The central bank should close a ‘troubled bank’ when it still has assets so that depositors can get their hard earned money.
THE Deposit Protection Corporation (DPC)’s chief executive officer, John Chikura, has urged the Reserve Bank of Zimbabwe (RBZ) to close troubled banks while they still have assets, noting that delays gave shareholders ample time to strip assets.
This consequently prejudiced depositors, who have failed to recover their deposits after several recent bank failures.
Closing troubled banks earlier would ensure that depositors accessed their deposits, including those in excess of the insured limit, after disposal of failed banks’ assets through the liquidation process.
The corporation has been struggling to pay out depositors in collapsed banks because most failed institutions would have turned into shells without any meaningful assets to sell at the time of their collapse.
DPC, which insures depositors against bank failures, was established in 2003 through an Act of Parliament to compensate depositors in the event of a bank’s collapse using premiums paid by banks.
These premiums have, however, proved to be inadequate.
The DPC currently pays out a maximum of US$500 per depositor in any failed bank, while those with higher balances are paid after the completion of the liquidation process.
“When a bank failure is imminent or inevitable, that financial institution will no longer be in a sound financial condition. The central bank should close that institution when it still has assets so that depositors can get their hard earned money,” said Chikura.
“If there are delays in closing such troubled banks, these will be shells and there will be nothing remaining to pay the depositors,” he said.
The country has experienced over 20 cases of bank failures since 2004 due to serious challenges that ranged from poor corporate governance, deep-seated risk management deficiencies and chronic liquidity problems.
Although every bank in the country is compelled to be a member of the DPC, paying subscriptions as agreed in any particular year, DPC is not adequately capitalised to fully compensate depositors in the event of a bank failure.
The local banking sector has been grappling with liquidity and solvency challenges due to macro and institution-specific factors.
Chikura said shareholders and directors failed to provide proper oversight in almost all cases of bank failures.
“Shareholders slept on duty and, as a result, failed to exercise proper oversight. They failed to hold their boards to account. Directors are also supposed to be on the steering wheel but they slept on the wheel.
“You ask non-executive directors (of the failed banks), they tell you they were not aware (of problems with their institutions). These are the people who have a fiduciary duty to look after the banks,” he said.
The Deposit Protection Corporation Act stipulates that payouts should commence within three months from date of closure of a contributory institution.
There has been growing concern over the growing number of banks that have failed over the past few years considering the key role that the financial sector plays in the development of the economy.
Recently, AfrAsia Bank, formerly Kingdom Bank, was placed under liquidation by the central bank after its shareholders surrendered their banking licence due to bad debts.
Another bank, Allied Bank, closed early this year. Last year, Trust Bank had its licence cancelled over abuse of depositors’ funds. The same year saw Capital Bank losing its licence.
In 2012, Interfin Banking Corporation was placed under recuperative curatorship after alleged looting of depositors’ funds by shareholders and directors. The central bank later allowed the institution to collapse after failing to get a rescue package for the bank.
An affected bank has the potential to threaten the stability of the entire financial sector.
In light of this, the RBZ will, with effect from the third quarter of this year, implement new stress tests on the country‘s banking institutions as it seeks to bring stability to the troubled sector.
The new stress tests are aimed at building strong and resilient banks.
Local banks currently stress test themselves using their own assumptions and scenarios.
Tough stress tests are meant to find weak spots in the banking system at an early stage, and to guide preventive actions as part of efforts to stabilise the financial sector.
The tests would enable the central bank to timeously identify key risks and vulnerabilities and also to ensure that failed banks exit the market with minimal disruptions to the overall functioning of the economy.
The banking sector is currently constituted by 14 commercial banks, one merchant bank, three building societies and one savings bank.
In 1980, there were only five banking institutions in the sector but due to financial reforms in the 1990s, more players entered the banking sector which was previously dominated by a few large foreign-owned banks.
Interestingly, there were 40 players in the banking sector in 2002. Though the expansion was a welcome development, some of these have since failed and there are only 19 institutions remaining.
The failed banks appeared to have engaged in over-trading, some failing to manage risks with the boards and management failing to put in place strong risk management systems.
Further pressure came from increased competition resulting in narrowing of margins and reduced profitability against a background of increased credit defaults.
Apart from the banking public enduring tremendous psychological and financial trauma as a result of bank failures, the failure of a single financial institution has the potential to cause widespread disruptions to the country’s payments system.
Banking is based entirely on a relationship of trust to safeguard deposits placed by the banking public.
The huge cost of bank failures is the loss of confidence in the entire banking system. Once this trust is lost or eroded, it is difficult to regain it.