reign, the industry has been over-regulated.
The challenge is to create a regulatory environment with the capacity to enforce and apply regulations effectively and consistently. CAR cannot be applied arbitrarily.
It should be set by applying differential risk weights. Basel capital requirements are a good idea. However, disproportionate capital requirements without an actuarial calculation of relative risk can create perverse incentives and destabilise the sector.
A recurring problem in the banking sector is ownership concentration which in many cases has led to corporate governance weaknesses and the abuse of depositor’s funds.
Addressing ownership challenges and increasing personal liability for bank directors in the event of collapse has to be a priority in achieving bank stability.
lLance Mambondiani is a development economist and a Zimbabwean banking expert. He is a guest lecturer in International Finance & Development at a UK university. Contact email [email protected]. Twitter @DrMambondiani
