25 April 2005

Zimbabwe: RBZ Closes Another Asset Firm

Harare — THE Reserve Bank of Zimbabwe has cancelled the licence of Mercantile Asset Management after investigations revealed that the asset firm was conducting banking business in violation of the Asset Management Act (Chapter 24:26).

Investigations by the central bank also revealed that the firm was funding fuel purchases using depositors' funds. As a result, the institution derived most of its income from interest charged on fuel loans.

As at December 31 2004, interest paid constituted 95 percent of the total income of $2,2 billion while fees accounted for a mere 1 percent and the balance of four percent was attributed to "other" income.

In addition, a review of the firm's asset management portfolio revealed that Mercantile did not bother to separate its clients' assets from its own properties. As at December 31 2004 the firm had funds amounting to $2,84 billion in Mercantile's name.

"The entire funds under the management were placed with two institutions only, namely Renaissance Merchant Bank and Interfin Merchant Bank, hence exposing the institution to high concentration risk," read documents in possession of the Herald Business.

"In addition to concentration risk inherent in the assets structure, the institution is also exposed to high concentration risk on the liabilities side, as the top five clients constituted 72 percent of funds under management as at 31 December 2004."

The probe also discovered that the accounting processes were manual and therefore prone to manipulation. To make matters worse, the asset manager's accounts for the period ended December 31 2004 are still being audited by KMPG accountants.

The Reserve Bank also discovered that the company was hit by a spate of resignations by three board members, including the chairman and finance executive, within a period of three months.

The resignations were not communicated to the Reserve Bank as required by the new guidelines for asset management firms and no effort had been made to fill the vacancies.

"Consequent to the above resignations the board is now left with three members which is in violation of Section 2.5.1 of the Corporate Governance number 01-2004/BSD which provides that financial institutions should have a minimum of five directors.

"When the Reserve Bank called for a meeting with the board of directors on 20 April 2005 to discuss examinations, none of the directors turned up as they were purported to be out of the country when, in fact, they were around," reads part of the document.

Investigations by the central bank further revealed that there was no board or management committee to supervise the operations of the asset firm.

Not only that, the board had never met since the firm was granted a licence in July 2004 while the executive management committee only met four times since licensing, the last time being in October 2004.

On licensing, the company had six directors with Mr Maxwell Jeranyama as the managing director.

The managing director, according to the investigations, holds a 14 percent stake in the financial institution, which is in contravention of Section 2.3.1 of the Corporate Governance Guidelines which provide that no shareholder with 10 percent of the shareholding in the financial institution should be part of the management.

"The institution misrepresented to the RBZ that he (Mr Jeranyama) had reduced his shareholding from 14 percent to 10 percent, in line with the guidelines, by selling the excess four percent to Mercantile Share Trust. However, an inspection revealed that there was no transfer to that effect," according to the document.

The closure of Mercantile by the central bank is part of the ongoing clean-up of the financial sector following a major shake-up 15 months ago which saw the placement of various financial institutions under curatorship or judicial management.

Of late at least four asset management firms have had their licences cancelled for various reasons.

Sunshine Asset Management had its licence cancelled following the unearthing of serious liquidity and viability problems.

Also caught in the RBZ net was GP2 Asset Management Company following revelations that it was engaged in "non-permissible" business activities.

First Factoring, another asset company which was involved in underhand activities, also met the same fate.

RBZ assumed responsibility for the licensing of asset management firms early last year as it stepped up its efforts to stem speculative activities in the market.

In a bid to restore sanity and weed out briefcase operators, the central bank promulgated new guidelines which require an aspiring asset management firm to present a certificate of incorporation, memorandum and articles of association and paid up capital of $500 million from their own coffers and not borrowed funds.

The asset management companies are also required to state past financial performance, management structures, proof of capital and submit a tax clearance certificate to the central bank before they can hope to be licensed.

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