Published by the government of Zimbabwe
Conway Tutani
19 February 2010
column
Harare — READING a newspaper article last week about the court case in which several employees at Central Africa Building Society and outsiders allegedly opened bank accounts in the names of pensioners who are legitimate account holders and managed to withdraw over US$14 000, one could not help but ask: "Is it that easy? Where are the checks and controls? How effective is internal security? How many cases go undetected?"
The last place where one would expect such laxity is a bank.
Yes, security breaches do occur now and then because nothing made or devised by the human hand is foolproof, but ordinarily, a bank should be largely a theft-proof fortress both in the physical and technological sense.
But it appears the cases making it to court are much minor and involve small fry and relatively insignificant amounts in comparison to the massive frauds that have been unearthed recently at some banks and other financial institutions.
In stark contrast, the top brass who have been implicated and even accepted blame, have been allowed by the institutions to settle out of court.
These fraud cases could be a symptom of a greater sector-wide malady.
One stock exchange-listed organisation, in appealing against its suspension from the bourse, gave the strange defence that it was not the only one involved in fraudulent activities and that the implicated individuals - senior management for that matter - had paid back the stolen amounts in full and, therefore, it should be allowed to continue trading.
The culprits are eased out quietly with all the ill-gotten profits of their criminality. But these individuals are no less criminal than the accused persons in the CABS case. In fact, they are more criminal because their moral blameworthiness is much higher going by the amounts and their seniority.
As can be deduced from the above, there appears to be widespread covering-up for each other. These ordinarily criminal offences are turned into civil cases.
Is there a conspiracy of silence like the Mafia's code of silence, the Omerta, which has been described as "the categorical prohibition of co-operation with State authorities or reliance on its services even when one has been a victim of crime"? What other interpretation can be made?
Professionalism is thrown out of the window and replaced by cronyism. Once you have this cosy relationship between banking executives in an inadequately regulated environment you are doomed to have an explosive cocktail. Top executives at major banks extend loans to friends and non-existent companies without ever expecting to have the loans paid back.
Inaction means that when action is finally taken, it will be drastic and there will be collateral damage mostly on the innocent majority. Collateral damage is harm that is unintended or incidental to the intended outcome - kubatanidzirwa/ukubanjakaniswa - like administering an antidote or medicine that kills the patient. When the monetary authorities moved against speculators, who suffered most? The ordinary person while the people who had brought this misery upon the nation thrived even more.
In Nigeria - perhaps with the memories of the dark era of successive military dictatorships between 1966 and 1979 and between 1983 and 1999 still fresh - they have taken the drastic step of limiting senior bank executives to serve a maximum of two five-year terms. This is to avoid the arrogance or insolence of office where an individual personalises his post to serve his private interests, such as self-enrichment, which goes against national interest.
We are basically talking of two issues which are interlinked: that of white collar crime and lack of regulation.
White collar crime covers offences committed by people of high social status. The main difference with blue collar crimes -- such as murder, burglary and rape -- is that white collar criminals are more of opportunists, who over time come to realise that they can take advantage of their positions for financial gain.
They are educated, intelligent, affluent, confident individuals, who are qualified enough to get a job which allows them the unmonitored access to often large sums of money. Many do not start out as criminals, and in many cases never see themselves as such.
Blue collar crime tends to be more obvious and thus attracts more active police attention. In contrast, white collar employees can merge legitimate and criminal behaviour, thus making themselves less conspicuous when committing the crime. A culture of commercial confidentiality to protect shareholder value results in much of white collar crime going undetected or, if detected, unreported. A large majority of prisoners are poor, "blue collar" criminals with white collar inmates less than 2 percent.
While the true extent and cost of white collar crime is unknown, it is estimated to cost the United States more than $300 billion annually, according to the FBI.
White collar crime thrives in a regulatory vacuum. Nigeria's raging banking crisis, which has left banks in ruins with an estimated US$10 billion in bad debt, has little to do with credit default swaps or subprime mortgages as in Europe and the US, but everything to do with gross mismanagement.
In 2005, Nigeria whittled down the country's 89 small-scale banks to 25. The new banks were bigger and broader in scope and had much more credit to lend, but fewer checks on how to lend it. That's where the problems began.
The consolidation worked, at first. The simplified financial structure encouraged more foreign investment into the national stock market. So, too, did soaring oil revenue.
To benefit from the blossoming market, major banks extended temptingly easy, no-collateral-required loans to local stockbrokers -- not much different from here where stockbrokers bought shares with cheques unsupported by funds but cleared by banks.
Furthermore, in many instances, Nigerian banks lured ordinary borrowers into investing in particular stocks -- an illegal way of artificially inflating the stock's price - just like many stockbrokers here advised clients to invest in a particular fungible share which the brokers promptly bought and sold on the London and Johannesburg stock exchanges, resulting in the share soaring by hundreds of percentage points daily.
According to Nigerian business journalist Dayo Coker: "It was simply greed and destructive capitalism. There was a chance to make millions and people seized it. The regulators failed the people."
Observed economist Adama Gaye: "The (authorities) didn't realise they were creating mammoth institutions without really taking the time to double-check the new freedoms offered to those in charge."
The bubble burst as oil prices fell and the loans became toxic assets overnight as many clients defaulted. Banks had accumulated non-secure loans of N500 billion, among other loans, that had gone bad and eroded their shareholders' funds. The central bank has had to inject 620 billion naira (US$4,2 billion) to keep the country's banks afloat.
The central bank governor has fired top executives of eight banks. Hundreds of bankers, investors and highly indebted persons are already under a corruption probe. CEOs of three banks are under 24-hour surveillance; a fourth fled the country last month. As a result, ordinary Nigerians and businesspeople are facing a credit crunch - which is why the government has tabled a US$2 billion stimulus package to reinvigorate Africa's second largest economy.
Zimbabwe had its own version of toxic assets in the quadrillions of Zim dollars that were deposited into bank accounts from "burning" forex and dividends of soaring stocks that were deposited into bank accounts in Zimbabwe dollars which became valueless overnight when the whole façade crashed. This money had value at some point, but it quickly became worthless as everyone joined the billionaire ranks.
People suddenly found that they had worthless paper money in their accounts. At the end, banks were stuck with these toxic assets when the market froze. Government was left to carry the can. "Banks and brokers are just like wild kids. They only want daddy's help when they get into trouble," observed one commentator.
There is need to put in place new restrictions to curb the risky behaviour that leads to a financial crisis and an enormous government bail-out package. Banks should not be allowed to stray too far from their mission of serving depositors. There is need for new restrictions on the size and scope of banks and other financial institutions to rein in excessive risk taking and to protect taxpayers and depositors. Current practices have to change. If one closely studies the history and basics of banking, it's straightforward: Pay depositors a rate of interest, charge borrowers a slightly higher rate of interest, service your customers and earn an honest profit.
Derivatives, credit default swaps, hedge funds, options and futures trading, trading on margin, we could go on -- these are the most dangerous and difficult concepts for the average investor to understand. The harder something is to understand for the majority, the easier it is for those in control to exploit it. It's not to suggest that banks and broker/dealers have to get back to the very basics, but they should separate non-banking activities and products from normal banking.
Policies should have relevance across the whole spectrum of high, middle to low income groups, and capacity to respond both in times of crisis as well as in normal circumstances.
The financial sector must not operate as a parallel institution, which now and then returns into the mainstream to feed off it in a parasitic manner.
We don't want a situation that Larry Summers, economics adviser to US President Barack Obama, described at the just-ended World Economic Forum at Davos, Switzerland, as a "statistical economic recovery, but a human recession", because projections of 7 percent growth this year will prove hollow if there is no substantial improvement in the livelihoods of the majority and only a few prosper disproportionately.
The finance sector should play by rules - as expected of everyone else. Prosperity cannot be built on financial speculation.
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