via Editorial Comment: Bigger banks prove resilient to shocks | The Herald March 2, 2015
Recent closures of AfrAsia and Allied banks is not an indictment of Zimbabwean-owned banks, but rather yet another warning that small, under-capitalised banks are more susceptible to threats that are far more easily overcome by large and better-funded financial institutions.
The failures are more a wake-up call for smaller banks to either find new shareholders or amalgamate to form more stable entities. Size is far more important than the nationality of shareholders when it comes to assessing stability.
When banking in Zimbabwe, previously very tightly controlled with very high entry barriers, was effectively opened up at the end of the 1990s, it was seen by some as an opportunity and by others as a licence to become rich. It almost became a status symbol to be owner or part owner of a bank.
There were a number of almost overnight benefits as new banks were founded. The old, slightly sleepy, banks were forced to compete. Depositors had choice and there was a sudden acceleration of innovation in the banking sector.
But there was a downside. It became apparent over the next few years that a number of new banks were not being prudently run, that insider loans were far too frequent and that some banks were unlikely to grow much unless their founder owners were prepared to dilute their shareholdings considerably, which few did.
The Reserve Bank of Zimbabwe had to step in and after seeing the damage to depositors after its first action then tried imposing curators, to see if it was possible to salvage something from a potential wreck and, with prudent management, restore a bank to viability.
But while showing some promise, this approach was eventually abandoned following lawsuits by original shareholders and a determination by some who preferred being boss of a little shaky bank rather than a significant, but definitely minority shareholder in a larger and more viable entity.
Efforts to form a new viable bank by amalgamating a number of failed or near failed banks in the end proved fruitless in the face of a determination by previous owners not to acquiesce in this sensible arrangement, and what happened is that yet another small bank was founded.
At the same time the RBZ started increasing the capital requirements, especially after new international standards started becoming available after the international financial crisis of 2007, and imposing greater controls. But it was still left with the effects of the earlier open-door policy.
Now the RBZ just ensures that a failing bank closes while it still has some assets that can be liquidated to refund depositors, and has put in place a Depositors Protection Corporation to ensure that ordinary people do not suffer much, being able to get up to $500 of their deposits in cash fairly promptly. The rest comes later after liquidation and hopefully the plug was pulled while assets were still greater than liabilities, so everyone will get their money back.
The only sufferers should be the shareholders.
But while the regulatory framework is now probably adequate, and while the procedure of cancelling licences and liquidating failing banks while they are still just above the surface is probably the best policy, there is still need to persuade the smaller banks to sell-up or amalgamate.
Depositors seem prepared to use locally-owned banks, but only do so because they feel sure that their money is safe, and that will only remain the case if Zimbabwean banks can demonstrate that they can cope with the sort of storms that sometimes do hit banks and are prudently managed.
That requires greater accountability in the use of depositors’ funds.
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