Gono hastens demise of banking sector

LONDON - Despite characteristically grandiose and far-fetched claims to the contrary, Gideon Gono has hardly been original in his construction of bank regulation.  Instead, he has fashioned his approach not on "home grown solutions" but on two categories drawn f

rom a number of regulations that are recommended in the Basel II banking regulations being urged on banks worldwide.  The first of these requires banks to set aside a certain amount of capital as a reserve against losses, varying with risk. The second involves stronger supervisory powers to enable government regulators to scrutinise and discipline banks.
Having borrowed from Basel II, Gono has then distorted the two basic policy objectives and shrouded them with personal fixations and deep-seated jealousy and hatred of entrepreneurs in the banking sector:
“Founder shareholders, especially individuals, should be prepared to dilute their holdings and allow new shareholders to come in if they do not have resources.”
Never mind the fact that indigenously-promoted banks are basically defunct in view of the unpredictable, arbitrary and deleteriously brutal way they are treated by the regulator, the solution to an impossible working environment according to the banausic Gono, is to introduce new shareholders. 
He gloats, with typical vindictiveness in his “monetary policy” rantings, hammering the last nail into the coffin now containing entrepreneurship in Zimbabwe’s financial sector: “We trust the individual shareholders would put interest of the institution above personal vanities as they chart the way forward.”
As if this is not enough, or just to be sure no indigenous promoters of financial institutions survive and stay submerged, he intones further: “all banking institutions are expected to maintain US Dollar linked minimum capital requirements with effect from September 2006.”
This is in a country with a host of exchange rates.  Only the regulator can specify the exchange rate of his choice at any time so that “shareholders can top up the difference”, i.e. he can move the goal posts at will, never mind the horribly flawed basis of the requirement in this context.  What is the basis for a USD10 million capital requirement for commercial banks, USD 7.5 million for merchant banks, finance houses and building societies etc?
Whilst banks struggle to fulfil the requirement for this arbitrarily decided USD10 million capital base, Gono is busy hastening their demise with his policy to “mop up excess liquidity”.  Banks are subject to a 60% statutory reserve requirement.  This means that 60 cents in every dollar deposited at a bank has to be placed with RBZ at zero percent interest.  On clearing if a bank is in surplus, RBZ seizes that surplus and issues the bank with 2-year treasury bills at 150%.  Should the same bank be short the next day, RBZ lends the bank its own statutory reserves at 850% interest compounded daily and takes the treasury bills as security!  The “in duplum” rule, which provides that interest stops accumulating when unpaid interest equals unpaid capital, is part of Zimbabwe law but is ignored by RBZ.
A recently compiled (published 2006), indeed the first comprehensive global database of bank regulations put together by Messrs Barth, Caprio and Levine, spanning 150 countries with databases covering 1998-2003 reveals some remarkable results.  In the first instance, they found that raising capital requirements has no discernible impact on whether a country had a more developed banking sector (measured by the amount of credit extended to private firms as a proportion to GDP), had more efficient banks (measured by net interest rate margins and overheads) or was less likely to experience a banking crisis.
Less surprising, perhaps, given what is common knowledge regarding the deliberately distorted pattern of bank lending especially Public Sector Funds (PSF) ASPEF and other subsidised lending extended directly by the RBZ or routed via its preferred institutions, notably CBZ and Agribank, is the study’s finding concerning the supervision powers of bank regulators.  Strengthening bank supervision was found to have, at best, neutral, otherwise a negative impact on banking development, reduced bank efficiency and increased the likelihood of crisis.
According to the findings of this study, corruption in bank lending tends to be higher in countries with more heavy-handed supervisors, except in places with strong, independent legal systems, and political institutions.  Harsh or simply brutal supervisory powers as in Zimbabwe, characterised as it is by weak governance, may invariably give officials more chance to help themselves.  The authors of this study raise a valid concern in this regard:
“The overriding message is that simply strengthening direct official oversight of banks may very well make things worse, not better, in the majority of countries.”
Zimbabwe is not an exception, in case one was in any doubt! What may not come as a surprise to the RBZ and other government officers who have been talking to the IMF/World Bank and is common knowledge to some bankers in Zimbabwe, is the study’s finding and confirmation that regulatory policies that boost private sector monitoring of banks tends to make banking systems more developed, banks more efficient and crises less likely. 
Monitoring by markets stresses transparency, full disclosure of information and private, dispersed ownership of banks.  This holds true even in countries with poorly developed capital markets, accounting standards and legal systems.  However “well-intentioned” Mr Gono’s “protective measures” may be, they aggravate “moral hazard” by making savers less careful about whom they trust with their money.  Savers then flock to foreign-owned banks and favoured banks such as CBZ despite glaring incompetencies and mismanagement which are masked by results based on special favours from the RBZ.  Locally promoted banks are then all bunched together and painted as unsound.

Post published in: Economy

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