Entrepreneurs build their business in the context of an environment that they may sometimes not be able to control. The robustness of a business venture is tried and tested by the vicissitudes of the environment. Within the environment, there are forces that can serve as great opportunities or threatening threats to business enterprise survival. Entrepreneurs need to understand the environment in which they operate in order to exploit emerging opportunities and mitigate potential threats.
This article serves to create an understanding of the forces at play and their effects on banking entrepreneurs in Zimbabwe. A brief historical overview of the banking sector in Zimbabwe is given. The impact of the regulatory and economic environment on the sector is assessed. An analysis of the structure of the banking sector facilitates an appreciation of the underlying forces in the sector.
In independence (1980), Zimbabwe had a sophisticated banking and finance market, with mostly foreign-owned commercial banks. The country had a central bank inherited from the Central Bank of Rhodesia and Nyasaland in the settlement of the Federation.
In the early years of independence, the Zimbabwean government did not interfere with the banking sector. There was no nationalization of foreign banks or restrictive legislative interference over which sectors to finance or the interest rates to charge, despite the national socialist ideology. However, the government bought some stakes in two banks. It bought 62% of Nedbank's Rhobank at a fair price when the bank withdrew from the country. The decision may have been motivated by a desire to stabilize the banking system. The bank has been renamed as Zimbank. The state did not interfere much with bank operations. In 1981, the state also partnered with the International Credit and Trade Bank (BCCI) as a 49% shareholder of a new commercial bank, the Zimbabwe Credit and Trade Bank (BCCZ). This was taken over and converted at the Commercial Bank of Zimbabwe (CBZ) when the BCCI collapsed in 1991 due to allegations of unethical business practices.
This should not be viewed as nationalization, but in line with state policy to prevent business closures. The holdings in Zimbank and CBZ were subsequently diluted to less than 25% each.
In the first decade, no indigenous banks were licensed and there is no evidence that the government has any financial reform plans. Harvey (s, page 6) cites the following as evidence of the lack of a coherent financial reform plan in those years:
– In 1981, the government stated that it would encourage rural banking, but the plan was not implemented.
– In 1982 and 1983, a Money and Finance Commission was proposed but never constituted.
– In 1986, there was no mention of any financial reform agenda in the National Five Year Development Plan.
Harvey argues that the government's reticence to intervene in the financial sector could be explained by the fact that it did not want to compromise the interests of the white population, of which the banking sector was an integral part. The country was vulnerable to this section of the population because it controlled agriculture and manufacturing, which were the basis of the economy. The state has taken a conservative approach to indigenization by learning a lesson from other African countries whose economies have almost collapsed due to the forced eviction of the white community without first developing a mechanism for skills transfer and empowerment in the black community. The economic cost of inadequate intervention was considered too high. Another plausible reason for the policy of nonintervention was that the state, in independence, inherited a highly controlled economic policy with rigid exchange control mechanisms from its predecessor. Since foreign currency control affected credit control, the government, by default, had strong sector control for economic and political purposes; therefore, it did not need to interfere.
However, after 1987, the government, at the request of multilateral creditors, initiated an Economic and Structural Adjustment Program (ESAP). As part of this program, the Reserve Bank of Zimbabwe (RBZ) has begun advocating for financial reforms through liberalization and deregulation. He argued that the banking oligopoly and lack of competition deprived the industry of choice and quality in service, innovation and efficiency. As a result, as early as 1994, the RBZ Annual Report indicates a desire for greater competition and efficiency in the banking sector, leading to banking reforms and new legislation that:
– allow prudential supervision of banks to be conducted in accordance with international best practice.
– allow off-site and on-site bank inspections to enhance RBZ's Bank Supervision function, and
– increase competition, innovation and improve customer service to banks.
Subsequently, the Bank Registrar of the Ministry of Finance, in contact with RBZ, began issuing licenses to new participants as the financial sector opened. From the mid-1990s until December 2003, there was a flurry of entrepreneurial activities in the financial sector when indigenous-owned banks were created. The chart below shows the trend in the number of financial institutions by category, operating since 1994. The trend shows an initial increase in commercial banks and discount houses, followed by the decline. The rise in commercial banks was initially slow, gaining momentum around 1999. The decline in commercial banks and discount houses was due to their conversion, mainly into commercial banks.
Source: RBZ Reports
Different entrepreneurs have used various methods to penetrate the financial services industry. Some started advisory services and later became commercial banks, while others started stock brokerage firms, which were high in discount houses.
From the beginning of financial services liberalization until around 1997, there was a notable absence of locally owned commercial banks. Some of the reasons for this were:
– Conservative licensing policy by the Registrar of Financial Institutions, as it was risky to license indigenous-owned commercial banks without favorable legislative and supervisory experience.
– Bank entrepreneurs chose non-bank financial institutions as they were less costly in terms of initial capital and working capital requirements. For example, a commercial bank would require less staff, would not need bank rooms, and would not need to negotiate expensive small retail deposits, which would reduce overhead and reduce the time to record profits. Thus, there was a rapid increase in nonbank financial institutions at that time, for example, in 1995, five out of ten commercial banks had started in the previous two years. This has become a preferred gateway for commercial banks for some, for example Kingdom Bank, NMB Bank and Trust Bank.
Some foreign banks were also expected to enter the market after the financial reforms, but this did not occur, probably due to the restriction of having a minimum local stake of 30%. Strict foreign currency controls could also have contributed, as well as the cautious approach taken by the licensing authorities. Existing foreign banks were not required to lose part of their equity interest, although Barclay & # 39; s Bank did so by listing on the local stock exchange.
Harvey argues that financial liberalization assumes that the removal of loan guidelines presupposes that banks can automatically lend for commercial reasons. But he says banks may not have this capability as they are affected by borrowers & # 39; inability to service loans due to currency restrictions or price controls. Similarly, having positive real interest rates would normally increase bank deposits and financial intermediation, but this logic falsely assumes that banks will always lend more efficiently. He further argues that the licensing of new banks does not imply increased competition, as it presupposes that new banks will be able to attract competent management and that banking legislation and supervision will be appropriate to prevent fraud and thus prevent bank collapse. and the resulting financial crisis. Unfortunately, their concerns do not seem to have been addressed in Zimbabwe's financial sector reform to the detriment of the national economy.
The operating environment
Any entrepreneurial activity is limited or aided by its operating environment. This section looks at the prevailing environment in Zimbabwe that may affect the banking sector.
The political environment in the 1990s was stable, but became volatile after 1998, mainly due to the following factors:
– an un budgeted payment to war veterans after they attacked 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 depreciated by 75% as the market foresaw the consequences of the government's decision. That day was recognized as the beginning of the country's strong economic downturn and was dubbed "Black Friday." This depreciation has become a catalyst for further inflation. He was followed a month later by violent eating disorders.
– A poorly planned Land Agrarian Reform, launched in 1998, where white commercial farmers were ostensibly evicted and replaced by blacks without due regard for land rights or compensation systems. This has resulted in a significant reduction in the country's productivity, which mainly depends on agriculture. The way land redistribution has been handled has angered the international community, which claims it is racially and politically motivated. International donors withdrew support for the program.
– an unwary military incursion, called Operation Sovereign Legitimacy, to defend the Democratic Republic of Congo in 1998, saw the country incur massive costs, with no apparent benefit to itself, and
– elections that the international community claimed were rigged in 2000, 2003 and 2008.
These factors have led to international isolation, significantly reducing the flow of foreign currency and foreign direct investment in the country. Investor confidence has been severely eroded. Agriculture and tourism, which have traditionally been huge foreign currency earners, have collapsed.
In the first decade after independence, the Banking Act (1965) was the main legislative framework. As this was enacted in most foreign-owned commercial banks, there were no instructions on prudential lending, prime lending, proportion of shareholder funds that could be borrowed from a borrower, definition of risky assets, and no provision for bank inspection.
The Banking Act (24:01), which came into effect in September 1999, was the culmination of RBZ's desire to liberalize and deregulate financial services. This law regulates commercial banks, commercial banks and discount houses. Barriers to entry have been removed, leading to increased competition. Deregulation also allowed banks some latitude to operate on non-essential services. It seems that this latitude was not well delimited and therefore presented opportunities to take risks. The RBZ has defended this deregulation as a way of disaggregating the financial sector and improving efficiency. (RBZ, 2000: 4.) These two factors presented opportunities for enterprising indigenous bankers to establish their own businesses in the sector. The law was revised and reissued as chapter 24:20 in August 2000. Increased competition has resulted in the introduction of new products and services, such as electronic 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 reform effort, the Central Bank Act (22:15) was enacted in September 1999.
Its main objective was to strengthen the Bank's supervisory role by:
– establish prudential standards within which banks operate
– internal and external bank surveillance
– apply sanctions and, where necessary, curate and
– Investigate banking institutions whenever necessary.
This law still had shortcomings, as Dr. Tsumba, then RBZ Governor, argued that there was a need for RBZ to be responsible for licensing and supervision, since "the final sanction available to a bank supervisor is the knowledge of the banking sector that The license issued will be canceled for gross violation of the operating rules. " However, the government seemed to have resisted this until January 2004. It can be argued that this deficiency could have given some bankers the impression that nothing would happen to their licenses. Dr. Tsumba, noting RBZ's role in maintaining bank management, directors and shareholders responsible for the viability of banks, stated that it was not RBZ's role or intention to "micromanage banks and direct their day-to-day operations. "
It seems that his successor's view differs significantly from that orthodox view, hence the evidence of micromanagement that has been observed in the industry since December 2003.
In November 2001, the Troubled and Insolvent Banks Policy, drawn up in recent years, went into operation. One of its intended objectives was that "the policy enhances transparency, regulatory accountability and ensures that regulatory responses are applied fairly and consistently." The prevailing view in the market is that this policy, when implemented after 2003, is definitely deficient. as measured against these ideals. Transparency and the inclusion and exclusion of vulnerable banks in ZABG are contestable.
A new RBZ governor was appointed in December 2003, when the economy was in free fall. He made significant changes in monetary policy, which caused tremors in the banking sector. The RBZ was finally authorized to act as a regulatory and licensing authority for financial institutions in January 2004. The regulatory environment has been revised and significant amendments have been made to the laws governing the financial sector.
The Resolution Law for Troubled Financial Institutions (2004) was promulgated. As a result of the new regulatory environment, several financial institutions were distressed. RBZ placed seven curated institutions while one was closed and one was in liquidation.
In January 2005, three of the distressed banks were merged under the authority of the Troubled Financial Institutions Act to form a new institution, the Zimbabwe Allied Banking Group (ZABG). These banks allegedly failed to pay RBZ advance funds to them. Affected institutions 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 trading illegally acquired assets. These bankers appealed to the Minister of Finance and lost their appeal. Later, in late 2006, they appealed to the Courts as provided by law. Finally, in April 2010, RBZ finally agreed to return the "stolen goods".
Another move taken by the new governor was to force management changes in the financial sector, which resulted in most corporate bank founders being forced out of their own companies under various pretexts. Some finally fled the country under threat of arrest. Bank boards have been restructured.
Economically, the country was stable until the mid-1990s, but a slowdown began around 1997-1998, mainly due to political decisions made at the time, as already discussed. Economic policy was driven by political considerations. As a result, multinational donors were withdrawn and the country was isolated. At the same time, a drought hit the country in the 2001-2002 season, exacerbating the detrimental effect of agricultural dumping on agricultural production. This reduced production had an adverse impact on the banks that financed agriculture. Interruptions in commercial agriculture and the concomitant reduction in food production have resulted in a precarious position of food security. Over the past twelve years, the country has been forced to import maize, further putting pressure on the country's meager foreign currency resources.
Another impact of the land reform program was that most farmers who had lent money from banks could not yet repay the loans, but the government, which took over their business, refused to take responsibility for the loans. By failing simultaneously to reward farmers quickly and fairly, it has become impracticable for farmers to service loans. Banks were exposed to these rotten loans.
The net result was spiraling inflation, business closures resulting in high unemployment, foreign currency shortages as international sources of funds dried up and food shortages. The shortage of foreign currency led to the shortage of fuel, which in turn reduced industrial production. As a result, Gross Domestic Product (GDP) has been declining since 1997. This negative economic environment meant a reduction in banking activity as industrial activity declined and banking services were directed to the non-formal and parallel market.
As illustrated in the chart below, inflation spiraled to a peak of 630% in January 2003. After a brief easing, the upward trend continued to rise to 1729% in February 2007. After that, the country entered a period of hyperinflation. unheard of in a period of peace. Inflation stresses the banks. Some argue that the rate of inflation has risen because currency devaluation has not been accompanied by a reduction in the budget deficit. Hyperinflation causes interest rates to rise as the value of collateral falls, resulting in mismatches between assets and liabilities. It also increases overdue loans as more people fail to repay their loans.
Indeed, in 2001 most banks adopted a conservative lending strategy, for example, with total advances to the banking sector being only 21.7% of total banking sector assets, compared to 31.1% in the previous year. Banks resorted to volatile nonfinancial revenues. Some began trading in the parallel foreign currency market, sometimes colluding with the RBZ.
In the last half of 2003, there was a severe cash shortage. People stopped using banks as intermediaries because they weren't sure they could access their money whenever they needed it. This has reduced the deposit base for banks. Due to the short-term maturity profile of the deposit base, banks were usually unable to invest significant portions of their funds in long-term assets and were therefore highly liquid until mid-2003. However, in 2003, due to demand of clients for returns corresponding to inflation, most indigenous banks resorted to speculative investments, which generated higher returns.
These speculative activities, especially non-core banking, have driven exponential growth in the financial sector. For example, a bank had its asset base increased from Z $ 200 billion (USD50 million) to Z $ 800 billion (USD200 million) within a year.
However, bankers have argued that what the governor calls speculative non-essential business is considered best practice in the world's most advanced banking systems. They argue that it is not uncommon for banks to take equity positions in nonbank institutions that have lent money to safeguard their investments. Examples were given by banks such as Nedbank (RSA) and JP Morgan (USA), which control vast real estate investments in their portfolios. Bankers argue convincingly that these investments are sometimes used to protect inflation.
RBZ's new governor instructions for banks to relax their positions overnight and the immediate withdrawal of a nightly bank support by RBZ spurred a crisis that led to significant asset and liability mismatches and a liquidity contraction for the bank. Most banks. . Property prices and the Zimbabwe Stock Exchange collapsed simultaneously due to massive sales from banks trying to hedge their positions. The loss of value in the stock market meant the loss of collateral, which most banks held in lieu of the loans they had advanced.
During this period, Zimbabwe remained in crisis, as most of its foreign debts were either underserved or under-serviced. The resulting worsening balance of payments (BP) put pressure on foreign exchange reserves and the overvalued currency. Government total domestic debt increased from Z $ 7.2 billion (1990) to Z $ 2.8 trillion (2004). This growth in domestic debt stems from high budget deficits and a decline in international financing.
Due to the volatile economy after the 1990s, the population became quite mobile, with a significant number of professionals emigrating for economic reasons. The Internet and satellite TV have made the world truly a global village. Customers demanded the same level of service excellence that they were exposed to globally. This has made quality of service a differential advantage. There was also a demand for banks to invest heavily in technology systems.
The rising cost of doing business in a hyperinflationary environment has led to high unemployment and the concomitant collapse of real income. As Zimbabwe Independent (2005: B14) so vehemently noted, a direct result of the hyperinflationary environment is "that currency substitution is abundant, implying that the Zimbabwe dollar is abandoning its function as a store of value, unit of account. and exchange rate "for more stable foreign currencies.
During this period, an affluent indigenous segment of society emerged, which was rich in money but avoided sponsoring banks. The emerging parallel market of foreign currency and cash during the cash crisis reinforced this. This effectively reduced the bank's customer base while more banks were entering the market. There was therefore aggressive competition within a declining market.
Socioeconomic 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 rising demand. imports and low returns on the economy. During this period, to increase income, there was an increase in cross-border trade and goods brokering by people who imported from China, Malaysia and Dubai. This effectively meant that imported substitutes for local products intensified competition, adversely affecting local industries.
As more banks entered the market, which had suffered a major brain drain for economic reasons, it was logical that many inexperienced bankers were thrown into the deep end. For example, ENG Asset Management's founding directors had less than five years of experience in financial services, yet ENG was the fastest growing financial institution in 2003. It was suggested that its failure in December 2003 was due to zeal. , greed and lack of young people. experience. The collapse of ENG affected some financial institutions that were financially exposed to it, and caused depositors to flee, leading to the collapse of some indigenous banks.