Maravi

Bank capital: right diagnosis, wrong medicine

COMMENT - This is an opinion piece from a former rival of dr. Gideon Gono. Also, I am not impressed by quoting GDP, when it is not a real reflection of economic activity in the country, only an indication of the level of exploitation and theft of natural resources.

Bank capital: right diagnosis, wrong medicine
06/08/2012 00:00:00
by Munyaradzi Kereke

TEMPERS are flaring following the recent announcement by the Central Bank Governor, Dr Gideon Gono that he has raised bank minimum capital levels from US$12.5 million to US$100 million, taking commercial banks as an example, albeit on a phased basis through to 2014.

Dr Gono obviously took this controversial decision after carefully examining options viewed from his own universe of psyche and his experience and conceptualisation of banking, advised by his team at the RBZ, along with the RBZ Board.

It will be fair to say that Dr Gono and his team have their reasons for making this move. They stand ready to “take off gloves” defending their stance so to speak.

On the day Dr Gono made this ground-breaking announcement, which made Zimbabwe the first US$10 billion economy to have such levels of bank capital, our shell-shocked bankers where firmly warned that some of them faced the risk of “going before Dr Gono himself goes” on completion of his non-renewable contract next year, demonstrating the very important and high stakes around this critical subject.

There are visible strong objections to this policy position by others, including the bankers themselves and some quarters in Government, Industry and Commerce and general pedestrians I have heard browsing and conversing on this issue.

This dichotomy of negation arising from the two opposing views makes it imperative that experts in the realms of Macroeconomic Management, Banking and Finance weigh in and be allowed to air their advisory views. I have, therefore, decided that I also add my modest input in the raging debate on bank capital levels.

In any discourse of life, be it in history, politics, medicine, religion, rocket science, raising of chicken, customary norms and so forth, there are times when society must defer to those that are qualified in respective areas to clear certain hurdles of the intellect. This is a statement of fact which yields fruity dividends to those societies that observe it. It is also common sense to do so for no musical band can hope to win Grammy awards in the classical genre using vuvuzelas and gongs where pianos and refined vocals are needed.

Having benefitted tremendously under Government of Zimbabwe’s far-sighted thrust in promoting education and the historic deepening of our Great Country’s human capital base, it would also have been very unpatriotic on my part had I elected to keep aloof, indifferent and quiet and not contribute to this vital debate.

It is my hope that the following few insights I am going to cover in the next paragraphs will positively impact on the ongoing debate.

The trinity of Government (The Executive, Legislature and Judicial arms) should draw from diverse discourse to make their decisions on this issue, informed by balanced empirical facts that are buttressed by expert opinions.

LEGAL SETTING

Banks in Zimbabwe operate under the umbrella of statues primarily under The Banking Act, Chapter 24:20; Banking Regulations, 2000 and the Reserve Bank of Zimbabwe Act, Chapter 22:15. Other players in the financial sector such as Building Societies, Insurance Companies and Financial Cooperative Schemes are covered under specific statutes of law as well.

Section 6 of the Banking Act articulates 5 specific classes of banking business (commercial banks, accepting houses, discount houses, finance houses, and micro-finance entities). Section 7 of the same Banking Act then goes on to lay out the lawful activities that these banking clusters can do.

The Reserve Bank of Zimbabwe Act then assigns the licensing, supervision and regulatory function of overseeing the banking sector to the Reserve Bank, under ministerial supervision and directions from the Minister of Finance who in turn accounts to The Executive in Cabinet, The Judiciary and Parliament. The Judicial arm serves the purpose of then ensuring that justice is served in strict observance of the various statutes governing the banking sector.

The decision to set banks’ minimum capital levels, therefore, lies in RBZ’s scored-card of deliverables, among other statutory outputs, guided by the relevant arms of Government under the checks and balances framework of governance.

BANKING AND THE ECONOMY

As is spelt out in the founding laws that create the banking sector, banks’ main roles are to serve as the catalysts for savings mobilisation in the economy on the one hand and financing of investment and economic activity (both productive and consumptive) on the other, as well as being the platform of transmission of financial impulses across and among internal sectors, and propelling Zimbabwe’s interface with the rest of the world’s economic and financial systems.

Stability in the banking sector is, therefore, an indispensable necessary condition for macroeconomic stability, rapid economic growth and broad-based social development. Conversely, troubles in the banking sector have the direct capacity to cause shockwaves and havoc in the entire economy, which would in turn set in motion other centrifugal forces in society.

The graveyards of contemporary societies that have gone through civil strife clearly attest to the fact that the banking sector is usually the original source of the sparks that set communities alight with welfare-induced upheavals.

Zimbabwe must avoid letting the banking sector deteriorate to levels that could engulf our beloved nation into ungovernable turmoil due to avoidable bubbles of implosion in our financial system.

It is for this reason that the Central Bank should act very objectively, carefully and free of emotions and vindictive knee-jack impulses to ensure that the country has a vibrant, safe, secure and reliable banking sector that has The People’s trust in it.

The recent bank collapses clearly show that there is a serious problem that has to be addressed without any further delays so that our economy can recover and thrust onto a high steady state growth path.
US$100m BANK CAPITAL THRESHOLDS

Instructed both by my own experience and protracted meticulous training in the realms of the economy, banking and finance, buttressed by empirical evidence on this subject, I unreservedly conclude that Zimbabwe is not yet ready for the high bank minimum capital levels of US$100 million.

The decision by Dr Gono and his team at the RBZ is, therefore, hazardously faulty and must be swiftly set aside before it spins the country’s financial sector into irreversible turmoil. This will be ruinous to our economy and in the end spark avoidable socio-political states of flux. This ugly eventuality must be avoided before it is too late.

Below I fully support my above opinion with both informed macroeconomic reasoning and what is prevailing in other countries. Doses of common sense also help clarify my point of view.

To any Zimbabwean, it is now a common secret that the RBZ Governor’s vehemently repeated statement is that bank capital levels were raised from US$12.5 million to US$100 million so as to create financial sector stability.

Dr Gono further argues that a bank’s capital “is its final line of defence” against inherent threats towards collapsing and that the US$100 million capital mark is “a precast wall” and hence a non-negotiable must for banks to comply with.

Whist the eloquence that has typically accompanied these statements by the RBZ Governor are appealing at the surface, a close professional dissection of what bank stability means shows that this line of thinking suffers from what economists call the pitfalls of the fallacy of composition (FoC).

Simply put, the fallacy of composition is where a policy proposition is anchored on the inverted logic that “if sugar is sweet, then eating more and more of it is good”. Medical doctors and dieticians know that eating too much sugar can be the most perilous thing to do, sweet as it is.

Having capital in a bank is good. More and more capital, especially if imposed drastically in a haphazard, panicky, afterthought fashion can be as poisonous to the economy as too much sugar is to the human body. The RBZ team needs to understand this far-reaching common-sense.

Even when a bank has super rich shareholders who inject a trillion dollars in it for capital every month (raising the “precast wall” sky-high to fit into Dr Gono’s frame of mind), it is a very simple and straightforward statement of fact that that bank can still collapse even in a matter of hours!

The trillion dollar capital bank, would still collapse if it is in the hands of rogue traders; it would still collapse if in the hands of boards that sleep on the job; it would still spectacularly collapse if regulated by central bankers who are deeply compromised by excessive borrowing from the same institutions they must supervise with a firm hand that is blind to personal business interests; it would still collapse if managed by executives who steal from that same bank; and it would still collapse if owned by shareholders who take irregular loans that are not repaid.

This is all common sense which the RBZ should take into account and not seek to respond to the recent bank failures by spiking the minimum capital levels to the comic levels of US$100 million.

The second strand of irrefutable facts on banking sector stability is in the area of the texture of banks’ asset books.

A 100-year-old bank may have had its shareholders inject adequate capital far back than at inception, such that its capital could be locked up sitting in the form of that bank’s owner-occupied buildings. In such a very practical scenario, no amount of miracles can lead to such assets being swiftly converted into liquid cash to then act as a viable “last line of defence” when the bank is in trouble.

Equally fundamental, a bank can have all the trillion dollars of hard currency capital but if that money is locked up in non-performing, unproductive loans, then that bank would still have high risks of collapsing.

A bank’s core line of defence which is both plausible and sustainable, therefore, lies in accurate calibration of resources across asset classes in a way that guarantees a fine balance between earning assets and liquidity for meeting depositors’ needs on demand.

Sound corporate governance practices in a bank will also ensure that the institution grows itself through greater customer loyalty lured by that bank’s track record of meeting withdrawals when needed.
SIZE OF THE ECONOMY

Dr Gono, the RBZ Board and their technocrats have also made a serious blunder by simply looking at capital levels in some countries in absolute terms to then conclude that levels of around US$100 million are plausible and sustainable.

In medicine, a new born infant is injected using very tiny syringes and smallest needles to deliver appropriate quantities of therapeutic medical cocktails that go with the relatively smaller body mass of the infant, whist for hefty grownups like myself, bigger syringes are used to inseminate higher doses of medicine.

The economic implication here is that the levels of bank minimum capital levels must be instructed by looking at an economy’s size as measured by that country’s Gross Domestic Product (GDP), population and credit risk profiles, among other aggregate considerations. The concept of bank capital must, therefore be seen relative to an economy’s size and credit risk profiling, as opposed to thump-sucked absolute numbers.

Zimbabwe’s US$10 billion economy clearly does not warrant bank capital levels of US$100 million as forcefully argued by the RBZ team. Below I present hard facts showing why the RBZ has made a serious error of judgement with potentially costly effects to the entire economy and generations to come if this policy is miraculously allowed to stay.

South Africa: GDP is around US$408 billion; population is around 50 million; and amount needed as capital to start a commercial bank is US$39 million as at end of 2011;

Angola: GDP is around US$101 billion; population is around 19 million; and amount needed as capital to start a commercial bank is US$4 million as at end of 2011;

Bostwana: GDP is around US$18 billion; population is around 2 million; and amount needed as capital to start a commercial bank is US$0.8 million as at end of 2011;

Malawi: GDP is around US$6 billion; population is around 15 million; and amount needed as capital to start a commercial bank is US$5 million as at end of 2011;

Zambia: GDP is around US$17 billion; population is around 13 million; and amount needed as capital to start a commercial bank is US$0.5 million as at end of 2011;

Mauritius: GDP is around US$11 billion; population is around 1.2 million; and amount needed as capital to start a commercial bank is US$6.5 million as at end of 2011;

Mozambique: GDP is around US$13 billion; population is around 23 million; and amount needed as capital to start a commercial bank is US$3 million as at end of 2011;

Namibia: GDP is around US$408 billion; population is around 2 million; and amount needed as capital to start a commercial bank is US$1.2 million as at end of 2011;

Uganda: GDP is around US$17 billion; population is around 35 million; and amount needed as capital to start a commercial bank is US$1.7 million as at end of 2011;

Kenya: GDP is around US$33 billion; population is around 41 million; and amount needed as capital to start a commercial bank is US$3.3 million as at end of 2011;

Tanzania: GDP is around US$24 billion; population is around 44 million; and amount needed as capital to start a commercial bank is US$3.2 million as at end of 2011;

China: GDP is around US$7 trillion; population is around 1.3 billion; and amount needed as capital to start a commercial bank is US$10.5 million for a bank with total risk assets of US$100 million as at end of 2011. Chinese banks have been given up to 31 December 2018 to comply with Basle III. This contrasts sharply with Dr Gono’s blind snappy decision.

Brazil: GDP is around US$2.5 trillion; population is around 196 million; and amount needed as capital to start a commercial bank is US$6.6 million as at end of 2011;

USA: GDP is around US$15 trillion; population is around 312 million; The amount needed to start a commercial bank is US$8 million for a bank with total risk assets of US$100 million as at end of 2011;

UK: GDP is around US$2.4 trillion; population is around 62 million; The amount needed to start a commercial bank is US$7 million for a bank with total risk assets of US$100 million as at end of 2011;

Canada: GDP is around US$1.7 trillion; population is around 34 million; The amount needed to start a commercial bank is US$7 million for a bank with total risk assets of US$100 million as at end of 2011;

Russia: GDP is around US$1.9 trillion; population is around 142 million; and amount needed as capital to start a commercial bank is US$10 million as at end of 2011;

From the above incontestable hard facts, it is very clear that the decision by Dr Gono and the RBZ Board to hike capital levels for banks from US$12.5 million to US$100 million is a clear unacceptable error of judgement which flies way out of line with any other country in the world. Their figure of US$100 million was, without doubt, thumb-sucked in isolation of the size of our economy and conditions prevailing on the ground.

As a US$10 billion economy, Zimbabwe has opened a new record of being the most expensive economy to start a bank. In the whole world, Zimbabwe is the only country that has a wild stray of bank minimum capital levels away from the relative size of the economy. This is a very dangerous bad world record!

I urge Zimbabwe to carefully go through the above factual examples and ask why as a country we must allow, even for a minute, Dr Gono’s bizarre decision of US$100 million bank capital to remain in place. Dr Gono must not try to defend this absolute figure, just out of bravado, the US$100 million figure is WRONG. It is based on wrong premises.

The startling ocean-wide margin of error by the RBZ can only mean one of three things:

# Dr Gono and his team listened to poisoned advice from foreign sources that deliberately want to cook up and foist an upheaval in Zimbabwe. Or;
# Simply that the decision is a manifestation of incompetence at RBZ that has cascaded to epic low troughs; or

# That the RBZ team itself is deliberately acting in a scotched-earth vengeful mode to somehow try and prove certain points or settle unspecified scores with some constituencies in the country, especially given that Dr Gono knows his tenure at RBZ is soon coming to a definite end.
The truth is that one or a combination of the above is what we are dealing with here and this is very worrying to say the least.

The country’s Leadership should, therefore, not think twice about stopping this aberration in our economic history, as letting such a policy stay would be to allow Zimbabwe to glide towards avoidable but definite ruin with our eyes and faculties wide open and awake. Ngatisadya uroi nenyadzi!
THE IMF-BASLE VIRUS

It would be a monumental omission for me to end this Advisory Note without sharing my professional view on the series of financial sector crises that the world has been driven into by frameworks and recommendations generated by the IMF and their colleague institutions such as the Basle Committee on Bank Supervision (Europe).

Tragically in Africa, the IMF descents on our central banks and Treasuries like Popes and Angels, never facing any objective critical scrutiny of what comes out of their mouths as some of our central bankers and Treasury people suffer from the inferiority complex of thinking that everything that the IMF says is superior, right and good for our economies. I prefer to call this tragic senselessness of self-condemnation the Ailment of Incurable Colonial Mentality of Self-Subjugation (AICoMoSS).

The Basle Committee is nothing but a group of people in Europe, who for instance presided over the crafting of the European Union and the European Central Bank utopia concept which many of them are now seeing as a time-bomb ready to explode in their faces any time.

In Greece, some households now use both sides of the tissue paper in their toilets as a way of cutting costs! Who would have thought the IMF-Basle-EU construct would come to this sorry state 10 years ago?

The same committee crafted Basle I and Basle II systems which, with the help of the IMF were foisted on the financial throats of the global economy only to result in spectacular bank failures that recently shook world markets.

In the 90s, the Asian world nearly irreparably blew up under stress from a severe financial crisis that erupted there under the nostrils of the IMF. Yet, surprisingly, they continue to be regarded by our Central Bank and Treasury as the wise-men from the West who can track sustainable directions for our nation reading from the stars even with their eyes closed!

Here at home, Dr Gideon Gono recently announced that the comic bank capital level of US$100 million was “to prepare the country’s implementation of Basle III” which in its simple terms means, among other things, expressing capital adequacy as a certain percentage of weighted risk assets as preached by the Basle Committee in Europe.

So if Dr Gono wants to prepare the country’s banks to move towards Basle III, where is US$100 million coming from when Basle simply pegs capital adequacy as a percentage of risk weighted assets? The global norm is that virtually all countries moving towards Basle III are pegging their capital requirements in the range of 4% to 10.5% of risk-weighted assets.

In Zimbabwe, the Central Bank chief simply pegs a whopping US$100 million as minimum capital, and at that uses Basle III as his excuse! The IMF, World Bank, Basle Committee, Zimbabwe’s Government must please intervene and correct Dr Gono on what is a clear wrong interpretation of how Basle III works.

On our part as a country, we must also take a leaf from China. China has delayed the full implementation of Basle III to 31 December 2018. Here in Zimbabwe, Dr Gono expects banks to respond to him with plans to comply by September, 2012!

Who and what is Basle III? A product of a committee in Europe whose methods have successively caused economic and financial havoc in the global financial system! We must, therefore be very careful not to rush ourselves to comply on their thresholds as this risks upsetting our internal systems needlessly.

Looking at it from another geopolitical angle, perhaps the questions to ask are: should Basle as a European committee be allowed to shape our own national policies in ways that are so disruptive to our own causes and inherent interests? Have our Parliament and the Executive been given their legitimate space to interrogate that Basle III mantra before it is already being used to cause drastic and disruptive policy changes in our banking sector, adversely impacting on innocent lives and companies?

Did Dr Gono and his Board stop for a minute to assess what this seemingly blind policy of appeasement to the proponents of Basle III (the committee in Europe)’s effect is on our noble Economic Empowerment and Indigenisation programme is?

It is very clear here that someone in RBZ Supervision, together with Dr Gono simply calculated a certain percentage of an assumed size of risk assets and boom, they got US$100 million, and the next day it was policy to “prepare for Basle III” and gloves will be out as they vow to defend this bizarre move! Really?

Our Parliament must swing into action and call experts and the RBZ team to come and testify on this subject. The RBZ must not be allowed to play dangerous reckless experiments with people’s lives and our collective national interests.
In fact, this decision merits the RBZ top team and the Board being fired. Immediately.

Please, the subject of bank capital is a serious matter that affects a country for generations. There is, thus, need for greater alertness and caution when formulating policy on bank capital levels.

The example of Brazil is telling. In that country for instance, one needs only US$6.6 million to start a new bank, yet they are a US$2.4 trillion GDP economy. Segio Darcy, that country’s Central Bank Regulatory Director recently announced that they are considering lowering capital requirements for starting new banks. This makes sense! They understand very clearly the importance of savings mobilisation as a catalyst for sustained economic growth and development.

In conclusion, it is strongly recommended that our Parliament considers very seriously the following urgent reforms to the banking sector laws:

# Legally barring central bank governors from excessive borrowing from banks they supervise. Under this proposal, central bank governors should apply for personal or business loans through the Treasury and parliament would debate and approve such loans. This way the central bank governors would not be compromised in their oversight and supervisory work.

In Zimbabwe, the current bank failures are a result of lax supervision and an astonishing mentality of “looking the other way” whilst bank executives and shareholders forage on depositors’ hard-earned funds. There is need for Parliament to ask central bank officials to disclose their extent of borrowing so that the nation is satisfied that they are not compromised in their work through excessive loans.

This requirement must also apply to me since I worked at the RBZ for a long time, even now after I am no longer there. I must be brought to account!;

# Criminalising sloppiness in central bank oversight and supervision, as well as barring the central bank from announcing drastic policy changes without thorough, well-researched internal scrutiny. The current case of making Zimbabwe’s US$10 billion economy a first in the whole world to institute US$100 million bank capital requirement is a clear example of obtuse sloppiness by the RBZ meriting judicial sanction;

# Mandating public institutions, for example ZIMRA, NSSA, GMB, Local Authorities etc, to evenly spread their deposits across all banking institutions to ensure that liquidity does not sag idly at a few institutions as well as giving firm grounding to players in the banking sector in a fair way;

# Requirement for establishment of money and capital market tradable instruments with liquid asset status. That Zimbabwe is going for years without Treasury bills or any other money market instrument speaks volumes about the policy vacuum that needs closure through legislative changes.

# Making the Central Bank accountable. That Parliament caucused and took the decision to block legitimate inquiry into suspected acts of theft at RBZ (which I have gone public about saying they actually took place and facts are there) makes a mockery of our seriousness in stamping out corruption from our society.

It is not true that making Dr Gono accountable to Parliament will undermine National Security. Any transactions the Central Bank ever did with arms of Government or ministries were legitimate transactions as this was permissible under Section 8 of the old RBZ Act. The Farm Mechanisation Programme was a noble, legitimate programme that was not and is not illegal and there is no value in trying to discuss it now. These transactions of the State were legitimate, confidential and closed and, hence, must not be looked at to preserve our state Security. They are and they must forever remain State Secretes covered under the Official Secrets Act. No one must breach this. Not me. Not Parliament. Not anyone.

All countries in the world at one point or another operate through their central banks to carry out strategic transactions and this is all legitimate. The criminality I referred to is rather in respect of company shares, gold bullion and millions of US dollars that were taken to meet individual ends of buying real estate properties and building business empires that had nothing to do with any Government institution or Public interests. The criminality I am referring to here is where one person wilfully illegally dipped into people and companies’ bank accounts without their approval and directed banks to fund his own private business interests. The criminality I am talking about is where that one person even sold people’s private property for his own use and is never brought to account and Parliament caucuses to the sad effect of protecting him!

Why must Parliament be misled into thinking that bringing accountability at RBZ against these fraudulent transgressions would compromise national interests? Someone goes to the media and says “I started breeding chicken in the early 70s etc”, and then says he only borrowed from offshore sources. Who doesn’t know that in Zimbabwe almost everyone, including Mbuya Nehanda in her sacred times, breeds roadrunner chickens at their homesteads? My own late mother Ester Dube started rearing chicken in 1943 during World War I, before the IMF and World Bank were even formed in the mountains of New Hampshire, USA.

The chicken project being talked about here is the multi-million dollar venture established in the recent past (2007-2010). Saying that this was funded from chicken proceeds of the 70’s is the greatest lie. This is a lie that Zimbabwean bankers and myself know. The questions our Parliament and the people of Zimbabwe must ask are: how are those multi-million dollar loans of this one person secured? Where did these hundreds of real estate properties securing the loans come from and when were they bought? How were they paid for?

The same directors on the multiple shelf companies in whose names these properties are, who are they and how do they account for their sudden blossoming real estate fortunes? The reality I know is that the bulk of these real estate assets were not bought in the 70’s but alas, between January 1, 2004, and March 30, 2009. Unless our Parliament genuinely soul-searches and sees the mute point I am now almost about to die for trying to bring to light, then all talk about fighting corruption etc is idle talk of artificial idealisms that we are neither sincere about nor committed to achieving. It is called cheating ourselves.

Our Judicial system must also seriously soul-search. That a court acquits people who were caught red-handed by uniformed police officers assaulting another innocent person, and having seriously injured that person to the point of losing teeth, the court saying that acquittal is justice because “there is no evidence” is a serious indictment we must collectively attend to and self-correct as a country.

And someone had to present lengthy commentaries of ululation and jubilation to some bootlicking media houses, even praising God from Cairo, Egypt, celebrating such soiled judicial “victory!” The same person brazenly steals US$100,00 from a company’s bank accounts and all the evidence is there, tracking the funds deep into that person’s pocket but he goes scot free!

Dr Munyaradzi Kereke is a former adviser to Reserve Bank Governor Gideon Gono

Labels: BANKING, GIDEON GONO

posted by MrK @ 1:55 PM