A Case Study of the Major Causes of the Current Bank Crisis in Zimbabwe
And The Likely Impact On the Economy
Introduction
Zimbabwe has a well developed and diversified financial sector. Complementing a substantial and relatively sophisticated banking system is a range of near banks: insurances and pension funds, a significant and well established stock market and a range of other market participants.
But bank financial distress has become a topical issue over the years. Bank managers, investors, policy-makers and regulators now share a keen interest in the stability of the financial system. Banks in the region are facing an increasingly challenging banking environment.
Here they are facing an increasing number of risks, which threaten their liquidity, solvency and profitability giving bank managers the enhanced task of minimizing risk while offering a better service. Financial institutions need to identify measure and control risk amidst the increased risk of failure. Regulators and policy-makers share the same interest as bank managers to ensure the safety and soundness of the financial services sector and thus avoid the systemic effects of bank financial distress and the associated costs.
As such, there is an apparent concern today that banks now face greater risks which impair the soundness of the financial system and affect public confidence. The large swings in economic fundamentals experienced in the country in terms of growth, high inflation and interest rates, the persistence of major sartorial imbalances and large scale industrial failures (unemployment currently at seventy percent) and the development of severe liquidity and debt problems are all factors that have powerfully contributed to sharp changes in the size, direction and variability of financial flows.
Recent research on banking crisis has shown that, banking crises are more severe in developing countries and the crises have a direct impact on inflation and the country’s currency.
This fact then makes it necessary to study bank financial distress since the issue of bank soundness is now of great interest in Zimbabwe. The more we learn about the indicators of banking crisis, the more we can asses their impacts on the economy and how we can be forewarned of these.
Literature Review
Zimbabwe’s banking sector has been growing for the last 12 years, moving from around 10 banks and asset management firms to over 30 in that time. But in the light of events now troubling this sector, it seems that the observed growth has not helped in matters of stability. (ASP, 2004, 1)
The beginning of 2004 heralded an almost-collapse for the banking system of Zimbabwe. According to Resave Bank of Zimbabwe’s (RBV) governor, this intense crisis has even affected the banking sector of neighboring areas like South Africa, where banks such as Absa, Nedcor, and Standard Bank had huge stakes in banks in Zimbabwe. (Rose, 2004, 1)
The crisis was said to have been prompted when a top asset management firm was alleged to have defrauded billion of Z$, leaving its shareholders to struggle with payment for goods and services as their cherubs were no longer being accepted. (ASP, 2004, 1)
The effect of this instability in the country’s banking system has shaken up public confidence, the fears of banking failures that prompting the public in general and companies in particular to refuse cherub payments. Recently established commercial banks were blacklisted from supermarkets, companies, and the capital city’s municipality. (ASP, 2004, 1) Concern that banks had no money to pay, particularly other banks, had some banks suspended from settling their inter-bank debts through the RBV settlement system. (Hardtack, 2004)
The country’s economy was reported to already be suffering from an inflation running at 700%, a state comparable to the recession of Germany before World War II. Already said to be the worst economic crisis since 1980 when Zimbabwe gained its independence from Britain. (2004) It suffered even more as a third of the country’s registered banks began showing apparent signs of liquidity problems. (Rose, 2004, 1; ASP, 2004, 1) This happened only months after the bank shortage of the previous year which forced the government to use forms of payment such as bearer cherubs and local traveler’s cherubs. (ASP, 2004, 1)
The problem, as RBV governor illustrates, is due to the weakness of these banks’ management, and their dependence on cheap and unlimited bank credit. Throw in the issue of the problems unearthed from the ill-regulated asset management sector then there is a lot of muscle work to be done before the country’s banking and financial system will approach anything resembling stability.
Probes were also launched into banking operations believed to be entrenched in suspicious activities in an effort to clean out the sector. This after they traced that the liquidity problems being seen are a result of this type of involvements. (ANA. 2004)
In the meanwhile, there are plans to set up a fund to aid in banks affected by the crisis. All measures would be taken to ensure that depositors are not inconvenienced and to protect investors, but Razz’s monetary policy statement will no longer allow institutions to abuse its support. Banks need to conform to the reshaping of the banking sector, with RBV instigating the removal of boards, managements, and treasury departments as a requirement of receiving its support. (ANA. 2004)
This then brings us to the question of how banks in Zimbabwe, and even in its neighbors, for 2004, plan to respond to the sector’s problems.. In The Banker’s Industry Overview (2004), African banks were asked to describe their strategies for growth in the country. This describes their stand on the country’s banking system. When asked for what they considered to be the two main internal drivers of their organization’s strategy, and how they are seen to impact their business for the next five years, the Standard Chartered Bank Zimbabwe answered as in the following paragraph.
Their statement places importance on becoming the best in their chosen markets, exerting focus and dominance with their two main drivers being: competent people occupying function-critical positions and the effective use of technology to gain an edge over their competition. They acknowledge in the face of hyperinflation, shortage of foreign currency, and ongoing regulatory changes that Zimbabwe’s current domestic economy is facing, their company’s performance will highly depend on these drivers, yet at the same time even their ability to achieve these is in question.
As it drew to a close, last year also saw the closure of a seventh private bank in Zimbabwe’s banking sector. The reasons were fraud and mismanagement, showing us that the campaign started at the beginning of the year still ranges on as the economy continues to struggle. (Shaw, 2004)
The economic crisis is growing deeper, with depositors being left at a disadvantage as banks, and companies, continue to lose ability to pay their way. Accounts are being locked, and riots are starting as the implications of the continued instability in banking hit investors. Both they and creditors of the banks that were affected by closure are still waiting for confirmation if they will get any part of their money back. The banking crisis, coupled with the shortage in gasoline, food, hard currency, gasoline, medicines and other necessary imports, power and water outages, soaring unemployment rates pain a vivid image of the troubles being faced by this southern African nation. (Hardtack, 2004; Shaw 2004)
Statement of the Problem
As mentioned previously the study of bank financial distress is of great interest in Zimbabwe. Especially after the experience of bank distress , the near collapse of a number of institutions ten years ago and the collapse of five banks in 2003.
Most case studies that deal with this same topic seem to point at poor asset quality as the underlying causes of bank financial distress. Data collected on cases of distressed banks in Zimbabwe also point toward the same conclusion. But none of these other researches have tried to look at the current problem from a collective view of the events that have transpired before it.
To do this, the study is conducted in relation to the origins of banking crises in Zimbabwe, drawing upon experience of ten countries of sub-Saharan Africa, during the period 1985-1995. Part of this is to examine, in particular, which factors were the most important sources of these crisis. These banking crises are the very prototype of endemic crises associated with heavy government intervention in the banking system. In this regard, the research analyzes the complex role of the government in banking in Africa, the many channels through which governments intervenes, and the economic and institutional environment in which the banks operates.
There is also a need to determine the main causes of bank failures so that the importance of risk management can be established. Also, the adequacy of the supervision role of the Reserve bank of Zimbabwe is reviewed to assess if it is in line with best banking practices world wide, and the promotion of good corporate governance.
This paper will then provide a better assessment of the causes of bank financial distress in the region and in Zimbabwe and provide a frame work for managing banks in a deregulated environment.
Significance of the Study
This research will provide information for the benefit of bank managers who have to manage the increased risks they are now facing, policy makers to create a sound operating and supportive framework, and regulators to monitor while steering the direction in which policy should go in order to enhance good banking practices.
This study also seeks to identify the risks that have been brought about by financial deregulation and evaluate how bank’s risk management strategies have responded to this challenge. A related aim is to use this evaluation exercise in order to establish policies on how best to implement, operate and develop the most appropriate risk management systems. The study also seeks to determine the key success factors for any player in commercial banking.
Thus the inquiries made will determine the main causes of bank failures to establish the importance of risk management and to examine the adequacy of the supervision role of the Reserve bank of Zimbabwe in line with best banking practices world wider and the promotion of good corporate governance.
Aims and Objectives
In view of the recent collapse of two financial institutions in December 2003 and ten years ago it has become imperative for risk management to be given more prominence by bankers, supervisors and policy makers. The importance of this study is, therefore:
- To provide an understanding of the main causes of bank financial distress
- To compare and contrast the Zimbabwean case and that of Sub –Saharan Africa during the period 1985-1995
- To identify which factors behind these crises are of greater importance
- To establish if the sources of the financial crisis in Zimbabwe are the same with those linked to crisis in sub-Saharan Africa and other parts of the world
- To establish the link between Banking and Currency Crises in Zimbabwe
- To establish what are the different channels through which the government in Zimbabwe intervened in the banking system
- To recommend to the government the need to improve security of depositor’s funds through random audits by external auditors
- To recommend an establishment of Early Warning System (EWES) of Banking crises
Research Questions
The researcher, based on the general flow of the objectives stated for this study, then poses the following questions:
1. What are the major causes of bank financial distress in Zimbabwe?
2. What comparison can be made with the sources of financial crises from the Zimbabwean case and that of sub-Saharan Africa situation during the period 1985-1995?
3. What is the link between the Banking and Currency in Zimbabwe?
4. What are the channels through which the government has intervened with the banking system in Zimbabwe?
5. In relation to questions 1 to 4, what recommendations can be given, to the government and to the sectors concerned, to ease the present crisis and to possibly circumvent future recurrence?
Overview of the Methodology
The study to be presented will be based upon ten major financial institutions. These financial institutions are selected because of their significant degree of involvement and contribution in the Zimbabwean economy.
The general empirical approach used in this study is to evaluate how banks are being managed to minimize the risks they are facing. This type of research was selected as it highlights the various risk management tools in use, how they are used, why and where they are used.
It will involve collecting secondary and primary data from bank managers and other people knowledgeable about risk management and financial stability.
Consequently, the researcher will depend on three main methods of investigation namely (1) Field survey of commercial and merchant banks in Zimbabwe, (2) Explanatory data analysis of bank performance in a deregulated environment, (3) Comparative study of countries’ experience for primary data collection.
Desk research will be used to collect secondary data for literature review. The details of data collection and the research instruments will be discussed further under the chapter on Methodology.
Scope and Limitation
The interpretation of the results of the study is subject to limitations imposed by the scale of the study and the research method used. First, the study uses a sample of ten financial institutions and therefore does not claim to be a representative study of Zimbabwe financial institutions. The second limitation results from the use of the technique of personal interviews based on a predetermined structure of open-ended questions, which was chosen because, with the non-quantitative nature of the study, it seemed the only appropriate method to produce the wide-ranging and intuitive answers and personal opinions aimed for.
The use of personal interviews also reduces the risk of misunderstandings and other factors which may lead to useless results in the case of alternative methods (e.g. postal questionnaires). However, in personal interviews the interviewer may exert a bias on the answers. The researcher must try to avoid this as much as possible by careful preparation. Also, the answers of he individuals interviewed are naturally subjective and need not always be identical with the attitudes and policies of the respective bank. The problem of confidentiality of information is also expected to limit the scope of the study.
Although a regression analysis was not practical in view of qualitative data, it would however be recommended to carry out such analysis in the future when appropriate data would be available.
Finally, given the research methodology chosen, the analysis will be undertaken without the benefit of an explicit conceptual framework. This inevitably creates problems when attempting to explain the findings. Undoubtedly the development of such a conceptual frame work is an area worthy of further consideration by all involved in research in the area of risk management.
Credit:ivythesis.typepad.com
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