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Zimbabwe banking overview (part one)

Entrepreneurs sometimes build businesses in uncontrollable environments. The soundness of entrepreneurship is tried and tested through changes in the environment. There are forces in the environment that could be huge opportunities or threats to the survival of entrepreneurial opportunities. Entrepreneurs need to understand their environment to take advantage of emerging opportunities and mitigate potential threats.

This article aims to shed light on the role it plays and its impact on Zimbabwe banking entrepreneurs. A brief historical overview of the banking industry in Zimbabwe. The impact of the regulatory and economic environment on the sector was assessed. An analysis of the structure of the banking industry helps to understand the potential strength of the industry.

History background

At independence [1980], Zimbabwe had sound banking and financial markets, and most commercial banks were wholly foreign-owned. After the federal liquidation, the country's central bank was inherited from the Central Banks of Rhodesia and Niassalan.

During the first years of independence, the Zimbabwean government did not intervene in the banking industry. Despite the socialist state ideology, there is neither the nationalization of foreign banks nor restrictive legislative intervention in the sectors that provide funds or charge interest rates. However, the government bought some shares in the two banks. When the bank withdrew from the country, it acquired a 62% stake in Nedbank's Rhobank at a reasonable price. The decision may be driven by the desire to stabilize the banking system. The bank was renamed Zimbank. The state does not have much influence on the operation of banks. In 1981, New York State also partnered with International Credit Commercial Bank [BCCI] to become a 49% shareholder of New Commercial Bank Zimbabwe Credit Commercial Bank [BCCZ]. When BCCI closed in 1991 on charges of unethical business practices, the asset was taken over and converted into the Commercial Bank of Zimbabwe [CBZ].

This should not be seen as nationalization, but in line with national policies to prevent corporate failures. Later, Zimbank and CBZ's equity were diluted to less than 25%.

During the first decade, no local bank was licensed and there was no evidence that the government had any financial reform plans. Harvey [unspecified, page 6] cites the following evidence showing a lack of consistent financial reform plans over the years:

-In 1981, the government announced that it would encourage rural banking services, but the plan was not implemented.

-The Monetary and Financial Committee was established in 1982 and 1983, but never established.

-By 1986, there was no mention of any financial reform agenda in the Five-Year National Development Plan.

According to Harvey, the government's reluctance to intervene in the financial sector can be explained by the fact that the government does not want to harm the interests of the white population, and that banking is an integral part. The country controls agriculture and manufacturing, which is the backbone of the economy, and is therefore vulnerable to this segment of the population. The state has adopted a conservative approach to indigenousization as it has learned from other African countries whose economies have almost collapsed due to the forced eviction of white communities without first establishing skills transfer and capacity building to black communities Mechanisms. The economic cost of inappropriate intervention is considered too high. Another reasonable reason for non-intervention policy is that when the country became independent, it inherited a highly controlled economic policy from its predecessor and had a strict exchange rate control mechanism. Because foreign exchange controls affect credit control, the government defaults to strong control of the sector for economic and political purposes. So it doesn't need to interfere.

Financial reform

However, after 1987, the government began the Economic and Structural Adjustment Program [ESAP] at the request of multilateral lenders. As part of the plan, the Reserve Bank of Zimbabwe [RBZ] began advocating financial reforms through liberalization and deregulation. It argues that the oligopoly and lack of competition in the banking industry deprives the sector of choice and quality in terms of service, innovation and efficiency. Therefore, as early as 1994, the RBZ annual report showed the desire for increased competition and efficiency in the banking industry, which led to the introduction of banking reforms and new legislation:

-Allow prudent supervision of banks in accordance with international best practices

-Allow on-site and off-site bank inspections to enhance RBZ's banking supervision functions, and

-Intensify competition, innovate and improve bank services to the public.

Subsequently, with the opening of the financial sector, the Bank Registry of the Ministry of Finance contacted RBZ and began issuing licenses to new participants. From the mid-1990s to December 2003, with the establishment of indigenously owned banks, a series of entrepreneurial activities appeared in the financial sector. The chart below shows the trend in the number of financial institutions operating since 1994. This trend indicates that commercial banks and discount banks increase first and then decrease. The growth of commercial banks was initially slow, and began to grow strongly around 1999. The decrease in commercial banks and discount banks was due to their conversion, mainly to commercial banks.

Source: RBZ report

Different entrepreneurs use various methods to penetrate the financial services sector. Some started offering consulting services and then upgraded to commercial banks, while others started to build stock brokerage companies, which were promoted to discount banks.

From the beginning of financial service liberalization to about 1997, the emergence of local commercial banks was clearly inadequate. Some of the reasons for this are:

-The conservative licensing policy of the Financial Institutions Registry, as there are risks in licensing locally owned commercial banks without legislative and banking supervision experience.

-Bank entrepreneurs chose non-bank financial institutions because their initial capital requirements and working capital costs are low. For example, a commercial bank will need fewer employees, no bank lobby, and no need to process expensive small retail deposits, which will reduce management costs and profitability time. Therefore, at this time non-bank financial institutions increased rapidly. For example, by 1995, five of the ten commercial banks had opened in the past two years. For some, this has become the preferred entry route into commercial banking. Kingdom Bank, NMB Bank and Trust Bank.

Some foreign banks are also expected to enter the market after financial reforms, but this has not happened, which may be due to restrictions on owning at least 30% of local equity. Strict foreign exchange controls and the cautious approach of licensing authorities may also play a role. Although Barclays Bank is listed on the local stock exchange, existing foreign banks do not have to give up some of their equity.

Harvey believes that the premise of the abolition of the direction of financial liberalization is that banks will be able to automatically lend for commercial reasons. But he believes that banks may not have this ability because they are affected by borrowers' inability to provide loans due to foreign exchange or price control restrictions. Similarly, positive real interest rates usually increase bank deposits and increase financial intermediation, but this logic incorrectly assumes that banks will always lend more effectively. He further pointed out that granting a new banking license does not imply increased competition, as it assumes that the new bank will be able to attract capable managers and that legislation and banking supervision are sufficient to prevent fraud, thereby preventing bank failures and the financial crisis that results. Regrettably, his concerns did not seem to be addressed in Zimbabwe's financial sector reform, which hurt the national economy.

Operating environment

Any entrepreneurial activity is bound or assisted by its business environment. This section analyzes the current environment in which Zimbabwe may have an impact on the banking industry.

Political legislation

The political environment of the 1990s was stable, but became volatile after 1998, mainly due to the following factors:

-After an attack on veterans in November 1997, an unbudgeted expenditure was given to veterans. This puts heavy pressure on the economy and causes the dollar to depreciate. As a result, the Zimbabwe dollar has depreciated by 75% as the market foresees the consequences of government decisions. That day was considered the beginning of a severe recession in the country and was called "Black Friday." Depreciation has become a catalyst for further inflation. A violent food riot occurred a month later.

-A poorly planned "land reform" was launched in 1998. On the surface, white commercial farmers were driven out of their homes and replaced by blacks without proper consideration of land rights or compensation systems. This has led to a significant decline in the country's productivity, which is largely dependent on agriculture. The way land is dealt with has angered the international community, which it claims is racially and politically motivated. International donors have withdrawn their support for the programme.

-Unwise military incursions in 1998 to defend the Democratic Republic of the Congo, known as legitimate actions of sovereignty and sovereignty, and seeing that the country has paid a heavy price without bringing significant benefits to itself,

-Elections alleged by the international community were held in 2000, 2003 and 2008.

These factors have led to international isolation, which has significantly reduced foreign exchange and foreign direct investment into the country. Investor confidence was severely damaged. Traditionally, agriculture and tourism have been huge income earners.

In the first decade after independence, the Banking Act [1965] was the main legislative framework. Since this rule was made when most foreign commercial banks own foreign capital, there are no instructions on prudent loans, internal loans, the proportion of shareholder funds that can be lent to a borrower, the definition of risk assets, and bank inspection regulations .

The Banking Law [24:01] came into effect in September 1999 and is the ultimate manifestation of RBZ's desire to relax and relax financial services. The law regulates commercial banks, commercial banks and discount banks. Elimination of barriers to entry has led to increased competition. Deregulation also gives banks a certain degree of freedom to engage in non-core businesses. It seems that this latitude is not well defined and therefore offers opportunities for adventurous entrepreneurs. RBZ advocates deregulation to eliminate division of labor in the financial sector and increase efficiency. [RBZ, 2000: 4.] These two factors provide opportunities for aggressive indigenous bankers to set up their own businesses in the industry. The bill was further revised and reissued as Chapter 24:20 in August 2000. Increased competition has led to the introduction of new products and services, such as e-banking and in-store banking. This entrepreneurial activity has led to “deepening and maturity of the financial sector” [RBZ, 2000: 5].

As part of the financial reform, the Reserve Bank Law was promulgated in September 1999 [22:15].

Its main purpose is to strengthen the Bank's supervisory role by:

-Establish prudent standards for bank operations

-On-site and off-site monitoring of banks

-Imposing sanctions and placing them under supervision if necessary, and

-Investigate banking institutions if necessary.

The bill was still flawed because the then RBZ Governor Dr. Tsumba believed that RBZ needed to be responsible for both licensing and supervision, because "the ultimate sanction that the banking regulator can know is that the banking industry knows that the license was cancelled due to a flagrant violation of operating rules." However, the government seems to have refused to do so until January 2004. Arguably, this flaw may give some bankers the impression that their licenses will not happen. Dr. Tsumba observed that RBZ's responsibilities in controlling bank management, directors and shareholders for bank viability pointed out that RBZ's “micro-management of banks and guidance of their daily operations” were neither effective nor intentional.

It seems that his successor's point of view is very different from this orthodox view, so evidence of micromanagement has been observed in the field since December 2003.

The Distressed and Insolvent Banking Policy, which was drafted in the past few years, was implemented in November 2001. One of its expected goals is, "The policy enhances regulatory transparency, accountability, and ensures that regulatory responses are implemented in a fair and consistent manner." The market generally believes that when the policy is implemented after 2003, it must be insufficient to correspond to these ideals. How transparent it is to include and exclude vulnerable banks in ZABG is controversial.

When the economy fell free, a new governor of RBZ was appointed in December 2003. He made major changes to monetary policy, which caused a shock in the banking industry. RBZ was finally authorized in January 2004 to serve as both a licensing and a regulatory body for financial institutions. The regulatory environment was reviewed, and major laws related to the financial sector were revised.

Enacted the "Bad Financial Institutions Resolution Act" [2004]. Many financial institutions are distressed by the new regulatory environment. RBZ placed seven institutions in the curator's bank, one of which was closed and the other was in liquidation.

In January 2005, under the authority of the “Faulty Financial Institutions Act”, three troubled banks were merged to form the new institution Zimbabwe United Bank Group [ZABG]. These banks were allegedly unable to repay funds advanced to them by RBZ. The affected institutions are Trust Bank, Royal Bank and Barbican Bank. The Supreme Court ruled that ZABG traded illegally acquired assets, and shareholders appealed and won the appeal. The bankers appealed to the finance minister, but the appeal failed. Later in the second half of 2006, they appealed to the court in accordance with the law. Finally, in April 2010, RBZ finally agreed to return the "stolen assets".

Another measure taken by the new governor is to force financial sector management changes, which has led most entrepreneur bank founders to be forced out of their companies under various pretexts. Some were eventually arrested and threatened to flee the country. The bank's board of directors was reorganized.

Economic environment

Economically, the country remained stable until the mid-1990s, but the economic downturn began around 1997-1998, mainly due to the political decisions already made at the time, as mentioned earlier. Economic policy is based on political considerations. As a result, multinational donors were withdrawn and the country was isolated. At the same time, the country was hit by drought in 2001-2002, exacerbating the harmful effects of evictions on crop production. The reduction in output has had an adverse impact on banks that finance agriculture. The disruption of commercial agriculture and the consequent reduction in food production have resulted in an unstable food security situation. Over the past twelve years, the country has been forced to import corn, which has further lengthened the country's fragile foreign exchange resources.

Another impact of the agrarian reform plan was that most farmers who borrowed money from banks were unable to repay their loans, but the government that took over their operations refused to take responsibility for loans. As farmers have not been compensated in a timely and fair manner, it has become impractical for farmers to repay loans. As a result, banks face the risk of these non-performing loans.

The end result is increased inflation, the collapse of companies leading to high unemployment, the depletion of international funding sources, a shortage of foreign exchange and a shortage of food. The shortage of foreign currencies has led to a shortage of fuel, which has reduced industrial production. As a result, gross domestic product [GDP] has been declining since 1997. This unfavourable economic environment means that as industrial activity decreases and banking services are pushed to parallel markets rather than the formal market, banking activity has decreased.

As shown in the figure below, inflation spiraled and reached a peak of 630% in January 2003. After a brief easing, the upward trend continued to 1729% in February 2007. Since then, the country has entered a period of hyperinflation unheard of in peacetime. Inflation is putting pressure on banks. Some believe that the rise in inflation is because currency depreciation has not been accompanied by a reduction in budget deficits. Hyperinflation will cause interest rates to soar, while the value of mortgage collateral will fall, leading to asset-liability mismatches. As more people are unable to repay loans, this also increases non-performing loans.

In fact, by 2001, most banks had adopted conservative lending strategies. For example, total advances in the banking sector accounted for only 21.7% of total industry assets, compared with 31.1% last year. Banks have resorted to volatile non-interest income. Some people start trading with parallel foreign exchange markets, sometimes collusion with RBZ.

In the second half of 2003, there was a severe cash shortage. People no longer use banks as intermediaries because they are not sure when they can use cash. This reduces the bank's deposit base. Due to the short-term maturity of the deposit base, banks are generally unable to invest most of their funds in longer-term assets, so as of mid-2003, liquidity was high. But in 2003, as customers demanded returns commensurate with inflation, most local banks resorted to speculative investment, which resulted in higher returns.

These speculations [mainly non-core banking] have driven exponential growth in the financial sector. For example, the asset base of a bank has grown from 200 billion Zimbabwe dollars [US $ 50 million] to 800 billion Zimbabwe dollars [US $ 200 million] within a year.

However, bankers have argued that in most of the world's most advanced banking systems, what the governor calls speculative non-core businesses is considered best practice. In their view, it is not uncommon for banks to hold stock positions in borrowed non-bank institutions to protect their investments. For example, banks such as Ned Bank [RSA] and J P Morgan [United States] control large amounts of real estate investments in their portfolios. Bankers convincingly point out that these investments are sometimes used to hedge against inflation.

RBZ's new governor demanded that banks close their positions overnight, and RBZ immediately withdrew its overnight housing support to the bank, triggering a crisis that led to most banks' asset-liability mismatch and liquidity tightening. . Real estate prices and the Zimbabwe Stock Exchange closed down at the same time as banks trying to hide their positions sold off heavily. The loss of stock market value means the value of collateral. Most banks use collateral instead of advances.

During this period, Zimbabwe remained in a state of debt tightening because most of its external debt was not repaid or underserved. The worsening balance of payments [BOP] has put pressure on foreign exchange reserves and overvalued currencies. The total domestic debt of the government increased from 7.2 billion rands [1990] to 2.8 trillion rands [2004]. The increase in domestic debt stems from high budget deficits and reduced international funding.

Social culture

Due to the economic turmoil since the 1990s, the population has become quite mobile and a large number of professionals have migrated for economic reasons. The Internet and satellite TV make the world truly a global village. Customers demand the same level of service excellence as the world. This makes the quality of service a differentiator. It also requires banks to invest heavily in technology systems.

The increased cost of doing business in a hyper-inflationary environment has led to high unemployment and concomitant declines in real income. As the Zimbabwe Independent reported [2005: B14] keenly observed, the direct result of the hyperinflationary environment was, "The flood of currency substitutions, which means that the Zimbabwean dollar is giving up its function as a store of value, unit accounts and exchange media … to a more stable foreign currency.

During this period, a wealthy indigenous social class emerged, which, despite having a lot of cash, avoided visiting banks. During the cash crisis, emerging parallel foreign exchange and cash markets reinforced this. In effect, this has reduced the customer base of banks, and more banks are entering the market. As a result, fierce competition has emerged in a shrinking market.

The socioeconomic costs associated with hyperinflation include: falling purchasing power parity, increased uncertainty in business plans and budgets, reduced disposable income, speculative activities that shift production resources to production activities, and increased import demand and poor returns The pressure savings on domestic exchange rates. During this period, to increase income, people who imported from China, Malaysia and Dubai increased cross-border trade and commodity brokerage businesses. This actually means that the competition for import substitution of local products has intensified, which has adversely affected the local industry.

As more and more banks enter the market, due to economic reasons, the market has suffered a serious brain drain, which of course has led many inexperienced bankers into trouble. For example, the founding directors of ENG Asset Management have less than five years of experience in the financial services sector, but ENG was the fastest growing financial institution by 2003. It was suggested that the failure of ENG in December 2003 was due to young enthusiasm, greed and lack of enthusiasm. experience. The collapse of ENG affected some financial institutions that were financially affected, and caused depositors to flee, leading to the failure of some local banks.