RBZ Should Keep Eye on the Ball

2 June 2011

editorial

THE surfacing of corporate governance problems at ReNaissance Financial Holdings Ltd (RFHL) raises the urgent need to look deeper into our banking regulations. The regulatory authorities have a vital role to play, making sure the banking sector operates in accordance with the Banking Act and regulations.

In its report on the RFHL saga, the central bank catalogued a series of breaches by the bank’s shareholders and managers which should never have been allowed. The Reserve Bank’s findings were, among others, that the group had a “number of deficiencies” that included “inadequate capitalisation, inappropriate shareholding structure, disintegration of corporate governance structures and internal controls, systematic abuse of depositors’ funds, high level of non-performing insider and related party exposures, chronic liquidity and income generation challenges, and gross violation of banking laws and regulations”.

The findings left the central bank with no option except to place ReNaissance Merchank Bank under curatorship yesterday — a move which could have been avoided if the central bank’s surveillance department had not slept on the job. The department should have detected this malaise early and acted to protect depositors’ money, as well as that of other well-meaning investors.

Since the banking sector failure of 2004, issues of corporate governance seem to have caused a collapse in the sector. Back then liquidity problems were the major source of bank failures. Banks had poor asset and liability management, manifested by their investment of short-term funds in illiquid assets which included real estate, bricks and mortar, and shares on the ZSE.

Banks were even using depositors’ funds to extend their branch networks. Also, significant advances of unsecured loans to insiders and use of depositors’ funds for capitalisation purposes made the banks factually and technically insolvent.

In his monetary policy statement in January 2011, Gideon Gono indicated that he was satisfied by initiatives that had been taken by banks to meet minimum capital requirements and he extended the deadline to June 30 2011.

But does the central bank have finer details of capitalisation transactions? In the RFHL case, the central bank was caught napping and only acted after the initiative by a whistle blower.

The Basel Accords are recommendations on banking laws and regulations issued by the Basel Committee on Banking Supervision and are there to create an international standard on banking regulations. Basel II, the second issue of the accords, is about how much capital banks need to put aside to guard against the types of financial and operational risks banks face.

In theory, Basel II attempts to accomplish this by setting up risk and capital management requirements designed to ensure that a bank holds capital reserves appropriate to the risk the bank exposes itself to through its lending and investment practices.

We need to know what risk is inherent at the moment through the failure by RFHL to raise the required minimum capital requirements. What are the permissible sources of funds when meeting minimum capital requirements?

Is it illegal to borrow funds to meet minimum capital requirements in terms of banking regulations?

It seems there is that syndrome in the local banking industry where shareholders technically capitalise their banks to meet minimum capital requirements, yet there is no commitment of their own funds.

In 2004, Gono in fury shut down most financial institutions that engaged in malpractices in the sector. But it seems he could have misread the legal implications of his action as all those once defunct banks have bounced back, with the governor having to tuck his tail between his legs.

Does that really mean banks are difficult to regulate? Globally, governments are at war with banks as they caused a global recession ignited by the subprime lending crisis. Since banks are regarded as an anchor in any economy, many have accessed bailouts from their governments and yet they still splash huge bonuses on their top executives and declare dividends.

Without a doubt, financial sector reforms are necessary. For how long should banks receive a reprieve — considered to be “recuperating” — yet their practices are askew? Interests of depositors definitely should be put first and reforms should be an on-going process as financial markets tend to develop fast propelled by technological advancements.

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