Entrepreneurs build their firm within the context of an environment which they sometimes may not be able to control. The robustness of an entrepreneurial venture is tried and tested by the vicissitudes of the environment. Within the environment are soldiery that may serve as great opportunities or menacing threats to the survival of the entrepreneurial venture. Entrepreneurs need to understand the environment within which they control so as to exploit emerging opportunities and mitigate against inherent threats.
This description serves to originate an comprehension of the soldiery at play and their follow on banking entrepreneurs in Zimbabwe. A brief historical summary of banking in Zimbabwe is carried out. The impact of the regulatory and economic environment on the sector is assessed. An determination of the buildings of the banking sector facilitates an appreciation of the basal soldiery in the industry.
Historical Background
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At independence (1980) Zimbabwe had a sophisticated banking and financial market, with commercial banks mostly foreign owned. The country had a central bank inherited from the Central Bank of Rhodesia and Nyasaland at the winding up of the Federation.
For the first few years of independence, the government of Zimbabwe did not interfere with the banking industry. There was neither nationalisation of foreign banks nor restrictive legislative interference on which sectors to fund or the interest rates to charge, despite the socialistic national ideology. However, the government purchased some shareholding in two banks. It acquired Nedbank's 62% of Rhobank at a fair price when the bank withdrew from the country. The decision may have been motivated by the desire to stabilise the banking system. The bank was re-branded as Zimbank. The state did not interfere much in the operations of the bank. The State in 1981 also partnered with Bank of reputation and industry International (Bcci) as a 49% shareholder in a new commercial bank, Bank of reputation and industry Zimbabwe (Bccz). This was taken over and converted to commercial Bank of Zimbabwe (Cbz) when Bcci collapsed in 1991 over allegations of unethical firm practices.
This should not be viewed as nationalisation but in line with state policy to preclude firm closures. The shareholdings in both Zimbank and Cbz were later diluted to below 25% each.
In the first decade, no indigenous bank was licensed and there is no evidence that the government had any financial reform plan. Harvey (n.d., page 6) cites the following as evidence of lack of a coherent financial reform plan in those years:
- In 1981 the government stated that it would encourage rural banking services, but the plan was not implemented.
- In 1982 and 1983 a Money and Finance Commission was proposed but never constituted.
- By 1986 there was no mention of any financial reform schedule in the Five Year National improvement Plan.
Harvey argues that the reticence of government to intervene in the financial sector could be explained by the fact that it did not want to jeopardise the interests of the white population, of which banking was an integral part. The country was vulnerable to this sector of the citizen as it controlled agriculture and manufacturing, which were the mainstay of the economy. The State adopted a conservative arrival to indigenisation as it had learnt a part from other African countries, whose economies nearly collapsed due to forceful eviction of the white community without first developing a mechanism of skills change and capacity building into the black community. The economic cost of inappropriate intervention was deemed to be too high. Someone else plausible speculate for the non- intervention policy was that the State, at independence, inherited a extremely controlled economic policy, with tight change control mechanisms, from its predecessor. Since control of foreign currency affected control of credit, the government by default, had a strong control of the sector for both economic and political purposes; hence it did not need to interfere.
Financial Reforms
However, after 1987 the government, at the behest of multilateral lenders, embarked on an Economic and Structural Adjustment Programme (Esap). As part of this programme the sustain Bank of Zimbabwe (Rbz) started advocating financial reforms through liberalisation and deregulation. It contended that the oligopoly in banking and lack of competition, deprived the sector of selection and potential in service, innovation and efficiency. Consequently, as early as 1994 the Rbz annual description indicates the desire for greater competition and efficiency in the banking sector, important to banking reforms and new legislation that would:
- allow for the escort of prudential supervision of banks along international best practice
- allow for both off-and on-site bank inspections to increase Rbz's Banking supervision function and
- improve competition, innovation and improve assistance to the communal from banks.
Subsequently the Registrar of Banks in the Ministry of Finance, in liaison with the Rbz, started issuing licences to new players as the financial sector opened up. From the mid-1990s up to December 2003, there was a flurry of entrepreneurial performance in the financial sector as indigenous owned banks were set up. The graph below depicts the trend in the numbers of financial institutions by category, operating since 1994. The trend shows an first increase in merchant banks and discount houses, followed by decline. The increase in commercial banks was initially slow, gathering momentum colse to 1999. The decline in merchant banks and discount houses was due to their conversion, mostly into commercial banks.
Source: Rbz Reports
Different entrepreneurs used discrete methods to jab the financial services sector. Some started advisory services and then upgraded into merchant banks, while others started stockbroking firms, which were elevated into discount houses.
From the beginning of the liberalisation of the financial services up to about 1997 there was a renowned absence of locally owned commercial banks. Some of the reasons for this were:
- Conservative licensing policy by the Registrar of Financial Institutions since it was risky to licence indigenous owned commercial banks without an enabling legislature and banking supervision experience.
- Banking entrepreneurs opted for non-banking financial institutions as these were less costly in terms of both first capital requirements and working capital. For example a merchant bank would wish less staff, would not need banking halls, and would have no need to deal in costly small sell deposits, which would cut overheads and cut the time to register profits. There was thus a rapid increase in non-banking financial institutions at this time, e.g. By 1995 five of the ten merchant banks had commenced within the former two years. This became an entry route of selection into commercial banking for some, e.g. Kingdom Bank, Nmb Bank and Trust Bank.
It was foreseen, that some foreign banks would also enter the shop after the financial reforms but this did not occur, probably due to the restriction of having a minimum 30% local shareholding. The stringent foreign currency controls could also have played a part, as well as the cautious arrival adopted by the licensing authorities. Existing foreign banks were not required to shed part of their shareholding although Barclay's Bank did, through listing on the local stock exchange.
Harvey argues that financial liberalisation assumes that removing direction on lending presupposes that banks would automatically be able to lend on commercial grounds. But he contends that banks may not have this capacity as they are affected by the borrowers' inability to assistance loans due to foreign change or price control restrictions. Similarly, having clear real interest rates would commonly increase bank deposits and increase financial intermediation but this logic falsely assumes that banks will always lend more efficiently. He added argues that licensing new banks does not imply increased competition as it assumes that the new banks will be able to attract competent supervision and that legislation and bank supervision will be enough to preclude fraud and thus preclude bank collapse and the resultant financial crisis. Sadly his concerns do not seem to have been addressed within the Zimbabwean financial sector reform, to the detriment of the national economy.
The Operating Environment
Any entrepreneurial performance is constrained or aided by its operating environment. This section analyses the prevailing environment in Zimbabwe that could have an follow on the banking sector.
Politico-legislative
The political environment in the 1990s was stable but turned vaporing after 1998, mainly due to the following factors:
- an unbudgeted pay out to war veterans after they mounted an charge on the State in November 1997. This exerted a heavy strain on the economy, resulting in a run on the dollar. Resultantly the Zimbabwean dollar depreciated by 75% as the shop foresaw the consequences of the government's decision. That day has been recognised as the beginning of severe decline of the country's economy and has been dubbed "Black Friday". This depreciation became a catalyst for added inflation. It was followed a month later by violent food riots.
- a poorly planned Agrarian Land Reform launched in 1998, where white commercial farmers were ostensibly evicted and replaced by blacks without due regard to land possession or recompense systems. This resulted in a requisite discount in the productivity of the country, which is mostly dependent on agriculture. The way the land redistribution was handled angered the international community, that alleges it is racially and politically motivated. International donors withdrew sustain for the programme.
- an ill- advised soldiery incursion, named operation Sovereign Legitimacy, to defend the Democratic Republic of Congo in 1998, saw the country incur heavy costs with no apparent benefit to itself and
- elections which the international community alleged were rigged in 2000,2003 and 2008.
These factors led to international isolation, significantly reducing foreign currency and foreign direct venture flow into the country. Investor belief was severely eroded. Agriculture and tourism, which traditionally, are huge foreign currency earners crumbled.
For the first post independence decade the Banking Act (1965) was the main legislative framework. Since this was enacted when most commercial banks where foreign owned, there were no directions on prudential lending, insider loans, proportion of shareholder funds that could be lent to one borrower, definition of risk assets, and no provision for bank inspection.
The Banking Act (24:01), which came into follow in September 1999, was the culmination of the Rbz's desire to liberalise and deregulate the financial services. This Act regulates commercial banks, merchant banks, and discount houses. Entry barriers were removed important to increased competition. The deregulation also allowed banks some latitude to control in non-core services. It appears that this latitude was not well delimited and hence presented opportunities for risk taking entrepreneurs. The Rbz advocated this deregulation as a way to de-segment the financial sector as well as improve efficiencies. (Rbz, 2000:4.) These two factors presented opportunities to enterprising indigenous bankers to make their own businesses in the industry. The Act was added revised and reissued as part 24:20 in August 2000. The increased competition resulted in the introduction of new products and services e.g. E-banking and in-store banking. This entrepreneurial performance resulted in the "deepening and sophistication of the financial sector" (Rbz, 2000:5).
As part of the financial reforms drive, the sustain Bank Act (22:15) was enacted in September 1999.
Its main purpose was to strengthen the supervisory role of the Bank through:
- setting prudential standards within which banks operate
- conducting both on and off-site watch of banks
- enforcing sanctions and where requisite placement under curatorship and
- investigating banking institutions wherever necessary.
This Act still had deficiencies as Dr Tsumba, the then Rbz governor, argued that there was need for the Rbz to be responsible for both licensing and supervision as "the greatest sanction available to a banking supervisor is the knowledge by the banking sector that the license issued will be cancelled for flagrant violation of operating rules". Any way the government seemed to have resisted this until January 2004. It can be argued that this deficiency could have given some bankers the impression that nothing would happen to their licences. Dr Tsumba, in observing the role of the Rbz in retention bank management, directors and shareholders responsible for banks viability, stated that it was neither the role nor intention of the Rbz to "micromanage banks and direct their day to day operations. "
It appears though as if the view of his successor differed significantly from this orthodox view, hence the evidence of micromanaging that has been observed in the sector since December 2003.
In November 2001 the Troubled and Insolvent Banks Policy, which had been drafted over the former few years, became operational. One of its intended goals was that, "the policy enhances regulatory transparency, accountability and ensures that regulatory responses will be applied in a fair and consistent manner" The prevailing view on the shop is that this policy when it was implemented post 2003 is assuredly deficient as measured against these ideals. It is contestable how transparent the inclusion and exclusion of vulnerable banks into Zabg was.
A new governor of the Rbz was appointed in December 2003 when the economy was on a free-fall. He made requisite changes to the monetary policy, which caused tremors in the banking sector. The Rbz was finally authorised to act as both the licensing and regulatory authority for financial institutions in January 2004. The regulatory environment was reviewed and requisite amendments were made to the laws governing the financial sector.
The Troubled Financial Institutions Resolution Act, (2004) was enacted. As a follow of the new regulatory environment, a whole of financial institutions were distressed. The Rbz located seven institutions under curatorship while one was closed and Someone else was located under liquidation.
In January 2005 three of the distressed banks were amalgamated on the authority of the Troubled Financial Institutions Act to form a new institution, Zimbabwe Allied Banking Group (Zabg). These banks allegedly failed to repay funds industrialized to them by the Rbz. The affected institutions were Trust Bank, Royal Bank and Barbican Bank. The shareholders appealed and won the request for retrial against the seizure of their assets with the supreme Court ruling that Zabg was trading in illegally acquired assets. These bankers appealed to the minister of Finance and lost their appeal. Subsequently in late 2006 they appealed to the Courts as in case,granted by the law. finally as at April 2010 the Rbz finally agreed to return the "stolen assets".
Another quantum taken by the new governor was to force supervision changes in the financial sector, which resulted in most entrepreneurial bank founders being forced out of their own clubs under varying pretexts. Some eventually fled the country under threat of arrest. Boards of Directors of banks were restructured.
Economic Environment
Economically, the country was stable up to the mid 1990s, but a downturn started colse to 1997-1998, mostly due to political decisions taken at that time, as already discussed. Economic policy was driven by political considerations. Consequently, there was a resignation of multi- national donors and the country was isolated. At the same time, a drought hit the country in the season 2001-2002, exacerbating the injurious follow of farm evictions on crop production. This reduced yield had an adverse impact on banks that funded agriculture. The interruptions in commercial farming and the concomitant discount in food yield resulted in a precarious food safety position. In the last twelve years the country has been forced to import maize, added straining the tenuous foreign currency resources of the country.
Another impact of the agrarian reform programme was that most farmers who had borrowed money from banks could not assistance the loans yet the government, which took over their businesses, refused to assume accountability for the loans. By concurrently failing to recompense the farmers instantly and fairly, it became impractical for the farmers to assistance the loans. Banks were thus exposed to these bad loans.
The net follow was spiralling inflation, firm closures resulting in high unemployment, foreign currency shortages as international sources of funds dried up, and food shortages. The foreign currency shortages led to fuel shortages, which in turn reduced commercial production. Consequently, the Gross Domestic goods (Gdp) has been on the decline since 1997. This negative economic environment meant reduced banking performance as commercial performance declined and banking services were driven onto the parallel rather than the formal market.
As depicted in the graph below, inflation spiralled and reached a peak of 630% in January 2003. After a brief reprieve the upward trend prolonged rising to 1729% by February 2007. Thereafter the country entered a period of hyperinflation unheard of in a peace time period. Inflation stresses banks. Some argue that the rate of inflation rose because the devaluation of the currency had not been accompanied by a discount in the funds deficit. Hyperinflation causes interest rates to soar while the value of collateral safety falls, resulting in asset-liability mismatches. It also increases non-performing loans as more citizen fail to assistance their loans.
Effectively, by 2001 most banks had adopted a conservative lending strategy e.g. With total advances for the banking sector being only 21.7% of total industry assets compared to 31.1% in the former year. Banks resorted to vaporing non- interest income. Some began to trade in the parallel foreign currency market, at times colluding with the Rbz.
In the last half of 2003 there was a severe cash shortage. citizen stopped using banks as intermediaries as they were not sure they would be able to passage their cash whenever they needed it. This reduced the deposit base for banks. Due to the short term maturity profile of the deposit base, banks are commonly not able to spend requisite portions of their funds in longer term assets and thus were extremely liquid up to mid-2003. Any way in 2003, because of the query by clients to have returns matching inflation, most indigenous banks resorted to speculative investments, which yielded higher returns.
These speculative activities, mostly on non-core banking activities, drove an exponential increase within the financial sector. For example one bank had its asset base grow from Z0 billion (Usd50 million) to Z0 billion (Usd200 million) within one year.
However bankers have argued that what the governor calls speculative non-core firm is considered best practice in most industrialized banking systems worldwide. They argue that it is not unusual for banks to take equity positions in non-banking institutions they have loaned money to safeguard their investments. Examples were given of banks like Nedbank (Rsa) and J P Morgan (Usa) which control vast real estate investments in their portfolios. Bankers argue convincingly that these investments are sometimes used to hedge against inflation.
The schooling by the new governor of the Rbz for banks to unwind their positions overnight, and the immediate resignation of an overnight room sustain for banks by the Rbz, stimulated a emergency which led to requisite asset-liability mismatches and a liquidity crunch for most banks. The prices of properties and the Zimbabwe Stock change collapsed simultaneously, due to the heavy selling by banks that were trying to cover their positions. The loss of value on the equities shop meant loss of value of the collateral, which most banks held in lieu of the loans they had advanced.
During this period Zimbabwe remained in a debt crunch as most of its foreign debts were whether un-serviced or under-serviced. The follow worsening of the equilibrium of payments (Bop) put pressure on the foreign change reserves and the overvalued currency. Total government domestic debt rose from Z.2 billion (1990) to Z.8 trillion (2004). This increase in domestic debt emanates from high budgetary deficits and decline in international funding.
Socio-cultural
Due to the vaporing economy after the 1990s, the citizen became fairly mobile with a requisite whole of professionals emigrating for economic reasons. The Internet and Satellite television made the world truly a global village. Customers demanded the same level of assistance excellence they were exposed to globally. This made assistance potential a differential advantage. There was also a query for banks to spend heavily in technological systems.
The increasing cost of doing firm in a hyperinflationary environment led to high unemployment and a concomitant collapse of real income. As the Zimbabwe Independent (2005:B14) so keenly observed, a direct outcome of hyperinflationary environment is, "that currency substitution is rife, implying that the Zimbabwe dollar is relinquishing its function as a store of value, unit of catalogue and medium of exchange" to more stable foreign currencies.
During this period an affluent indigenous segment of community emerged, which was cash rich but avoided patronising banks. The emerging parallel shop for foreign currency and for cash during the cash emergency reinforced this. Effectively, this reduced the buyer base for banks while more banks were coming onto the market. There was thus aggressive competition within a dwindling market.
Socio-economic costs associated with hyperinflation include: erosion of purchasing power parity, increased uncertainty in firm planning and budgeting, reduced disposable income, speculative activities that divert resources from efficient activities, pressure on the domestic change rate due to increased import query and poor returns on savings. during this period, to augment earnings there was increased cross border trading as well as commodity broking by citizen who imported from China, Malaysia and Dubai. This effectively meant that imported substitutes for local products intensified competition, adversely affecting local industries.
As more banks entered the market, which had suffered a major brain drain for economic reasons, it stood to speculate that many inexperienced bankers were thrown into the deep end. For example the founding directors of Eng Asset supervision had less than five years sense in financial services and yet Eng was the fastest growing financial practice by 2003. It has been suggested that its failure in December 2003 was due to adolescent zeal, greed and lack of experience. The collapse of Eng affected some financial institutions that were financially exposed to it, as well as eliciting depositor flight important to the collapse of some indigenous banks.
summary of Zimbabwean Banking Sector (Part One)
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