by Gilbert Nyambabvu
CENTRAL bank governor Gideon Gono defiantly stuck to his guns on Friday, insisting that banks must comply with a tenfold increase in the minimum capital requirements despite what appears to be a cross-party cabinet revolt over the move.
In his mid-term monetary policy review presented this week, Gono increased to US$100 million the minimum capital requirements for commercial and merchant banks from the current levels of US$12.5 million and US$10 million respectively. He gave the banks until 2014 to meet the new thresholds.
But the move sparked fears that more banks, particularly the indigenously-owned institutions, would suffer the fate of Genesis Bank and Royal Bank which were forced to hand over their operating licences having failed to meet the current capital requirements.
The NewsDay newspaper reported that the secretary to the President and cabinet wrote to Gono and Finance Minister Tendai Biti declaring the increase null and void after the move was shot down by both Zanu PF and the MDC parties in the coalition government.
The parties felt the increase would adversely impact the indigenous banks and force many of them to close thereby pegging back the country’s economic empowerment programme.
But speaking to reporters on Friday, Gono said there was no going back on the increase, insisting that inadequate capital positions were responsible for the fragility of the country’s financial services sector as well as high bank charges and lending rates.
“A number of banking institutions are registering persistent losses due to inadequate business volumes, which in turn is emanating from low capitalisation. Banking institutions with higher capital levels, such as CBZ Bank and Standard Chartered Bank revealed demonstrable ability to generate revenues in excess of their operating costs,” he said.
“In contrast, banking institutions with low capital levels, such as Royal Bank and ZABG, as well as those with illiquid capital such as Agribank and Trust, have higher incidence of reporting losses.”
Gono said banks with weak capital positions could not generate sufficient business and revenues to meet their operational costs and were therefore resorting to high charges and other activities which undermine confidence in the sector.
“Marginally capitalised institutions often resort to charging higher fees to compensate for low levels of business. These high bank charges erode confidence in the banking system leading to financial disintermediation, where economic agents keep their money outside the banking system. An estimated $2 billion to $3 billion dollars is considered to be circulating outside the banking system,” he said.
“It’s the Reserve Bank’s considered view that only profitable banks can positively impact on economic activity in our country via low bank charges, low interest rates, sound credit extension, and provision of liquidity, among others.”
Critics said the new capital requirements were unrealistic for an economy Zimbabwe’s size, adding the problem with the country’s financial services sector was not capitalisation but poor oversight and regulation by the central bank.
Said UK-based banking expert and New Zimbabwe.com blogger Lance Mambondiani: “The central banks’ abdication of effective regulation and supervision, preferring to manage banks by a yearly increase in capital requirements is patently bad policy which takes the course of least resistance whilst failing to address the core of a 10-year crisis.
“The recurrence of near identical bank crises since 2003 even after several changes in the capital requirements could indicate that the problem is less about adequacy.
“An increase in capital adequacy ratio has to be proportionate to the size of the banking sector and country’s economic activity. At the proposed level, with one of the lowest GDP (US$10.7 billion), Zimbabwe will have the highest CAR in Africa, higher than South Africa with CAR at US$39 million and a GDP of US$408 billion.
[Only a fool would use GDP as a measure of anything, when the mines are in foreign hands. Foreign mines dragging diamonds, gold and platinum out of the economy is not development or meaningful economic growth, but it is counted as GDP. - MrK]
“Besides being empirically mismatched, such an increase less than six months after a previous increase to US$12 million defies realism, and is the type of policy inconsistency which contributes to fragility within the banking sector.”
[I'm sorry, but I couldn't decipher any of that. - MrK]
But Gono said he would not be swayed by “fly-by-night experts” in the regulation and supervision of banks, insisting Zimbabwe had far too many banks for an economy its size.
“Zimbabwe, with an area size of 390,757 square kilometers has more banking institutions per square kilometer compared to Nigeria and South Africa with area sizes 923,768 and 1,228,376 square kilometers respectively,” he said.
“South Africa with a GDP of over $400 billion in 2011 is supported by 32 banking institutions. In contrast, Zimbabwe with a GDP of around $10 billion has 26 operating banking institutions.
“It is noteworthy that Zimbabwe with an estimated population size of only 13.5 million has 25 banking institutions whilst Nigeria, with a population of around 160 million, has the same number of banking institutions. Further, South Africa with a population size of more than three times Zimbabwe’s population has 32 banks.”
The RBZ chief said institutions unable to meet the new capital requirements must merge and consolidate their operations so that the country ends up with a leaner but much more stable financial services sector.
“A fragmented banking system characterised by numerous weak and undercapitalised banks will not only increase the vulnerability of the financial system but also of the economy as a whole,” he said.
“Fewer, strong and adequately capitalised banking institutions are better placed to meet the funding requirements of a country’s economic agents than numerous weak and inadequately capitalised institutions.
“It is the Reserve Bank’s firm conviction that it is time indigenous banks extricate themselves from the fringes of the financial sector and transform into indigenous Citibanks and HSBCs.
“As long as we are not ready to take bold decisions to strengthen the financial sector through a number of measures including mergers and consolidations, indigenous banks will continue to operate in the periphery of the financial services sector.”
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