Banking sector to emerge stronger

HARARE - Following the central bank’s raising of financial institutions’ capital threshold to $100 million, analysts say the Zimbabwean financial services sector is poised for greater growth in the medium to long-term, given that only banks with solid balance sheets will remain standing.

Analysts’ consensus is that the ongoing rush by financial institutions to raise fresh capital is likely to change the competitive landscape of the Zimbabwean banking environment through the emergence of a few dominant banks.

Responding to businessdaily questions, MMC Capital research said the raising of capital requirements by the apex bank will bring sanity and enhance the stability of the sector as no ailing banks that may cause systematic vulnerabilities on other banks will remain afloat.

“In our view, the banking sector is poised for greater heights in the medium to long-term given that only banks with solid balance sheets will remain afloat.

However, in the short-term growth may be stunted especially as a result of rising non-performing loans, poor corporate governance practices, inadequate reporting and disclosures as well as the absence of the lender-of-last-resort function of the RBZ,” said MMC.

Presenting the Mid-Term Monetary Policy Review Statement last month, Reserve Bank of Zimbabwe (RBZ) governor Gideon Gono said the increase in minimum capital levels for banking institutions had been necessitated by the dynamic nature of the financial landscape, regulatory requirements, increase in competition and economic uncertainties, which have placed an unprecedented pressure on them to be adequately capitalised.

The new measures require commercial and merchant banks to build up their paid-up equity capital to $100 million from $12,5 million and $10 million respectively. Building societies are required to meet $80 million new capital levels from $10 million, while discount and finance houses are expected to put up $60 million compared to the current $7,5 million to support their operations.

Microfinance institutions’ minimum capital base was raised from $1 million to $5 million.

Since the announcement several banks have taken measures towards complying with the minimum capital requirements.

BancABC, CBZ Holdings, FBC Bank, Kingdom, MBCA (owned by South Africa’s Nedbank), Stanbic Bank, Standard Chartered Bank and ZABG, have written letters to RBZ governor indicating they have complied, or are in the process of complying with the new requirements.

Gono hinted that there would not be extensions to the deadlines and urged banking institutions to either merge or sell to stronger financial entities.

MMC Capital however said chances of bank mergers are slim considering that most banks in the country are moving towards recapitalisation due to either strong earnings generating capacity or links to deeppocketed institutions.

“We don’t foresee any horizontal mergers of local banks save for those (ZB Bank and FBC Bank) who have announced that they may consider merging their commercial banking and building society operations internally so that instead of raising $80 million for the building society and another $100 million for the commercial banking operations they will only raise capital for one unit,” said the economic think tank.

Economist Christopher Mugaga said, “it has to be realised that raising capital requirements will not automatically promote mergers, it can actually see most players falling by the wayside considering the voodoo culture in most owner-managed banks.The executives will not be willing to disclose the anomalies in their operations which will have to be exposed if the merger is to be succesful (case of CFX bank Century Discount House) in 2004.”

Economic analyst Tapiwa Nyandoro noted that new capital thresholds will likely result in reduced bank institutions, reduced overheads and increased economies of scale.

“This may translate into reduced interest rates for borrowers and increased interest on depositors’ funds. The latter migh prompt a saving culture, attracting funds from the informal sector and the currently unbanked, leading to a virtuous cycle where landing rates come down further as the economy takes off,” he said.

Nyandoro said foreign direct investment (FDI) might follow the opportunity to invest in what is felt to be a safe industry with more or less guaranteed returns due to tight regulations.

“The investment itself would address the liquidity constraints. Concurrently proceeds from diamonds which may be offshore, for want of suitable vehicles to invest in, may be encouraged to return home.

“Should any of this take place, lending rates might come down and debt forgiveness for defaulting bank clients might be accelerated as balance sheets are cleaned to attract new capital. This could spur consumption and economic growth,” he said.

Nyandoro said the stronger balance sheets would also allow banks to support big local industries such as Bindura Nickel Corporation, RioZim and Zimplats among others currently unable to be serviced by local institutions.

Economist Joseph Mverecha was recently quoted saying forced mergers (largely expected as a result of the new capital requirements) are not necessarily synonymous with greater efficiency.

“Fewer banks from such mergers mean that financing to SMEs and micro enterprises will be even reduced, at a time when our economy is 70 percent SMEs.

“Capital thresholds of $100 million is so huge an amount, it is 2,5 times in South Africa when that economy is 40 times larger than that of Zimbabwe. It is out of proportion,” he said.

Experts equally predict a change from the usual banking method to retail banking by most banks.

In the past, banks have not found this segment of the market profitable and one doubts if things would change significantly, unless banks are able to deliver retail banking services in a very efficient manner, with technology playing a major role, they may not be able to keep their customers. - John Kachembere


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