Overview of Zimbabwe's banking sector (Part One)

Entrepreneurs build their business in the context of an environment they may not be able to control. The resilience of an entrepreneurial venture is experienced and tested by environmental upheavals. Within the environment are forces that may serve as major opportunities or threats to the survival of the entrepreneurial venture. Entrepreneurs need to understand the environment in which they operate to seize emerging opportunities and face potential threats.

This article is used to gain an understanding of the powers in the game and their impact on Zimbabwean banking entrepreneurs. Conducts a brief historical overview of banking in Zimbabwe. The impact of the regulatory and economic environment on the sector is examined. Analysis of the structure of the banking sector enables the basic forces in the industry to be assessed.
historical background

Independence (1980) Zimbabwe had a sophisticated banking and financial market, with commercial banks being mostly foreign-owned. The state had a central bank inherited from the Central Bank of Rhodesia and Maniasland with the dissolution of the federation.

During the first years of independence, the Zimbabwe government did not interfere in the banking industry. There was no nationalization of foreign banks and no restrictive legislative intervention in which sectors to finance or interest rates, despite the socialist national ideology. However, the government has acquired a stake in two banks. It acquired Nedbank & 62% 62% of Rovank at a fair price when the bank withdrew from the country. The decision may have prevented the desire to stabilize the banking system. The bank was renamed Zimbabwe. The state did not interfere much with the bank's activities. The country in 1981 also partnered with the Bank of Credit and International Trade (BCCI) as a 49% shareholder in a new commercial bank, the Bank of Credit and Trade Zimbabwe (BCCZ). It took over and was converted to the Zimbabwe Commercial Bank (CBZ) when BCCI collapsed in 1991 because of allegations of unethical business practices.

This should not be considered nationalization except in accordance with state policy to prevent corporate closures. Shares in both Zimbabwe and CBZ were later diluted to below 25% each.
In the first decade there was no license for a native bank and there is no evidence that the government had any financial reform plan. Harvey (page 6) notes the following as evidence of a lack of a coherent economic reform plan in those years:

– In 1981 the government declared that it would encourage rural banking services, but the plan was not implemented.
– In 1982 and in 1983, a money and finance committee was proposed but never constituted.
Until 1986, no financial reform agenda was mentioned in the National Development Plan for five years.

Harvey argues that the government's consent to intervene in the financial sector can be explained by not wanting to jeopardize the interests of the white population, of which banking was an integral part. The country was exposed to this sector in the population because it dominated agriculture and production, which were the mainstay of the economy. The country has taken a conservative approach to indigenization, as it has learned lessons from other African countries, whose economies have almost collapsed because of white power's powerless eviction without first developing a mechanism for transferring skills and capacity building to the black community. The economic cost of inappropriate intervention was considered too high. Another plausible reason for the policy of non-intervention was that the state, independently, inherited a highly controlled economic policy, with tight exchange control mechanisms, from its predecessor. Because foreign exchange control affected credit control, the government by default had strong control of the sector for both economic and political purposes; Hence he should not have interfered.

Financial Reforms

However, after 1987, the government, for examining multilateral lenders, launched an Economic and Structural Adjustment Program (ESAP). As part of this program, the Reserve Bank of Zimbabwe (RBZ) has begun to recommend financial reforms through liberalization and regulation. She argued that the oligopoly in banking and competition, deprived the selection and quality of service, innovation and efficiency sectors. As a result, as early as 1994, RBZ's annual report indicates the desire for greater competition and efficiency in the banking sector, leading to banking reforms and new legislation that will allow:

– Enable careful supervision of banks according to international best practices
– Enable both off-site banking checks and increase RBZ bank oversight and
– Improve competition, innovation and improve public service from banks.

The Registrar of Banks then began, in collaboration with the RBZ, to issue licenses to new players as the financial sector opened. From the mid-1990s until December 2003, entrepreneurial activity in the financial sector occurred in the establishment of native-owned banks. The graph below shows the trend in numbers of financial institutions by category, which has been operating since 1994. The trend shows an initial increase in merchant banks and discount houses followed by a decline. The growth in commercial banks was slow at first, gaining momentum around 1999. The decline in merchant and discount banks was due to their conversion, usually to commercial banks.

Source: RBZ reports

Various entrepreneurs used a variety of methods to penetrate the field of financial services. Some began with consulting services and then upgraded to merchant banks, while others started at stock brokers' offices that were expanded to discount houses.

From the beginning of the financial services liberalization until 1997, there was a marked absence of locally owned commercial banks. Some of the reasons were:

– Conservative licensing policy by the Registrar of Financial Institutions because it was dangerous for licensing indigenous commercial banks without legislative experience and banking supervision.
– Banking entrepreneurs chose non-banking financial institutions as these were less expensive in terms of both initial capital and working capital requirements. For example, a merchant bank would require fewer employees, would not need banking halls, and would not have to deal with small, expensive retail deposits, which would reduce overhead and reduce profit logging time. If so, there was a rapid rise in non-banking financial institutions during this time, for example, by 1995, five of the ten merchant banks had begun in the previous two years. This has become the entry route of choice in commercial banking for some, for example the State Bank, the NMB Bank and the Trust Bank.

Some foreign banks were expected to enter the market even after the financial reforms, but this did not occur, probably due to the minimum 30% domestic holding limit. The stringent controls in foreign currency could also play a role, as did the cautious approach taken by licensing authorities. Existing foreign banks were not required to shed some of their holdings even though Barclay Bank did so through listing on the local stock exchange.

Harvey argues that financial liberalization assumes that removing a direction for loans assumes that banks will be able to lend automatically on a commercial basis. But he argues that banks may not have this ability because they are affected by borrowers & # 39; Inability to grant loans due to currency or price control restrictions. Similarly, a positive real interest rate will usually increase bank deposits and increase financial intermediation, but this logic incorrectly assumes that banks will always lend to more efficiency. New does not imply increased competition because it assumes that the new banks will be able to attract competent management and that the legislation and supervision of the banks will be sufficient to prevent fraud and thus prevent the collapse of banks and the resulting economic crisis. Unfortunately, his concerns did not address the financial sector reform at the same time, .

Operating environment

Any entrepreneurial activity is limited or aided in its operating environment. This chapter analyzes the prevailing environment in Zimbabwe that could affect the banking sector.

Political legislation

The political environment in the 1990s was stable but became volatile after 1998, mainly due to the following factors:

– Compensation without budgets for veterans of war after they attacked the state in November 1997. This put a great strain on the economy and the result was a profit on the dollar. As a result, the Zimbabwean dollar depreciated by 75% as the market saw the consequences of the government decision. That day was recognized as the beginning of the severe downturn in the country's economy and was nicknamed "Black Friday." This depreciation has become a catalyst for continued inflation. A month later, violent food riots followed.
– Improperly planned agrarian land reform launched in 1998, where supposedly white commercial farmers were evacuated and replaced by blacks regardless of land or compensation systems. This has led to a significant decline in agricultural productivity, which is largely dependent on agriculture. The manner in which land was divided angered the international community, which it said was racially and politically motivated. International donors have withdrawn support for the program.
– An unarmed military invasion, in the name of a sovereign legitimation campaign, to protect the Democratic Republic of Congo in 1998, has caused the country massive costs with no apparent benefit to itself and
– Elections that the international community allegedly held in 2000, 2003 and 2008.

These factors have led to international isolation, significantly reducing the flow of foreign exchange and foreign direct investment in the country. Investors' confidence has been severely eroded. Agriculture and tourism, traditionally, are huge foreign exchange earners.

In the first post-independence decade, the Banking Act (1965) was the primary legislative framework. Because this was enacted when most of the foreign-owned commercial banks had no provisions on prudent loans, domestic loans, some of the shareholder's money that could be lent to a single borrower, defining risk assets, and there was no provision for bank testing.

The Banking Law (24:01), which came into force in September 1999, was the peak of RBZ's desire for success. Liberalization and the downgrading of financial services. This law regulates commercial banks, merchant banks and discount houses. Entrance barriers were removed which led to increased competition. The deregulation also allowed some benchmark banks to operate in non-core services. This latitude does not appear to be well delimited and hence presented opportunities for risk taking. The RBZ advocated this regulation as a way of segmenting the financial sector as well as improving efficiency. (RBZ, 2000: 4.) These two factors presented opportunities for indigenous bankers to initiate their own business in the industry. The law was updated and re-released as of Chapter 24:20, August 2000. Increasing competition has led to the introduction of new products and services, such as electronic banking and in-store banking. This entrepreneurial activity has resulted in "deepening and sophistication of the financial sector" (RBZ, 2000: 5).

As part of the financial reform, in September 1999, the Reserve Bank Law was passed (22:15).

Its main purpose was to strengthen the Bank's supervisory role through:
– Establish precautionary standards within which banks operate
– Monitoring both banks and off-site
– Enforcing sanctions and, if necessary, placing them under treasures
– Investigate banking institutions wherever needed.

This law still had flaws as Dr. Zumba, the then RBZ governor, argued that it was necessary for the RBZ to be responsible for both licensing and supervision, as "the final sanction available to the banking supervisor is the knowledge of the banking sector that the license issued will be revoked for breach But the government seems to have opposed it until January 2004. Arguably, this lack could have given some bankers the impression that nothing would happen to their licenses. Dr. Zumba, in maintaining the RBZ's role In holding the management of the banks, directors and shareholders responsible for the viability of the banks, he stated that it is not the job or intention of the RBZ to "manage banks to finance and direct its operations End daily. "

It seems that his view continues to be significantly different from this orthodox view, hence the evidence of micromania observed in the sector since December 2003.
In November 2001, the problematic and disruptive banking policy, which was drafted during the previous years, became. One of its intended objectives was that "the policy enhances regulatory transparency, accountability and ensures that regulatory responses are implemented fairly and consistently." The prevailing view in the market is that this policy, when implemented after 2003, certainly suffers as measured against these ideals. The degree of transparency and exclusion of vulnerable banks in ZABG can be tackled.

A new governor of the RBZ was appointed in December 2003 when the economy was in free fall. He made significant changes to monetary policy, causing the banking sector to shake. The RBZ was finally authorized to act as the Licensing and Regulatory Authority for Financial Institutions in January 2004. The regulatory environment has been reviewed and significant amendments have been made to financial sector laws.

The Financial Institutions Decision Act (2004) was enacted. As a result of the new regulatory environment, several financial institutions found themselves in distress. The RBZ placed seven institutions in the treasury while one was closed and another was disbanded.

In January 2005, three of the distressed banks were incorporated because of the authority of the troubled financial institutions law to establish a new institution, Zimbabwe Allied Banking Group (ZABG). It is suspected that these banks did not return funds transferred to them by the RBZ. The institutions affected were Trust Bank, Royal Bank and Barbican Bank. Shareholders appealed and won the seizure of their assets in the Supreme Court ruling that ZABG was trading illegally purchased assets. These bankers contacted the finance minister and lost their appeal. Then in late 2006, they approached the courts as the law provided. Finally starting in April 2010 RBZ finally agreed to return the "stolen assets".

Another step taken by the new governor was to force financial sector management changes, which led to the founders of most entrepreneurial banks having to exit their own companies under varying degrees. Some fled the country in danger of being arrested. Re-directors of banks.

Economic environment

Economically, the country was stable until the mid-1990s, but a decline began around 1997-1998, mainly due to political decisions made at that time, as already discussed. Economic policy is driven by political considerations. As a result, the withdrawal of multinational donors and the state was isolated. At the same time, drought hit the country in the 2001-2002 seasons, exacerbating the detrimental effect of farm evacuation on crop production. A reduction in this production had a negative impact on banks that financed agriculture. The disruptions in commercial agriculture and the concomitant decline in food production have resulted in a safe position of food. For the past 12 years, the country has had to import corn, further straining the country's foreign currency resources.

Another effect of the agrarian reform program was that most farmers borrowing money from banks could not provide the loans, but the government, which took over their business, refused to take on the responsibility for the loans. By not bringing farmers' compensation quickly and fairly, farmers became impractical to service the loans. The banks were therefore exposed to these bad loans.

The net result was an increase in inflation, closures of companies that resulted in high unemployment, a shortage of foreign currency as international financial sources dried up and food shortages. The shortage of foreign currency led to a shortage of fuel, which in turn reduced industrial production. As a result, gross domestic product (GDP) has been declining since 1997. A negative economic environment means a reduction in banking activity as industrial activity has diminished and banking services have been paralleled rather than in the official market.

As illustrated in the chart below, inflation rose to a peak of 630% in January 2003. After a brief rejection, the upward trend continued to rise to 1729% by February 2007. The country then entered a period of hyper-unheard-of inflation. Period. Inflation underlines banks. Some argue that the inflation rate has risen because currency depreciation has not been accompanied by a decline in the budget deficit. Hyperinflation results in an increase in the interest rate while the value of a collateral security falls, resulting in mismatches of assets liabilities. It also increases non-performing loans as more people fail to give their loans.

Effectively, by 2001, most banks had adopted a conservative lending strategy, for example, with advances for the banking sector accounting for only 21.7% of all industrial assets compared to 31.1% the previous year. Banks have taken volatile non-interest income. Some began trading in the parallel foreign exchange market, sometimes clashing with the RBZ.

In the last half of 2003 there was a severe cash shortage. People stopped using banks as intermediaries because they weren't sure they could access their cash whenever they needed it. This reduced the deposit base for banks. Due to the short-term repayment profile of the deposit base, banks are generally unable to invest much of their money in longer-term assets and therefore were most liquid by mid-2003. However, in 2003, due to customer demand to return inflationary returns, most indigenous banks resorted to speculative investments , Which yielded higher yields.

These speculative activities, especially on non-core banking activities, led to exponential growth in the financial sector. For example, one bank had its asset base to grow from $ 200 billion ($ 50 million) to $ 800 billion ($ 200 million) within a year.

However, bankers have argued that what a governor calls a speculative non-core business is considered the best practice in the world's most advanced banking systems. According to them, it is not unusual for banks to take capital positions in non-banking institutions that they have borrowed money to protect their investments. Examples have been given to banks such as Nedbank (RSA) and JP Morgan (USA) that control huge real estate investments in their portfolios. Bankers convincingly argue that these investments are sometimes used to hedge against inflation.

The RBZ governor's directive to banks to cancel their positions overnight, and the immediate withdrawal of bank accommodation support by the RBZ, triggered a crisis that led to significant asset liability mismatches and liquidity distress for most banks. Property prices and the Zimbabwe Stock Exchange have collapsed at the same time because of the huge sale of banks trying to cover their positions. The loss of value in the stock market means the loss of the collateral value, which most banks held in place of prior loans.

During this period Zimbabwe remained in debt, as most of its foreign debt was not in the services or not in the services. The exacerbation of the balance of payments (BOP) as a result of exerting pressure on the foreign exchange reserves and estimated currency. Total government debt rose from $ 7.2 billion (1990) to $ 2.8 trillion (2004). This increase in domestic debt is due to high budget deficits and a decrease in international financing.


Because of the volatile economy after the 1990s, the population became quite mobile with a significant number of professionals migrating for economic reasons. Internet TV and satellite have made the world a truly global village. Customers demanded the same level of service excellence that they were exposed to worldwide. This has made service quality a distinct advantage. There was also a demand for banks to invest heavily in technology systems.

The growing cost of doing business in a hyperinflationary environment has led to high unemployment and the collapse of real income. As Zimbabwe's supreme acumen (2005: B14) has pointed out, a direct consequence of the hyperinflationary environment is "the exchange of widespread currencies, suggesting that the Zimbabwean dollar is giving up its function as a store of value, unit of account and exchange medium" to more stable foreign currencies.

During this period, a wealthy native segment of the company was discovered, which was rich in cash but avoided patronizing banks. The corresponding emerging market for foreign exchange and cash during the cash crisis strengthened this. Effectively, this has reduced banks' customer base while more banks have entered the market. Thus, there was aggressive competition in a dwindling market.

Socioeconomic costs related to hyperinflation include: erosion of purchasing power parity, increase in business planning and budgeting uncertainty, reduction in disposable income, speculative activities that divert resources from producer activity, pressure on local exchange rates due to rising demand. About saving. During this period, in order to increase income, there was an increase in cross-border trade as well as brokering of goods by people imported from China, Malaysia and Dubai. This meant that imported substitutes for local products increased competition, adversely affecting the local industry.

As more banks entered the market, which suffered from major brain drain for financial reasons, it was evident that many inexperienced bankers were being thrown to the deep end. For example, the founding directors of ENG Asset Management had less than five years of experience in financial services and yet ENG was the fastest growing financial institution by 2003. It was suggested that its failure in December 2003 was due to youth jealousy, greed and lack of experience. The breakdown of ENG has affected some financial institutions that were exposed to it financially, as well as by canceling the flight of depositors which led to the collapse of some indigenous banks.