A club of failures or beacon of hope?
Barnabas Thondlana
Published: 14-JAN-05

This month will mark the official opening of what has been dubbed the largest locally-owned commercial banking firm in Zimbabwe, the Zimbabwe Allied Banking Group (ZABG). The new bank will pit the government and other local shareholders against three international banks that have been accused of drawing huge profits at the expense of Zimbabweans.

The three - Stanbic Africa, Standard Chartered and Barclays – happen to be the major banks operating in Zimbabwe. They reported an after-tax cost profit of Z$501.4bn in the six months to June 2004, compared with Z$24.961bn in the same period in 2003. This is an overall increase of nearly 2000% on the previous comparable period.

The formation of the ZABG marks the commencement of another era in the Zimbabwean banking sector. Some of the banks collapsed into this umbrella institution include Barbican, Royal Bank, Intermarket Discount House, Trust Bank, Time Bank, Intermarket Building Society and Intermarket Banking Corporation. Two financial institutions, First National Building Society and Rapid Discount House, have slipped into liquidation.

The new entity will have to convince Zimbabweans, who’ve already suffered at the hands of an unstable local banking sector, to deposit their hard-earned cash into the new bank. Already, Dr Gideon Gono, the Governor of the Reserve Bank of Zimbabwe (RBZ), is hard-pressed to convince sceptical Zimbabweans that “ZABG is built upon good corporate governance”, in an apparent reference to imprudent business practices that have been set by other locally owned and managed banks.

The RBZ says the establishment of ZABG preserved the localisation of the financial sector, but some analysts are not convinced. “The jury is still out on the ZABG. There is a real danger that the bank will drag on and on without attracting new depositors and banking on government,” said one independent analyst in Zimbabwe.

Optimistic analysts have proclaimed the move to merge the collapsed banks under one umbrella bank as arguably the best thing that could have happened to Zimbabwe’s banking sector in recent years, although sceptics question the viability of the operation.

“Because of its background, it is being viewed as a club of failures, an association of the weak. Depositors have became wary of who they trust their money with. That caution is likely to blind the depositor to any attempts to convince them that the ZABG is an entirely new bank, that whoever burnt them in the past cannot burn them any more,” said one analyst.

It would appear that Dr Gono has been systematically preparing for the consolidation of the country’s banking sector since taking offi ce. Last year, the RBZ triggered a run on banks by setting a September deadline for all fi nancial institutions to declare their capital reserves and show they have enough liquidity to continue operating. Dr Gono eased the pain by announcing that Central bank offi cials would work with shareholders, directors and managers to keep troubled institutions afl oat by recapitalising them.

Recently, he told a breakfast meeting debating the central bank’s third quarter monetary policy statement in Harare that ZABG would be “three or four times bigger” than the individual existing banks in Zimbabwe. It has the mandate of spearheading long-term capital projects such as infrastructure development.

The ZABG has been capitalised to the tune of Z$2 trillion. The figure has raised alarm amongst some analysts, who argue that it would place infl ationary pressures on the economy. At the end of 2004, Zimbabwe’s infl ation rate was stubbornly sitting above 200%, although this was an improvement from the alltime high of 622% at the beginning of the same year.

The ZABG is seen as the first major step towards strengthening the financial sector, which suffered from under-capitalisation, instability and scandals for most of 2004. Banks still on the Troubled Bank Fund (TBF) are likely to be roped in into the quasi-government fi nancial group later in the year.

The TBF is a facility created by the RBZ as bridging fi nance for institutions that had been forced to borrow from the central bank to stay afl oat. The institutions were given a deadline of November 30 2004 to repay the loans, failure of which would result in the loans being converted to equity.

The central bank created the Allied Financial Services (AFS), a special purpose vehicle which holds equity in the troubled banks. AFS is jointly owned by government, by virtue of the central bank’s injection of funds into the troubled banks, creditors and depositors whose savings have been converted into equity.

Under ZABG, single account holders with a deposit equalling or less than Z$5m were refunded, while those holding deposits beyond this fi gure along with creditors and government became automatic shareholders. This would be done via a debt to equity conversion transaction. Government would have to shed off its entire shareholding by 2007.

Initially, the bank will be managed by a management board of turnaround and integration experts supported by a competent management board of directors. Perhaps, the bank will be better positioned targeting the unbanked in the rural and oulying areas of the country. Already, Dr Gono hinted in that direction in his third quarter monetary policy statement, saying that “the majority of banking institutions are primarily concentrated in a few urban areas, with limited and in most cases, non-existent representation across the entirety of the country’s main centres of economic activity”.

Analysts and ordinary Zimbabweans agree that this year will determine whether ZABG is a bankable project initiated by the central bank. While it has given fresh hope to a collapsing, yet key sector of the economy, the bank will have to do a lot more to gain public confi dence. It will need aggressive marketing campaigns and solid management to convince Zimbabweans to move their funds from largely foreign owned banks with unrivalled experience in operating in a diffi cult market such as Zimbabwe, to an entity that some have dubbed “the club of failures”.

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