Why local banks are collapsing

CLOSE to 10 banking institutions have ceased operations in Zimbabwe in the past five years triggering questions why indigenous banks seem to be falling into the hole of liquidation while foreign-owned ones survive the economic malaise.

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harareOfficialdom has blamed Western sabotage through its sanctions mantra.

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The Zimbabwe Bank and Allied Workers’ Union (Zibawu) recently called for an investigation of the industry blaming stakeholders from executives to the Reserve Bank of Zimbabwe (RBZ) for the rampant collapse of various banking institutions.

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However, a look at basic economic fundamentals explains a lot, exposing an embedded lack of integrity and corporate backbone which has been the chronic terminal illness killing indigenous banks.

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“To investigate the local banking industry and reasons for most banks’ failure is a very complicated but not impossible task,” Robertson said.For veteran economist John Robertson, the biblical tale of two houses, one built on sand and the other with a foundation on stone, best illustrates the industry.

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He said international banks were grounded on fundamental principles that when adhered to, would never dally on the tight rope between survival and demise.

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“Quality of leadership, extent of capitalisation, best customers with the ability to repay loans and general good governance are the basis of these so-called traditional international banks, which are towing the line in these tough times.

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“To say they are international or foreign would be untrue because there are such banks as Zimbank (now ZB Bank), which are local, but still compete with the likes of Barclays and Standard Chartered,” he added.

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“To say they are international or foreign would be untrue because there are such banks as Zimbank (now ZB Bank), which are local, but still compete with the likes of Barclays and Standard Chartered,”

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Any effort to talk about indigenous banks seems paltry without the mention of Kingdom Bank (AfriAsia), which rode a crest from the front leading the rise of local banks from the mid-1990 era.

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More important is the fact that it rode that crest with Trust, Barbican, Interfin, Intermarket and the Zimbabwe Allied Banking Group (later Allied Bank) as faces of local entrepreneurs standing their ground in a formerly imperial realm.

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Robertson argued that the road was still blurry and the nouveau riche bankers were yet to steer clear of the mist.

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“New banks were likely to attract not so sound customers and the quality of leadership elevated by a liberalisation policy to protect the country from big banks which could hold it to ransom, saw even the less deserving securing bank licences,” the economist said.

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He blamed this leadership for accruing lethal non-performing loans by awarding easy credit to their relatives and friends which were then consumed rather than invested.

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Save for the questionable industry purges by the then RBZ governor Gideon Gono, the empowerment mantra was well on course to bear fruit in Zimbabwe.

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But behind the plump appearance, Robertson said the bank owners were devouring their own children.

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“Leaders agreed to personally borrow from their own institutions and managers would even borrow to build houses; discipline in the sector was eroded by the structure of banking,” he said.

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This statement seemed a script from the declaration by economic advisor Gift Mugano that governance was at the centre of problems in the banking sector.

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“Non-performing loans are all tied up with relatives of executives in banking institutions. And then there is perception and mindset of bankers, especially those with less depositors who are not innovative enough and shun some markets like the small-to-medium enterprises,” Mugano said.

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Both economists noted that local banks were fighting from a compromised position, especially since the country started using foreign currency.

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“For example, Barclays is owned by the British and making money available to this country is business to them, the interest rate in Europe is around 2%, but local banks will get money at 10% to 15% before giving to someone else. It means the local banks were working on very thin margins,” Mugano said.

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Robertson said the problem for new banks was disguised by inflation.

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“Profits were bigger, but generously overvalued while banks were working in a shallow business territory. All I can say is that they were victorious in a collapsing economy,” Robertson added.