Strengthen banking sector, World Bank urges Zim

HARARE - The World Bank says Zimbabwe must strengthen its financial sector to curb systemic risk and avoid bank failures.

Nadia Piffaretti, the institution’s local economist, last week told a Sapes Trust business conference that “given the current low level of domestic savings, high cost of doing business and high cost of capital, there is need for… the strengthening of financial supervision”.

She added that Zimbabwe needed to adopt prudent fiscal policies.

This comes after the Bretton Woods institution, in its April 2014 report, highlighted the banking sector’s vulnerabilities as one of the challenges that need attention.

Zimbabwe’s financial sector has remained fragile in the multicurrency regime owing to multiple factors that include lack of lender of last resort, unstable deposit base, under capitalisation, poor corporate governance and high non-performing loans.

The country has experienced liquidity challenges since 2009 but the situation worsened last year with some banks running out of cash towards the festive season.

Market experts have been urging the monetary authorities to focus on stabilising the financial sector and improving the overall liquidity situation in the country.

Last month, Bruce Wharton, the US ambassador to Zimbabwe said the country should strengthen its vulnerable banking system to attract more foreign investment.

“Zimbabwe must develop and implement transparent, consistent, fiscally responsible policies and rebuild confidence in the nation’s economic and banking systems,” he said.

“The elements of these policies are not mysterious. They are what the governments of Zimbabwe’s neighbours do to attract investors, protect national interests, and grow the economy,” added Wharton.

The Reserve Bank of Zimbabwe (RBZ) announced new minimum capital requirements in July 2012 that saw banks being required to have at least $100 million in capital by June 2014.

The measure was meant to strengthen banks’ balance sheets so that they could withstand deeper levels of losses but many banks, especially locally owned, have been struggling to meet the capital requirements.

However, the economic and political environment made it difficult to raise additional capital from both local and foreign markets. Banking sector profitability remained constrained as short term deposits dominated, making it difficult for banks to create profitable assets.

At the same time, the indigenisation requirements made some foreign investors sceptical of partnering local institutions.

This resulted in the central bank revising the minimum capital requirements deadline to the year 2020.

A recent report by AfrAsia Bank Zimbabwe Limited noted that the best way to deal with financial sector stability in the country was full implementation of Basell II requirements which advocate for risk-based capital allocation, enhanced supervision and more public disclosure.

“Besides capital requirements, the monetary authorities must also address corporate governance issues in the banking sector. Previous bank failures have been blamed on weak corporate governance and insider lending, therefore measures to curb these will go a long way in restoring public confidence in the financial sector,” read the report.

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ORIGINAL - 19 May 2014

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