7 August 2012

Zimbabwe: 'Capitalisation Levels Open New Avenues'

BANKS have significant leeway to comply with the Reserve Bank of Zimbabwe's new minimum capital requirements. BancABC economist Mr James Wadi says the fact that Dr Gideon Gono has allowed for graduated capital levels for the various financial institutions means that those banks (commercial and merchant) that fail to meet the new US$100 million minimum capital threshold can transform into alternative financial institutions.

"The graduated capital levels for various financial institutions may give banks latitude to move from one category to another," he said.

"Such downgrading may be necessary, particularly in the event that some banks fail to meet the minimum capital levels."

Mr Wadi said he believed this could be of additional benefit to previously "unbanked" sectors of the economy. "Whilst this framework provides a soft landing for banks that may fail to meet the minimum capital levels, it also provides them with an opportunity to focus in other sectors that are not well served, yet they contribute significantly to the economy.

"These sectors include the small-to-medium enterprises (SMEs) and the informal sectors, including the low-income earners."

According to the new RBZ minimum capital requirements, commercial banks and merchant banks are now required to reach a US$100 million threshold up from US$12,5 million, building societies (US$80 million from US$10 million), finance houses (US$60 million from US$7,5 million), discount houses (US$60 million from US$7,5 million), and micro-finance banks (US$5 million from US$1 million).

The RBZ has also allowed for a phased approach for meeting the minimum capital levels, giving banks ample time to act on their recapitalisation strategies.

However, from another perspective, the new capital threshold requirements can also have a negative impact on the smaller companies.

Some observers believe that the increase in banks' minimum capital threshold may induce balance sheet shrinkage as banks struggle to raise fresh capital at short notice, which will further exacerbate the credit crunch.

ZABG economist Mr Joseph Mverecha said forced mergers (largely expected as a result of the new capital requirements) are not necessarily synonymous with greater efficiency.

"Fewer banks from such mergers mean that financing to SMEs and micro enterprises will be even reduced, at a time when our economy is 70 percent SMEs.

"Capital thresholds of US$100 million is so huge an amount, it is 2,5 times in South Africa when that economy is 40 times larger than that of Zimbabwe. It is out of proportion," he said.

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