The Herald (Harare)

17 January 2013

Zimbabwe: Shareholders in the Cold

opinion

A FIGURATIVE gold rush is brewing as the deadline for the first phase of bank capitalisation has just been extended fuelling rumours that there is a depressed appetite among foreigners to buy into local banks.

In principle, the US$25 million required by March might not appear significant considering it's a quarter of the massive US$100 million overall capitalisation level.

It now seems as if banks are now preoccupied with meeting capital requirements ahead of promoting economic development. Institutions such as Stanbic, Standard Chartered Bank, MBCA, CBZ, FBC and Capital Bank might not have any worries as they certainly enjoyed the festive hype just as in other years.

However, the small boys in the financial sector probably spent the festive season holed up somewhere with tablets and laptops cranking in order to come up with an optimal solution. To extend the deadline to March smacks of indecisive stance. Will banks be fairly stronger in the next 90 days?

Is this a climbdown considering the impracticality of the new capital requirements in an economy where there is literary no business to underwrite?

Zimbabwe's banking sector is yet to adhere to the tenets and principles of Basel II, but events on the ground cannot match the demanding values of the Swiss Accord. The thick layer of opaqueness on how the banking business is conducted coupled with unhealthy shareholding structures for these institutions leave a lot to be desired. With regards to local bankers, there seems to be confusion in trying to distinguish between owning a bank and managing it, which is a basic corporate governance concern.

It is this failure to separate the two roles which had seen most of the founding faces of local banks failing to entrust the capitalisation matter to shareholders.

About 88 percent of annual general meetings to do with banking that have been held so far have left market analysts with more questions than answers as some of these executives have been tight-lipped about developments in their banks. At an NMB analyst briefing held last year for their interim results, chief executive James Mushore was not at liberty to discuss the modalities they were employing to achieve the capitalisation thresholds.

Ironically, this is a banking institution which is also dually listed on both the Zimbabwe and London stock exchanges. As much as the local exchange is treated with disdain, what on earth should whet the appetite of portfolio investors to entrust their funds with the counter?

At FBC Holdings, an unimpressive response to the reason why management and not shareholders wanted to deal with the capitalisation matter is also a mystery.

Egos and grandstanding have to be tamed as we are fully aware that most of these banking executives do not have the financial muscle that will make a positive impact on the institutions they might have founded.

The new capital requirements have exposed how minority shareholders are being undermined.

Even during rights issues the small voices of minority shareholders have been deliberately discounted on the pretext that they were not bringing value to the table.

Most of the local banks, which are struggling to attract foreign investors, lack a clear or honest track record of doing business. Some are not prepared to bring new faces to the board outside their usual cohort.

The shocking poor asset base of some banks that are saddled with non-performing loans as a result of strategic risk are a barrier to mergers as this can only be swallowed by those with fever pitch risk appetite.

While the raising of capital requirements was a noble idea to strengthen the banking sector from the imminent systemic risk induced by liquidity crunch, it was also expected that measure will compel banks to merge in order to create stronger balance sheets.

Alas, this might not be practical, as the culture of banking institutions in Zimbabwe is so diverse yet they use similar uncouth models to survive. I believe that the National Social Security Authority must take this opportunity to shed its endless shareholdings in different banking institutions.

It holds a 26,4 percent shareholding in FBC, almost 40 percent in ZB Bank and about 85 percent stake in Capital Bank. This can distort the market behaviour as an oligopolistic structure within the sector can produce unintended consequences such as interest rate fixing, crippling of the interbank market and costly supervision.

NSSA has to concentrate on its core activity through preserving employee benefits in assets which gives meaningful returns. I believe that instead of relying on NSSA we should take the route travelled by the United States government in 2008 where it bailed out failing banks through a special vehicle or sovereign wealth fund. In exchange, the government converted the support into equity in instances where the banks failed to repay the bailout amount.

Indeed, most banks are in a quandary and the simple fact that they are not willing to lose their licences might alter their tone considering the seemingly insurmountable challenge they are facing.

The scrapping of bank charges on amounts less than US$800 and the linking of interest rates to the amount invested that were announced by Finance Minister Tendai Biti in his 2013 Budget statement has also worsened the challenges. Everyday banking is no longer applicable as the domestic banks have to widen their business practices.

In Kenya, their top four native banks have been performing ahead of international ones because they quickly learnt that banking could not continue by the book.

The dominance of the informal sector the East African nation was so great to the extent that credit ratings were no longer valuing collateral ahead of other Cs such as cash flows, business conditions and the capital of the business. It would certainly be a nightmare for those banks, which are yet to secure a partner, to inject capital into their arteries. Prior to the announcement of the new capital requirements there was room for a moratorium where they could enjoy a deadline extension, but the extension of the deadline to March 2013 will distort the entire banking regulations.

This is a symptom of policy inconsistency just a week after the New Year had begun.

The fact that Reserve Bank Governor Dr Gideon Gono's term of office had also reached a ceiling is bound to push him to invoke the powers bestowed upon him by the Banking and RBZ Acts to rein in defaulters.

There are real chances that we will see two or three banks choking this time around. The only reprieve is that some of banks that will be affected will be so insignificant in terms of market size, which means that there will be no significant systemic risk.

In the transatlantic zone, the fiscal cliff has seen major political parties in US reaching a compromise with the tea party so determined to see to it that tax levels are slashed whilst the richest economy has an unsustainable trade deficit which requires an overhaul of public finance system. This coupled with the recent appointment of Chuck Hagle, former Vietnam War veteran, to head the Defence Department has left the eurozone and American markets awe struck as the drone attacks on the peninsula are expected to continue.

Time is nigh to listen to what appears like insignificant shareholders as managers are there to preserve capital hence expecting a miraculous recapitalisation strategy from bank management is as good as building a labour ward in a gay community.

Christopher Takunda Mugaga is an economist, he is also the head of research at Econometer Global Capital, a regional Finance and Economics research firm.

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