Zimbabwe: Let’s Take a Leaf From Global Financial Crisis

The Holy Bible starts from Genesis and ends with Revelations and in our local financial sector bank failure started with Genesis then Interfin and most recently Royal Bank. Almost everyone is hoping that the closure of Royal Bank would be the Revelations, the last.

However, news doing the rounds suggests that more banks are on the brink of failure.

With effects of financial and banking crisis being known to be associated with spillover effects from the banking sector to the corporate sector this leaves the depositors in confusion over their current bankers who might follow the trail sooner or later.

While the RBZ has belatedly jumped into action by announcing new capital requirements, it must be made clear that the problem cannot be solved by just throwing money.

Part of the problem emanates from the RBZ’s failure to carry out its mandate of lender of last resort.

The RBZ is not in a position to assist financial market orderliness by providing credit to the banks while they restructure their portfolios and capital structure.

This has undermined confidence in the whole banking sector and exposed the smaller banks to systematic risk, which should be normally addressed by the presence of a strong central bank which gives confidence to the public.

The new capital requirements while they maybe positive in the long run the timing doesn’t do much in building confidence in the sector.

Banks recently struggled to meet the current levels. The time frame proposed for recapitalisation suggests lack of patience on the part of the authorities if banks struggle to raise US$12,5 million in two years what hope is there for them to raise an additional US$87,5 million in less than two years?

The suggestion that banks can strengthen themselves by merging is a fallacy because you cannot create a strong bank by simply combining two weak banks.

A combination of weak banks will result in a bigger bank that is weak, which poses a more serious threat to the financial system.

Still on capital requirements it’s interesting to note that the RBZ is capitalised to the tune of less than US$10 million and possibly having negative core capital due to its massive quasi- fiscal activities driven debt levels.

There are plans to raise a lender of last resort fund of US$150 million with Government providing US$20 million and donors providing the rest.

Now if the RBZ and Government cannot raise US$150 million for the lender of last resort function, it makes sense for the Bankers’ Association of Zimbabwe to call for a reduced figure of US$20 million as it is closer to reality and more practical.

Should the levels be increased to US$100 million, the law of proportionality demands that RBZ be capitalised to at least US$2 billion for it to be able to support 26 banks.

RBZ role

The general populace might be tempted to put all the blame on RBZ’s department of banking supervision and surveillance for failure of execution of its duties.

However, research shows that many industrial countries, including Japan and the United States, generally have difficulties in managing a banking system.

Many would remember the 2007/08 global financial crisis that was another of such banking crises from the highly developed United States.

However, we may need to take a leaf from the global financial crisis in solving our spat of bank failures. One would quickly point out to mergers and acquisitions, bailouts, etc.

These indications may suggest that problems in this area must be very real. Research has further shown that in developing countries like Zimbabwe, the ability to supervise financial institutions is even more limited than in the industrial world, and risks may be more pronounced, especially if the country’s productive structure is relatively undiversified and capital controls limit diversification.

Furthermore, without substantial multilateral finance institutions like the World Bank and IMF assisting, there usually is only quite limited bank supervision.

Policy consultation seems to be lacking in the banking sector with several key stakeholders not singing from the same hymn book.

There is need for policy consultations, which will ensure that all stakeholders support announced policy as their input will be embedded in new policy.

Way forward

Supervision is one part of the solution to this problem but supervision faces chronic problems in many countries too, typically being starved of resources and subject to severe pay constraints.

Moreover, both political and economic forces lean towards supervisors keeping silent about problem banks until net worth is already negative.

Charity should begin at home on this one. The RBZ must be recapitalised to restore its stature as lender of last resort.

This will enable the RBZ to support the financial sectors in words and in deeds in addition to allow it to launch open market operations which can induce or reduce liquidity in the financial markets.

Zimbabwe has been forced to rely on fiscal policy alone since the introduction of multiple currencies.

The time may be approaching when the country needs to start preparations of launching its own gold-backed currency supported by the country’s massive mineral resources.

The over-reliance on external currencies in the absence of a local currency or forex reserves presents clear and present danger for the country’s financial stability.