RBZ proposes 3-tier system for banks

via RBZ proposes 3-tier system for banks 26 August 2014 by Ndamu Sandu

THE Reserve Bank of Zimbabwe (RBZ) has proposed a three-tier system for banks in complying with the minimum capital threshold as the current operating environment had presented challenges in banks’ ability to grow capital organically or raise from investors.

Then RBZ acting governor Charity Dhliwayo had given banks up to 2020 to attain a $100 million minimum equity capital.

In his inaugural and mid-term monetary policy statement yesterday, RBZ governor John Mangudya proposed three segments for banks—Tier I, Tier II and Tier III — which have different capital thresholds and functions.

He said the regulator had taken such an approach after revelations that most local shareholders lack financial capacity to inject the much-needed capital into their respective banking institutions.

As a result, the local shareholders have failed to follow up on their rights during capital calls, he said.

Mangudya said Tier I segment comprises of large indigenous commercial banks and all foreign banks.

“These will conduct their core banking activities, and in addition, offer other activities such as mortgage lending, leasing and hire purchase that have longer term maturities as well as other sophisticated products,” he said.

Banks in the Tier I strategic segment would be required to have minimum core capital requirements of $100 million by 2020 as previously announced, he said. He said the capital would enable the Tier I banks to absorb the risk associated with the scope and complexity of their activities.

The Tier II segment comprises of commercial banks, merchant banks, building societies, development banks, finance houses and discount houses that will only conduct their core banking activities.

The Tier II banking institutions should maintain minimum capital requirements of $25 million.

Mangudya said banks, other than foreign-owned, that elect not to increase their capital to $100 million threshold would automatically fall in the Tier II category offering the limited product range.

He said banking institutions in Tier II can migrate to the Tier I strategic group provided they meet the capital requirements and the risk management systems that are commensurate with the nature and scope of the activities.

Mangudya said the Tier III segment which has current minimum capital requirements of $5 million comprises of deposit-taking microfinance institutions.

He said the minimum capital requirements of $7,5 million by 2020 for Tier III takes into account start-up costs such as acquisition of an IT system and establishment of branches. He said it was envisaged that the institutions in Tier III would further bolster the current financial inclusion initiatives.

The RBZ boss said the Zimbabwean economy required strong banks that can adequately support the funding requirements of industries.

“Banks should therefore ensure they build capital bases to levels that provide critical mass necessary to make significant contribution to the economy,” Mangudya said.

“The above strategic segmentation allows the existence of smaller, profitable banks with strong governance and risk management systems that play a meaningful role in the economy.”

Banking institutions would be required to submit revised capital plans for December 2020 based on their chosen strategic group by December 31.