Entrepreneurs build their business within an environment that they may not be able to control. The robustness of an entrepreneurial business is tested by environmental changes. Within the environment are forces that can serve as great opportunities or threatening threats to the survival of the entrepreneurial business. Entrepreneurs need to understand the environment in which they work in order to take advantage of new opportunities and mitigate potential threats.
This article serves to create an understanding of the forces at play and their impact on banking in Zimbabwe. A brief historical overview of banking in Zimbabwe is being conducted. The impact of the regulatory and economic environment on the sector is assessed. An analysis of the structure of the banking sector facilitates an understanding of the underlying forces in the industry.
By Independence (1980), Zimbabwe had a sophisticated banking and finance market where commercial banks were mainly foreign-owned. The country had a central bank inherited from the Central Bank of Rhodesia and Nyasaland at the time of the federation.
In the first few years of independence, the Zimbabwean government did not interfere in the banking sector. There was neither nationalization of foreign banks nor restrictive regulatory interference in the sectors to be financed or the interest rates to be levied, despite the socialist national ideology. However, the government bought a certain stake in two banks. It took over Nedbank's 62% of Rhobank at a reasonable price when the bank withdrew from the country. The decision may have been motivated by the desire to stabilize the banking system. The bank was re-branded as Zimbabank. The state did not interfere much in the bank's operations. The state in 1981 also partnered with Bank of Credit and Commerce International (BCCI) as a 49% shareholder in a new commercial bank, Bank of Credit and Commerce Zimbabwe (BCCZ). This was taken over and converted to the Commercial Bank of Zimbabwe (CBZ) when the BCCI collapsed in 1991 due to allegations of unethical business conduct.
This should not be seen as nationalization, but in line with the state's policy of preventing corporate closures. The holdings in both Hawk and CBZ were later diluted to less than 25% each.
In the first decade, no original bank was licensed, and there is no evidence that the government had any financial reform plan. Harvey (n.d., page 6) cites the following as evidence of a lack of a coherent financial reform plan these years:
– In 1981, the government declared it would encourage rural banking, but the plan was not implemented.
– In 1982 and 1983, a money and finance commission was proposed, but it never constituted.
– In 1986, no financial reform agenda was mentioned in the five-year national development plan.
Harvey argues that the government's reluctance to intervene in the financial sector could be explained by the fact that it did not want to jeopardize the interests of the white population, where banking was an integral part. The country was vulnerable to this sector of the population as it controlled agriculture and manufacturing which was the mainstay of the economy. The state adopted a conservative approach to indigenization as it had learned a lesson from other African countries whose economies almost collapsed due to strong expulsion of white society without first developing a skills transfer and capacity building mechanism in the black community. The financial costs of inappropriate intervention were considered to be too high. Another plausible reason for the non-intervention policy was that the state inherited, through independence, a highly controlled economic policy with tight currency control mechanisms from its predecessor. As foreign exchange control affected credit control, by default, the government had strong control over the sector for both economic and political purposes; therefore, it did not need to interfere.
After 1987, at the request of multilateral lenders, the government began an Economic and Structural Adjustment Program (ESAP). As part of this program, the Reserve Bank of Zimbabwe (RBZ) began to advocate for economic reform through liberalization and deregulation. It argued that the oligopoly in banking and non-competition deprived the sector of choice and quality in service, innovation and efficiency. Therefore, as early as 1994, the RBZ Annual Report indicates the desire for greater competition and efficiency in the banking sector, leading to banking reforms and new legislation that would:
– enable the conduct of prudent supervision of banks in accordance with international best practice
– allow both on-site banking inspections and to increase RBZ's banking supervision function, and
– strengthen competition, innovation and improve service to the public from banks.
Then, in cooperation with RBZ, the Registrar of the Ministry of Finance began issuing licenses to new entrants as the financial sector opened. From the mid-1990s until December 2003, there was a storm of entrepreneurial activity in the financial sector when original owned banks were created. The graph below shows the trend in the number of financial institutions by category that has operated since 1994. The trend shows an initial increase in commercial banks and discount houses followed by decline. The rise in commercial banks was initially slow, picking up pace around 1999. The decline in commercial banks and discount houses was due to their conversion, mostly to commercial banks.
Source: RBZ reports
Different entrepreneurs used different methods to penetrate the financial services sector. Some started consulting services and then upgraded to commercial banks, while others started stockbroking businesses that were raised for discount houses.
From the beginning of the liberalization of financial services until about 1997, there was a notable absence of locally owned commercial banks. Some of the reasons for this were:
– Conservative licensing policy from the Registrar of Financial Institutions, as it was risky to license original owned commercial banks without a possible legislature and banking experience.
– Banking companies chose non-banking financial institutions as these were cheaper in terms of both start-up capital requirements and working capital. For example, a commercial bank would require less staff, no need for a bankroom, and no need to trade in expensive small retail deposits, which would reduce costs and reduce the time to record profits. Thus, there was a rapid rise in non-banking financial institutions at this time, e.g. in 1995, five of the ten commercial banks had commenced within the previous two years. This became an optional entryway into commercial banking for some, e.g. Kingdom Bank, NMB Bank and Trust Bank.
It was expected that some foreign banks would also enter the market after the financial reform, but this did not occur, probably due to the restriction of having a minimum of 30% local stock. The strict control of foreign exchange could also have played a role as well as the cautious approach used by the licensing authorities. Existing foreign banks were not required to shed part of their stock, although Barclay & # 39; s Bank did so through listing on the local stock exchange.
Harvey argues that financial liberalization assumes that removing lending guidelines presupposes that banks would automatically be able to lend on commercial grounds. But he argues that banks may not have this capacity as they are affected by the borrower's inability to service loans due to currency exchange rate restrictions or price controls. Similarly, a positive real interest rate would normally increase bank deposits and increase financial intermediation, but this logic falsely assumes that banks will always lend more effectively. He further argues that licensing to new banks does not entail increased competition as it assumes that the new banks will be able to attract competent management and that legislation and banking supervision will be sufficient to prevent fraud and thus prevent bank collapse and the resulting financial crisis. Unfortunately, his concerns do not appear to have been addressed within Zimbabwean financial sector reform to the detriment of the national economy.
Any entrepreneurial activity is limited or aided by its operating environment. This section analyzes the prevailing environment in Zimbabwe that may have an impact on the banking sector.
The political environment in the 1990s was stable, but became unstable after 1998, mainly due to the following factors:
– an unbudgeted disbursement to war veterans after they launched an attack on the state in November 1997. This put a heavy strain on the economy, resulting in a run on the dollar. As a result, the Zimbabwean dollar fell by 75% as the market anticipated the consequences of the government's decision. That day has been recognized as the beginning of a sharp decline in the country's economy and has been dubbed "Black Friday". This depreciation became a catalyst for further inflation. It was followed a month later by violent food riots.
– a poorly planned agricultural land reform launched in 1998, when white commercial farmers were apparently ejected and replaced by blacks without due regard for land rights or compensation systems. This resulted in a marked reduction in the country's productivity, which is mostly dependent on agriculture. The way land distribution was handled angered the international community, claiming it is racially and politically motivated. International donors withdrew support for the program.
– an illicit military invasion, called Operation Sovereign Legitimacy, to defend the Democratic Republic of Congo in 1998, leaving the country at great expense without any obvious benefit to itself, and
– elections that the international community claimed were rigged in 2000/2003 and 2008.
These factors led to international isolation, which significantly reduced foreign exchange and foreign direct investment in the country. Investors' confidence was severely eroded. Agriculture and tourism, which are traditionally huge foreign currency earners, crumbled.
For the first decade after independence, the Banking Act (1965) was the most important legislative framework. When this was adopted, as most commercial banks where foreign owned, there were no directions on prudent lending, insider lending, share of stock that could be loaned to a borrower, definition of risk values and no provision for bank inspection.
The Banking Act (24:01), which came into force in September 1999, was the culmination of RBZ & # 39; s desire to liberalize and deregulate financial services. This law regulates commercial banks, commercial banks and discount houses. Access barriers were removed, leading to increased competition. The deregulation also allowed banks a degree of latitude to operate in non-core services. It appears that this latitude was not well defined and therefore presented opportunities for risk taking by entrepreneurs. RBZ proposed this deregulation as a way to de-segment the financial sector as well as improve efficiency. (RBZ, 2000: 4.) These two factors presented opportunities for enterprising indigenous bankers to establish their own businesses in the industry. The Act was further revised and reissued as Chapter 24:20 in August 2000. The increased competition resulted in the introduction of new products and services, e.g. e-banking and in-store banking. This entrepreneurial activity resulted in "deepening and sophistication of the financial sector" (RBZ, 2000: 5).
As part of the financial reforms, the Reserve Bank Act (22:15) was passed in September 1999.
Its main purpose was to strengthen the bank's supervisory role through:
– the setting of supervisory standards within which banks operate
– perform both on-site monitoring of banks
– enforce penalties and, if necessary, place them under the trustee and
– examine banking institutions where necessary.
This law was still missing when Dr. Tsumba, the then RBZ governor, argued that there was a need for RBZ to be responsible for both licensing and supervision, since "the ultimate sanction available to a bank supervisor is the banking sector's knowledge that the license issued is canceled for overt violation of the operating rules ". However, the government appeared to have resisted this until January 2004. It can be argued that this shortage could have given some bankers the impression that nothing would happen to their licenses. In upholding RBZ & # 39; s role in banking management, directors and shareholders responsible for bank viability, said Dr. Tsumba, that it was neither RBZ's role nor the intention to "micro-manage banks and direct their day-to-day operations."
It seems that the view of his successor differs markedly from this orthodox view, and thus the evidence of micromanaging that has been observed in the sector since December 2003.
In November 2001, the troubled and insolvent banking policy that had been drawn up in previous years became operational. One of its intended objectives was that "the policy increases regulatory transparency, accountability and ensures that regulatory responses are applied fairly and consistently" The prevailing view of the market is that when implemented after 2003, this policy definitely is deficient as measured against these ideals. It can be competitive how transparent the inclusion and exclusion of vulnerable banks in the ZABG was.
A new governor for the RBZ was appointed in December 2003, when the economy was on the run. He made significant changes in monetary policy, which caused a stir in the banking sector. RBZ was finally authorized to act as both licensing and regulatory authority for financial institutions in January 2004. The regulatory environment was revised and significant changes were made to the financial sector legislation.
The Act on Troubled Financial Institution Resolution Act (2004) was adopted. As a result of the new regulatory environment, a number of financial institutions became distressed. The RBZ placed seven institutions under curatorship while one was closed and the other placed under liquidation.
In January 2005, three of the distressed banks merged under the law on troubled financial institutions to form a new institution, the Zimbabwe Allied Banking Group (ZABG). These banks allegedly failed to repay funds provided to them by RBZ. The institutions concerned were Trust Bank, Royal Bank and Barbican Bank. The shareholders appealed and won the appeal against the seizure of their assets with the Supreme Court ruling that ZABG was dealing with illegally acquired assets. These bankers appealed to the finance minister and lost their appeal. Subsequently, in 2006, they eventually appealed to the courts under the law. Finally, as of April 2010, RBZ finally agreed to return the "stolen assets".
Another measure taken by the new governor was to force management changes in the financial sector, which resulted in most entrepreneur bank founders being forced out of their own businesses under various pretexts. Some eventually fled the country under threat of arrest. The banks' boards were restructured.
Economically, the country remained stable until the mid-1990s, but a downturn began around 1997-1998, mostly due to political decisions made at the time, as already discussed. Economic policy was driven by political considerations. Consequently, there was the withdrawal of multinational donors and the country was isolated. At the same time, a drought hit the country during the 2001-2002 season, exacerbating the deleterious impact of farm drafts on crop production. This reduced production had a negative impact on banks that financed agriculture. The disruptions in commercial agriculture and the simultaneous reduction in food production resulted in an uncertain food security position. For the past twelve years, the country has been forced to import corn, further exacerbating the country's weaknesses in foreign currency.
Another effect of the agrarian reform program was that most farmers who had borrowed money from banks were unable to service the loans, but the government, which took over their businesses, refused to take responsibility for the loans. By not compensating farmers quickly and fairly, it became impractical for farmers to service the loans. The banks were thus exposed to these bad loans.
The net result was spiraling inflation, business closures that resulted in high unemployment, shortages in foreign currency, as international sources of drying and food shortages. The lack of foreign currency led to fuel shortages, which in turn reduced industrial production. As a result, gross domestic product (GDP) has been in decline since 1997. This negative economic environment meant reduced banking activity as industrial activity declined and banking services operated in the parallel rather than the formal market.
As depicted in the graph below, inflation spiraled to a peak of 630% in January 2003. After a brief postponement, the trend continued to rise to 1729% in February 2007. Thereafter, the country entered a period of hyperinflation unheard of in a peacetime period. Inflation underlines banks. Some argue that inflation increased because the devaluation of the currency had not been accompanied by a reduction in the budget deficit. Hyperinflation causes interest rates to rise while collateral values decline, resulting in asset-liability mismatches. It also increases failure of loans as more people do not pay off their loans.
Effectively, most banks had adopted a conservative lending strategy in 2001, for example. where overall progress for the banking sector accounted for only 21.7% of total corporate assets, compared to 31.1% in the previous year. Banks resort to the unstable income without interest. Some began trading in the parallel market in foreign currency, sometimes colliding with RBZ.
In the latter half of 2003 there was a serious cash shortage. People stopped using banks as intermediaries as they were not sure they could access their cash when they needed it. This reduced the deposit base for banks. Due to the short maturity profile of the deposit base, banks are usually unable to invest significant portions of their funds in long-term assets and were thus very liquid until mid-2003. In 2003, however, most of the original banks, due to customer demand for inflation-related returns, took on speculative investments that yielded higher returns.
These speculative activities, mainly on banking activities outside the core business, generated exponential growth in the financial sector. For example, a bank made its asset base grow from $ 200 billion. USD ($ 50 million) to $ 800 billion ($ 200 million) within a year.
However, bankers have argued that what the governor calls speculative non-core business is considered best practice in most advanced banking systems worldwide. They claim that it is not unusual for banks to take equity positions in non-banking institutions, they have borrowed money to secure their investments. Examples were given to banks such as Nedbank (RSA) and J P Morgan (USA), which control large real estate investments in their portfolios. Bankers convincingly claim that these investments are sometimes used to hedge against inflation.
The instruction from the new governor of RBZ to banks to relax their positions overnight, and the immediate withdrawal of overnight accommodation support for banks by RBZ, stimulated a crisis that led to significant mismatches between asset liabilities and a liquidity scarcity for most banks. Property prices and the Zimbabwe Stock Exchange collapsed at the same time due to massive sales by banks trying to cover their positions. The loss of value in the stock market meant the collapse of the collateral most banks had instead of the loans they had dissolved.
During this period, Zimbabwe remained in debt relief as most of its foreign debt was either unpaid or underpaid. The resulting deterioration in the balance of payments (BOP) puts pressure on foreign exchange reserves and the overvalued currency. Total government domestic debt increased from $ 7.2 billion (1990) to $ 2.8 trillion (2004). This growth in domestic debt stems from high budget deficits and decreases in international financing.
Due to the unstable economy after the 1990s, the population became quite mobile with a significant number of professionals emigrating for economic reasons. The internet and satellite TV really made the world a global village. Customers demanded the same level of service expertise they were exposed to globally. This made service quality a different benefit. There was also a demand for banks to invest heavily in technological systems.
The rising cost of doing business in a hyperinflationary environment led to high unemployment and a simultaneous collapse of real income. As Zimbabwe Independent (2005: B14) so much observed, a direct result of the hyperinflationary environment is "that currency substitution is common, which implies that the Zimbabwe dollar abandons its function as a store of value, unit of account and exchange medium" to more stable foreign currencies .
During this period, a wealthy, indigenous segment of society emerged that was cash rich but avoided patronizing banks. The growing parallel foreign exchange and cash market during the cash crisis reinforced this. This effectively reduced the customer base for banks, while more banks came on the market. Thus, there was aggressive competition within a dwindling market.
Socio-economic costs associated with hyperinflation include: erosion of purchasing power parity, increased uncertainty in business planning and budgeting, reduced disposable income, speculative activities that divert resources from productive activities, pressure on the domestic exchange rate due to increased import demand and poor returns on savings. During this period to increase income there was increased cross-border trade as well as commodity brokerage of people who imported from China, Malaysia and Dubai. In fact, this meant that imported substitutes for local products intensified competition, adversely affecting local industries.
As more banks entered the market, which for financial reasons suffered a major brain drain, this was the reason why many inexperienced bankers were thrown to the deep end. Eg. 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 has been suggested that its failure in December 2003 was due to youthful zeal, greed and lack of experience. The collapse of ENG affected some financial institutions that were financially exposed to it, as well as inducing depositor flight that led to the collapse of some original banks.