By Tapiwanashe Mangwiro.
HARARE (News of the South) – Capital requirements play a key role in the supervision and regulation of banks. Policy makers have put in considerable effort to design bank capital regulation as a way of safeguarding overall financial stability. In Zimbabwe, the Basel Capital Accord was issued in 1988 and market risk was dealt with in 1996 and the Basel II Accord was issued in 2004.
Accompanying the policy effort has been the adoption of the Basel capital standards. The main objectives of the Basel Committee on Banking Supervision (BCBS) were to encourage international banks to boost capital positions and to reduce competitive inequalities.
According to the BCBS, banks were required to maintain a capital adequacy ratio of 8% measured as net capital divided by total risk weighted assets. In line with this, the Reserve Bank of Zimbabwe (RBZ) adopted formalised capital requirements for banking institutions in 1996. The Reserve Bank of Zimbabwe pegged the minimum capital at US$30 million for Tier I banks and US$20 million for Tier II banks in January 2020.
With 13 operating commercial banks, only four have surpassed the minimum capital requirements according to their HY2019 financial reports. The Monetary Policy Committee recommended that the banks must have RTGS value equivalent to the US dollar values by 31 December 2020.
In their half year financial reports, the biggest commercial bank in Zimbabwe CBZ had capital of Z$896.3 million (US$51.2 million as per interbank rate). Ecobank was the only bank to report over a billion of capital as they reported Z$1.8 billion (US$103 million).
BancABC was the third bank to report capital which was above the minimum required capital after they reported capital of Z$545.8 million (US$32.26 million). The fourth bank which reported capital over the new minimum capital requirements was NMB after they reported capital of Z$524 million (US$30.8 million) in their half year 2019 financials.
However, with the turn in macroeconomic events, there is a need to scrutinise whether the US$30m statutory requirement is appropriate in a small economy like Zimbabwe. Indeed, other countries such as Zambia have implemented such policies to strengthen the banking sector and maintain its stability.
With 13 operating commercial banks, the policy measure entails that there be a minimum of US$390 million in commercial banks’ capital lying idle. Banks can lend up to 10 times their capital. This means that, potentially, commercial bank loans should rise to US$3.9bn for banks to fully enjoy the benefits of having huge capital.
Currently, banks are struggling to disburse loans due to lack of quality borrowing clients and regulated lending rates that at times may not cover specific banks’ credit risk. With loans to the private sector at US$490 million, representing roughly 15% of GDP, increasing loans to US$3.9bn requires a constant annual average growth rate of over 80%.
The practicality is questionable given the country’s bleak economic outlook in the short to medium term. Loans-to-GDP averages 18% in Sub-Saharan Africa and, at 15%, Zimbabwe is within the average.
Maintaining the status quo, a US$30m minimum capital requirement, in a country with 13 operating commercial banks requires growing the economy to around US$13bn for commercial banks to fully enjoy the benefits of having such high minimum capital levels. Currently, minimum capital requirements are set at Z$100m and all commercial banks have met the set level.
It is guaranteed that, when fully met, these capital requirements will help in ensuring that the banks are adequately capitalised for them to remain resilient to financial instability as the result of external and internal factors. Sufficient capital buffers enable banks to take on big transactions and improve the banking sector’s access to funds which the banks can easily loan to local depositors and various markets.
The move is a welcome developments as indexing the minimum capital requirements against the US dollar will fight the rising inflation. It also serves to avoid the regulator to continuously review the minimum capital requirements when inflation has increased. This however sends a negative signal to the market as it ends up saying the regulator is dollarizing slowly under the carpet.
That, however, remains to be witnessed because previously the government through its various wings, including the RBZ, has come up with several well-intended policy measures which have ended up being frustrated by other stakeholders. A relook into the policy might be necessary given the underlying macroeconomic difficulties. Although banks have continued to remain profitable, most of them have capitalised on opportunities arising from the cash crisis and Treasury Bills (TBs).
The current cash crisis has seen transaction volumes skyrocketing, boosting banks’ non-funded income. Banks have increased their holding of TBs, enjoying huge discounts in the secondary market to boost short-term returns. Income from lending activities should generally be the key driver of banks’ income in a normal economy, not other things.
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