Banking crisis: Causes, consequences, remedies

via Banking crisis: Causes, consequences, remedies – DailyNews Live  by John Kachembere 16 DECEMBER 2013

Mugabe has warned financial institutions to stop abusing depositors’ funds, but economists are blaming the collapse of local indigenous banks on worsening liquidity crunch and the tough economic environment in the country.

The veteran Zanu PF leader on Friday told thousands of his party members at the party’s annual congress in Chinhoyi that local bankers were stealing depositors’ funds, resulting in some financial institutions being shut down.

“Our banks must improve their discipline,” Mugabe said.

“They are not there to steal; they are there to serve our economy and our people.”

Mugabe’s comment comes after the Reserve Bank of Zimbabwe (RBZ) last week cancelled Trust Bank’s licence in what the central bank said followed “abuse of the depositors’ funds by management.”

The central bank said it was left with no option but to take this course of action in the interest of protecting depositors’ funds and financial sector stability.

“The bank is financially unsound and is not operating in accordance with sound administrative and accounting practices and procedures in violation of the Banking Act (chapter 24:20),” part of the notice of licence cancellation reads.

“The banks’s recapitalisation efforts have all been futile and the bank is no longer safe and sound. In the circumstances, the registration of Trust Bank as a banking institution is undesirable and is not in the interests of its members, depositors and creditors. Accordingly, the Registrar has cancelled the bank’s licence in terms of section 14(1)(f)(j) and (k) of the Banking Act.”

RBZ said it would commence liquidation proceeding in the near future in order to facilitate payments to depositors and other creditors.

This is not the first time that Mugabe has criticised banks for failing to honour their obligations to depositors.

In June this year while officially launching the Finscope Zimbabwe 2012 Small and Medium Enterprises Survey report, a highly-charged Mugabe attacked the banking sector for charging high transaction fees but failing to award interest on deposits and starving local small to medium enterprises of funding.

“I urge our financial sector, including our financial institutions, to improve their honest handling of their services and especially the deposits brought to banks by clients,” Mugabe said.

He said improving clients’ confidence in the sector was beneficial to banks as the banking public would not hesitate to deposit their hard-earned money.

“This is the confidence that the banking sector should bestow in the clients so that small and medium enterprises (SMEs) will start banking with them,” he said.

Zimbabwe has a fairly diversified financial services sector comprising of 26 banks, 16 asset management companies and 172 microfinance institutions under the supervision of the Reserve Bank.

However, due to poor corporate governance and risk management systems and inadequate capitalisation, four banks — Interfin Banking Corporation, Genesis Investment Bank, Royal Bank and Trust Bank — have closed shop since dollarisation in 2009.

More local banks are facing risks of winding up operations or will be forced to transform into micro-finance institutions.

Economic experts are blaming the collapse of local indigenous banks on worsening liquidity crunch and the tough economic environment obtaining in the country.

Kipson Gundani, an economist with the Zimbabwe National Chamber of Commerce said there was little that monetary authorities can do to avert the situation.

“Since the introduction of the multiple-currency system in 2009, most banks in the country loaned excessively to industry. However, as industry failed to perform it became apparent that banks would be left with a huge non-performing loan book,” he said.

According to RBZ figures, non-performing loans reached $500 million in the first half of the year amid fears that banks would curtail lending. The percentage of non-performing loans out of total loans and advances was 13 percent during the period, the highest in southern Africa.

Gundani noted that some local financial institutions might collapse if nothing is done to help revive industry — which used to provide primary and secondary employment to many people in the country.

The collapse of Trust Bank comes after government recently gazetted a new set of banking sector regulations that seeks to protect the interests of depositors with a view of increasing savings in the economy.

According to Statutory Instrument 156 of 2013 gazetted in November, depositors will be paid their funds immediately after a financial institution is placed under curatorship.

The new set of regulations also seeks to increase savings within the economy by the regular monitoring of financial institutions’ capitalisation levels.

John Chikura, the chief executive of Deposit Protection Corporation, said the new regulations will also facilitate public confidence as well as stability in the banking sector.

“These are the set of regulations that we believe will restore depositors’ confidence,” he said.

The government and banks are crafting strategies aimed at increasing depositors’ confidence in the banking sector at a time official estimates show that more than $2 billion is circulating outside the formal financial sector.

Other market experts contend that Zimbabwe is struggling to tap into foreign direct investment inflows as investors are wary of the indigenisation legislation that gives locals control ahead of foreigners who would have brought the money required to start companies.

Economist John Robertson said there was need for government to scrap the indigenisation law to help financial institutions to raise equity from abroad.

“Government should take a stand and immediately issue a statement that no bank would be subjected to indigenisation regulations. This will not only help banks to get funding from abroad but will also see the country getting support from other countries,” he said.