Banks consolidation sensible

HARARE - The decision by Reserve Bank of Zimbabwe (RBZ) to introduce a three-tier system for banks in complying with the minimum capital threshold might be welcome in some quarters, but it poses a serious confidence threat on some local banking institutions.

The central bank governor John Mangudya  in his maiden monetary policy statement proposed three segments for banks —Tier I, Tier II and Tier III — which have different capital thresholds and functions.

Tier I segment comprises of large indigenous commercial banks and all foreign banks.

Banks in the Tier I segment would be required to have minimum core capital requirements of $100 million by 2020 as previously announced.

The Tier II segment comprises of commercial banks, merchant banks, building societies, development banks, finance houses and discount houses which will only conduct their core banking activities.

Tier II banking institutions would be expected to maintain minimum capital requirements of $25 million, while Tier III segment which has current minimum capital requirements of $5 million will comprise of deposit-taking microfinance institutions.

When all is said and done, a bank is as good as its deposits which in this case will be determined by the ability of the institution to attract depositors and customers.

Following the collapse of indigenous banks such Royal, Genesis, Renaissance, Interfin and Trust among others, the fear of history repeating itself in the remaining few indigenous banks will result in most financial institutions with a lower capital base struggling compared to the bigger institutions.

And really what would stop the bigger banks, when seeking new business and luring more depositors, to mention their capital base as a drawing card at the expense of the smaller players.

Instead of implementing the proposed system, what might have been needed was a positioning implemented in Nigeria where the country’s struggling banks were forced to merge.

This process started in 2004 after the Central Bank of Nigeria (CBN) announced new capital requirements for Nigerian banks.

The intention was to make banks increase their average size through mergers and acquisitions.

Some of them could neither satisfy the new capital requirements nor find a suitable merger partner, and therefore were forced to go into liquidation.

As a result, their number was considerably reduced.

Other important results of the consolidation process were that bank branch networks rose from 3 382 prior to consolidation to 4 500 post consolidation, aggregate bank assets increased from over $19 billion in 2004 to over $40 billion in 2006 and the capital adequacy ratio climbed from 15,2 percent in 2004 to 21,6 percent in 2006.

Neighbouring South Africa also consolidated from seven banks to four big banks (with the smallest of them having at least $53 billion plus assets).

The consolidation happened when four medium-sized banks merged into what is now ABSA (Amalgamated Banks of SA) leaving, First National Bank, Standard Bank and Nedbank as the major players.

Barclays bought 57 percent of ABSA in 2004 for $5,5 billion and in return agreed that ABSA would buy out all African operations of Barclays plc.

Below them are second tier banks like Capitec with over a  $1 billion in assets.

Several advantages flow from a consolidation move. 

For instance, you don’t want to have banks that are so small that they can’t even afford to put up ATM machines.

Also complexity can be eliminated when it comes to inter-bank settlements.

These can take anything from seven to 21 days in some banks in West Africa as opposed to 12 to 24 hours in South Africa.

A consolidated banking sector will make it easier for banks to streamline settlements between themselves and link-up ATM networks more effectively to realise economies of scale.

It will also accelerate investment decisions as the return on investment becomes more attractive when there are eight banks as opposed to 12 or more banks all fighting for the same market.

Comments (1)

Good analysis. Local banks already are at a disadvantage, have limited capacity to raise required capital threshholds hence consolidation should be done sooner than latter otherwise more will close shop. More and more companies, even local ones, are moving to international banks further depriving the small guys the much needed income

Thell - 8 September 2014

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