Shape up or ship out, RBZ tells banks

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RBZ

BY SHAME MAKOSHORI
BANKING sector experts have thrown their weight behind the Reserve Bank of Zimbabwe (RBZ)’s move to tighten screws on operators that fail to comply with new minimum capital requirements, which came into force this January.

After pursuing the moral suasion route on the issue of capitalisation, RBZ governor John Mangudya said in last week’s monetary policy statement (MPS) that shareholders would have to forgo dividends if their firms failed to meet the new minimum thresholds.

In a seemingly hardline stance, uncharacteristic of the man at the helm of Zimbabwe’s financial system, Mangudya wants shareholders in such banks to seek his approval before dividends can land in their accounts.

Under the new regime, banks are compelled to have the equivalent of at least US$30 million in minimum capital.

This will be important in making sure that the financial institution is safe and sound, and has fallback positions in the event of shocks. It was a crucial step by the RBZ chief, who has been working round the clock to avoid a recurrence of deadly financial sector failures, which rattled Zimbabwe’s once vibrant financial system between 2003 and 2008. Back then, dozens of big and small banks faltered under the weight of a rot in governance, which coincided with the global financial crisis.

In the end, an army of bank executives fled the country once the RBZ started demanding explanations. There has been less bloodbath since 2015, when the last remnants of a bad past collapsed, leaving behind a leaner, but reliable and significantly safer financial system.

Still, Mangudya, who is seeing through the final leg of his tenure at the RBZ, is determined to leave behind a clean sheet — and his new measures could be one of his final steps to galvanise a financial system that has generally been sound since he took over in 2014.

The sad thing is that while bank safety appears to have improved, the sector still has significantly less to offer to a market that so desperately requires capital after two decades of hard knocks. The trouble is that banks could revert to retaining their resources and making even lesser interventions in terms of lending should they fall under tremendous pressure to shore up their capital.

But capital market analyst Mike Nhete is of the opinion that bank executives and their shareholders should be in constant touch to see how they can navigate the capital demands.

“Banks management can approach their shareholders to raise capital,” he said.

“Some will opt to retain dividends to add to capital. But you find that some shareholders are ready to invest more to help banks meet their minimum capital requirements.”

He spoke as the central bank on Monday issued an update that Nedbank, one of five banks that had reportedly failed to meet minimum capital requirements in last week’s MPS, had raised enough capital.

“Further to the announcement in the monetary policy statement of February 7, 2022, that Nedbank Zimbabwe Limited was non-compliant with the minimum capital requirement as at December 31, 2021, the bank is pleased to advise the public that Nedbank has raised additional capital through a rights issue and is now compliant with the minimum capital requirement of ZW$ equivalent to US$31,1 million, against the regulatory minimum of the ZW$ equivalent to US$30 million,” Mangudya said in a market update.

The State-run AFC Commercial Bank, together with CBZ Building Society, National Building Society and ZB Bank are the other banks that failed to meet the US$30 million benchmark. However, they have all announced their game plans, which include merging some units in order to comply.

The RBZ said AFC was granted extension for compliance to December 2022, while Nedbank was ordered to comply by the end of June. Zimbabwe’s biggest banking group, CBZ Holdings Limited, recently said it was set to merge its major units to comply.

It said it would merge its flagship commercial banking unit, CBZ Bank Limited and CBZ Building Society. The banking group has applied to Finance minister Mthuli Ncube for approval.

The proposed transaction comes as CBZ is seeking to create a domestic and regional multi-asset class business in the financial services sector. The RBZ said NBS was granted an extension to comply by the end of March 2022, while ZB Bank, would merge with ZB Building Society. Generally, higher bank capital contributes to financial stability in any market. According to experts, well capitalised banks can absorb losses during a crisis or other distressful events.

They say in addition to financial stability, higher bank capital tends to curb risk-taking because shareholders would be having more skin in the game. Central bank capital requirements compel banks to comply with minimum ratios of capital in relation to their risk-weighted and unweighted assets. However, higher capital requirements could lead some banks cutting lending in the short run, according to experts.

“Before the global financial crisis, regulation in many countries allowed banks to take excessive risk without holding adequate amounts of high-quality capital, such as common equity,” according to the Global Financial Development Report 2019/20.

“But the Basel III framework, which was proposed after the crisis in 2009, aims to increase the quality and quantity of capital that banks can reserve in order to stand any forms of shocks along the way. Basel III has been widely adopted in big economies, such as those with membership to the Organisation for Economic Co-operation and Development (OECD),” the report said. In contrast, developing economies have been taking a more cautious approach.

According to experts, banks operating in high-income economies are holding more regulatory capital relative to their risk-weighted assets now than before the global financial crisis.

“The global financial crisis in 2007/09 revealed significant weaknesses in the regulatory and supervisory system, leading to major reform efforts. Experts agree that the crisis stemmed in part from regulatory and supervisory failures. These failures extended to different areas of banking regulation, but capital regulation was lacking as well, in the sense that it did not provide banks with enough high-quality equity capital to weather the crisis. It also did not sufficiently curb bank risk-taking before the crisis. There is a consensus as well that regulatory weaknesses stemmed in part from the lack of enforcement of existing regulations and the failure to use supervisory powers,” the report added.

It said: “Since the financial crisis, regulators have been revamping regulation by, for example, launching the Basel III framework. Capital regulation is a major element of this reform effort, so it is the subject of this chapter. The chapter begins by defining bank capital and summarising its main functions. It then discusses the reasons for regulating bank capital and reviews efforts to standardise capital regulation across countries (Basel I and II)”.

In his MPS, Mangudya said the sector remained adequately capitalised, with average capital adequacy and tier one ratios of 32,86% and 26,54%, respectively, above the regulatory minima of 12% and 8%, respectively.

The aggregate core capital increased by 59,11% from $63,39 billion as at September 30, 2021 to $100,83 billion as at December 31, 2021. He said the banking institutions bolstered their capital positions through organic growth including recapitalisation of revaluation gains on investment properties as well as capital injection by shareholders.

The RBZ said it was confident that the remaining institutions would meet minimum capital requirements by December 31, 2022. Mangudya said the banking sector asset quality also remained satisfactory with an average non-performing loans to total loans ratio of 0,94% as at December 31, 2021, against an international benchmark of 5%.

Total banking sector loans and advances increased by 61% from $142,79 billion as at June 30, 2021 to $229,94 billion as at December 31, 2021, largely attributed to the translation of foreign currency denominated loans.

  • This article first appeared in the Weekly Digest, a publication of Alpha Media Holdings