Downgrade, Chinamasa tells struggling banks

via Downgrade, Chinamasa tells struggling banks – DailyNews Live 23 July 2014 by Kudzai Chawafambira

HARARE – Finance minister Patrick Chinamasa has urged indigenous banks to comply with the central bank’s minimum capital requirements or face downgrading to micro finance institutions.

“If you say that you have found yourself in the top league and you clearly don’t qualify, please go back to the league you qualify before we disqualify you,” he told Parliament’s Finance and Economic Development portfolio committee on Monday.

“We can’t all be the same size, even as businesses and also even as financial institutions. But if you are in the third league you must not play the game of the premier league,” the Treasury chief said.

He added that authorities created an option for the establishment of deposit-taking micro finance institutions to accommodate banks that are not adequately capitalised. “…go to the level where you belong.

“Obviously, we are in a situation where players are already in the field. I did ask the Reserve Bank of Zimbabwe (RBZ) to go easy on enforcing capital adequacy ratios, but what this means is that at the end of the day you must know your capital levels,” Chinamasa said.

“For example, if you are a five million-dollar bank, there are prudential requirements that you lend eight times your capital level.

This means you should not lend more than $40 million. If you do that, you get into trouble and my first instinct is to protect depositors, not the banker,” he said.

Of the 18 banks operating in Zimbabwe, five are foreign-owned.

According to reports, four banks hold 60 percent of the approximately $4,7 billion deposits in the system.

But, with Zimbabwe’s economy faltering, some banks have closed, weighed down by indiscriminate lending and failure to raise new capital to cover loan losses.

Chinamasa noted that government was clear on the need to have strong and adequately capitalised indigenous banks to spur economic development.

“Those who have the opportunity to do so must be sound managers.

“They must not take short cuts, because in doing so they will undermine the whole effort towards indigenisation,” he said.

This comes as central bank governor John Mangudya early this month hinted that the RBZ might review the $100 million minimum capital requirements for banks.

The central bank chief early this month told Parliament that the strength of Zimbabwe’s financial institutions “should be judged on the quality of their asset books”.

“I don’t believe that the one-size-fits-all model will work with our banks.

“We should be able to benchmark minimum capital requirements depending on the size of the bank’s balance sheet,” he said.

“What we should be emphasising on is the quality of asset books for banks, because it does not make sense for a bank to have $100 million minimum capital… yet it has high non-performing loans,” said Mangudya.

This comes as the central bank early this year extended the banks’ capital requirements to June 2020 in an effort to allow local and small banks to comply.

Nonetheless, many of Zimbabwe’s small indigenous banks are struggling to raise the money and have resorted to seeking foreign capital.

However, Mangudya noted that despite about five banks being undercapitalised, the country’s banking sector remains safe and sound.

“When you have four or five banks that are struggling and carry about five percent of the total deposits, then we can conclude that the sector is strong because we have other banks that carry 95 percent of the total deposits that are doing well,” he said.

Mangudya, a former CBZ Holdings chief executive, said the central bank was working on plans to minimise the effect of non-performing loans (NPLs), which are currently around 16 percent of total deposits.