ECONOMY-ZIMBABWE: Panic Grips the Banking Sector

By IPS Correspondents Reprint | | Print |

Lewis Machipisa

HARARE, May 6 1998 (IPS) - The unprecedented closure of a local merchant bank has caused panic in Zimbabwe’s financial sector once touted as the second most stable in Sub-Saharan Africa after South Africa.

The United Merchant Bank (UMB), owned by controversial Black tycoon, Roger Boka, had its licence revoked last week after it was discovered that the bank could no longer meet depositors’ claims, and that its liquidity ratio was too low to meet debt obligations and other liabilities.

Although government officials have fallen over themselves to create an image that all is well, banking experts are sounding an alarm.

The experts say as a result of the closure, several banks are on the brink of collapse, unless government comes in quickly and clean up the mess.

“This is really a serious crisis. We have not had a crisis of this nature in the history of this country. It’s a crisis of an unparalleled magnitude in the sense that it will affect the entire economy,” says Theresa Moyo, economics lecturer at the University of Zimbabwe, and a specialist in banking.

UMB’s collapse comes at a time when Zimbabwe is facing serious labour unrest, and the macro-economic environment is unstable.

Trading last week was thin on the money market amid uncertainties surrounding the banking industry. The key Industrial Index lost a massive 145 points Tuesday to close at 7409 as industrials and financials on the Zimbabwe Stock Exchange (ZSE) remained depressed.

A number of counters, including the bourse’s largest quoted counter, Delta, which shed 25 cents to 1,175, went down as the market hobbled on without direction.

Tony Barfoot, chief executive officer of the ZSE, told IPS the market is concerned with what has happened to UMB. Soon after the news of the bank’s fall, the stock exchange lost five percent of its value. The UMB crisis has wiped off some 127 million U.S. dollars in the values of all firms listed on the ZSE in the last seven days.

According to Barfoot, “there is need for a policy decision to clarify the position and I feel that the government should intervene as soon a possible.”

“We need a stable position in the money market, because people are jittery. The confused situation is rubbing off on the stock exchange,” he said.

So far, eight financial institutions are known to be facing huge losses as a result of UMB’s closure. The institutions together stand to lose 47 million U.S. dollars.

“The UMB closure … really jeopardises the future stability of the sector. It’s really a bad development in the sense that there is loss of confidence in the sector at the moment,” said Moyo, who also chairs the economics department at the University of Zimbabwe.

But what really disturbs banking experts is that the crisis could have been avoided had the relevant authorities acted earlier.

In the last three years, many new banks have opened in the Zimbabwean capital of Harare, as the government continues to opened up the market and deregulate the financial sector.

But in the case of UMB, it was not the cut-throat competition that forced the bank to collapse. It simply lacked portfolio and risk management skills.

Boka, one of the most vocal proponents for the government opening up the space for more Blacks to gain entry into Zimbabwe’s white-controlled economy, has several other business interests which, according to sources, are not doing very well.

It is alleged that he used UMB depositors’ money to help his Tobacco Auction Floors, which are said to be the largest in the world. This season’s low tobacco prices on the floors affected his repayment of the borrowed money to the bank.

Mistake number two: The UMB, insiders say, was “just giving loans without respecting the principals of prudent bank management, which are profitability, prudence, solvency and liquidity.”

Some of the clients who received loans were really “high risk clients”. Boka never insisted on security, because the understanding was that he was trying to promote indigenous (Black) business, and therefore was not too rigid on demanding collateral, one source indicated.

Moyo says a loose policy on collateral is not bad, but “… then you must be sure that whatever project the money is going to be used for, is going to be viable.”

“The whole thing raises a question of poor management of the banking sector and also raises issues of supervision by the relevant authorities,” says Moyo.

It is also alleged that Boka’s bank fraudulently issued false treasury bills and raised more than one billion Zimbabwe dollars from the market, when the amount it had been tasked to raise was 300 million Zimbabwe dollars.

How this was allowed to happen for a long time, baffles a member of parliament, who refused to be named. One of the major functions of the Reserve Bank is to supervise and monitor the financial sector.

“The Reserve Bank and the ministry of Finance knew two months before the bank collapsed that this was happening. It did nothing. Surely, they are partly to blame for the mess we are in. Surely heads must role,” the MP told IPS.

A source in the banking sector agreed. “Given the poor portfolio management of UMB, surely someone should have noticed that the trend was bad and that at some point, it was going to collapse, and that it needed some protective measures there and then.”

According to the member of parliament, “people should be arrested over this issue, because this is a serious crime.”

“The worst is yet to happen as the whole issue involves high ranking government officials. The crisis has the potential of bringing down the government, and we can’t just keep quiet, as if everything is okay,” the legislator told IPS.

Moyo says the problem lies in the fact that the Reserve Bank is not empowered to take punitive measures once it detects anomalies within banks.

“Under the current Banking Act, the Reserve Bank is severely limited. Its hands are tied and it cannot take that kind of action legally,” explains Moyo.

She argues that the new Banking Act should allow the Central Bank to have more powers so that it can be an efficient supervisor.

“There is a separation of functions which unduly lengthens the decision making process. The Central Bank may identify problems, but it cannot stop the institutions; at best, it can only make recommendations to the finance ministry,” Moyo says, adding that “ultimately”, the decision made may be a “political decision”.

Rumours are widespread throughout the capital about a collapse in the banking sector, which has led to panic withdrawals, since Zimbabwe does not have depositors’ insurance.

As a way forward, Moyo suggests that the Banking Act should make it a legal requirement that all financial institutions have a depositors’ insurance.

“The ministry of finance should also come with a very clear, elaborate statement to explain to the public what exactly happened (with UMB), and what it is doing to make sure this won’t happen again. This may restore confidence and stabilise the stock market and the short term money market,” Moyo says.

“Judging from what has happened in other countries, this may just be the beginning, so we have to act on it,” she says. “It’s also incumbent on the part of the banks themselves that they correct the image.”

Meanwhile, the government has appointed the Governor of the Reserve Bank, Leonard Tsumba, as the special investigator into UMB. It has also declared Boka a “specified” person under the Prevention of Corruption Act, along with the companies in the Boka Group and UMB, opening the way for the probe into his business affairs.

While some observers have said the government may have to step in with funds to save the situation and to stop the ripple effects of the bank’s collapse throughout the economy, it simply does not have the money needed.

A report by the auditor-general published Wednesday reveals how the lavish Zimbabwean government illegally borrowed 4.5 billion U.S.dollars without parliamentary approval in the 1995/96 fiscal year, pushing its public debt to unmanageable levels.