THE BANKING SECTOR AND CAPITAL

The setting of capital requirements to $100 million by the Reserve Bank of Zimbabwe (RBZ) by 2014 was a great challenge to the banks in Zimbabwe and to an extent it threatened the existence of some local banks. The period might have been too short for banks to raise the capital and this might have constrained most banks. Banks were now pressured into new capital raising deals and partnerships with prospective investors as a way to meet the minimum capital requirements. Financial institutions were now exposing themselves to unfavorable deals that would have worked against them instead of working for them and also they might have exposed themselves to the popular loan sharks that shook up most banks last year. 

Recent results by the central bank for the first stage of meeting capital requirements saw notable local banks such as FBC, Kingdom, Trust and the infant of commercial banking sector Capital bank ex Renaissance Merchant Bank failing to meet the stipulated $25 million. The story continues from 2014 to 2020 as a much broader deadline for the banks to meet the $100 million capital requirement was gazetted. This came as a respite by the RBZ to the local banking sector. This has allowed banks more breathing space and will add more stability to the sector as bank directors will now have to map more suitable strategies to meet the capital requirement. The only question that remains is that is 2020 a more suitable period or not?

Our banking sector has not been stable ever since 2003 when banks began to fold and were placed under curatorship, knocking down investor and banking confidence to low levels and up to now most citizens do not have full confidence in our banking sector. Local banks have been the most affected by the knock on confidence as they are considered risky by their own locals compared to foreign banks whom they themselves also face the risk of the indigenisation act that is endangering their existence. Friction between the foreign banks and the regulators on indigenisation has been reduced by the iteration by the President that for the local banks they can negotiate for a 50-50 position or an even lesser stake as they (foreign banks) would have brought their own resources to start businesses. With that being said it’s more comforting for the sector and it relaxes a bit of tension in the sector and reduces the level of risk associated with the local banking sector.

Capital in a bank works in 2 ways the first being that it absorbs losses and cushions depositor funds and the second being that it restrains bankers from channeling funds to illicit deals which was what other banks did in period starting 2003. Even stronger banks like the Royal Bank of Scotland is in tough times after holding 3.5 percent  of capital and the rest channeling it to other activities which have exposed the bank so much. Our local sector has been affected by non-performing loans leaving the banks with a huge exposure and thereby needing more capital to cushion the depositors thereby bringing the question of whether 2020 is appropriate or not. In our opinion we believe that the central bank should have extended the period to 2015 in line with the default risk that is in the sector and as a way of restoring the confidence of clients through the strengthening of the capital base of banks.

We are in the process of implementing the Basel 2 framework which under the minimum capital requirement which states that banks with credit worthy clients could hold less capital whilst banks with uncreditworthy clients must hold more capital. This is merely putting much of the regulation into the bank shareholder’s hands, which in our instance would be disastrous as we have seen in the past that shareholders tend to misuse depositors’ funds and end up closing shop with depositors left undone. This then entails the central bank to speed up the process so that we can implement Basel 3 which requires banks to hold more capital and requiring much of it to be in equity, minimum capital set to rise from 8 percent to 1.05 percent by 2019 for advanced countries. Basel 3 will close loopholes that allowed banks to hold less capital.

Well it’s all food for thought!!!!!!!!!

AfriFinance