eBusiness Weekly
Tawanda Musarurwa
With the deadline for the implementation of Basel III set for March 31, 2019, Zimbabwe’s financial services sector appears to be far from it.
The Basel Standards were agreed upon by the members of the Basel Committee on Banking Supervision in around 2010/2011 as regulators sought to rein in the sort of risk-taking that caused the last global financial crisis.
The standards, and was scheduled to be introduced from 2013 until 2015; however, changes from 1 April 2013 extended implementation until 31 March 2018 and again extended to the end of March next year.
Basel III in particular was developed in response to the deficiencies in financial regulation revealed by the financial crisis of 2007–2008.
It is intended to strengthen bank capital requirements by increasing bank liquidity and decreasing bank leverage.
A step behind
Notwithstanding the fast-approaching deadline, Zimbabwe could be a step behind.
“Zimbabwe is still trying to implement Basel II and this is championed centrally by the Central Bank. There has not been talk of implementing Basel III unless if the international banks are being driven by their mother bodies,” said financial analyst Nyararai Mavenga, a senior manager (business risk) at Agribank.
And that’s because the Reserve Bank of Zimbabwe (RBZ) is yet to announce the localised framework for the implementation of Basel III.
“The bank continued to provide tailored technical assistance to banking institutions to capacitate the sector in the implementation of Basel II. Meanwhile, the Basel Committee on Bank Supervision concluded the outstanding components of the Basel III framework in December 2017.
“In this regard, the Reserve Bank is in the process of developing the Basel III capital and liquidity frameworks to improve the quality, consistency and transparency of capital and reduce pro-cyclicality, as well as, enhance liquidity management,” said RBZ governor Dr John Mangudya in his Monetary Policy Statement early this year.
Other analysts are more optimistic
“As regards capital the Basel reforms are twofold: on the one hand the committee recommends the recognition of permanent capital namely common equity and retained earnings as Tier 1 Capital giving less prominence to the other elements previously considered as Tier 1 Capital thereby improving the quality of Tier 1 Capital and on the other hand increasing the level of contribution of common equity and retained earnings from the current low level of 2 percent of risk-weighted assets (RWA) to 6 percent of risk-weighted assets,” said one analyst.
“Total Capital Adequacy Ratio (CAR) made up of Tier 1 and Tier 2 minimum is 8 percent. As such by 2019 in the minimum CAR of 8 percent, Tier 2 will only contribute 2 percent.”
“However, for Zimbabwe the minimum CAR is set at 10 percent which already has a buffer above the international set level. In my view for Zimbabwean banks there has been little reliance on Tier 2 capital elements. Many bank balance sheets are skewed towards core capital and as such it will not be difficult to meet the requirements as proposed,” said the analyst, who declined to be named.
But whether local banks implement Basel III or not, there will be no direct penalizations because the Basel Standards are a global, voluntary regulatory framework on bank capital adequacy, stress testing and market liquidity risk.
Possible consequences of non-compliance, however, are however closer to the global financial crisis of circa 2008, or perhaps closer to home the Zimbabwe banking crisis of 2003- 2004.
There are a number of factors that contributed to the local banking crisis of 2003/2004, but some trends still persist.
That TBs issue
A noticeable trend within the local financial services sector is that the bank’s balance sheets are seemingly being financed by Treasury Bills.
Observers say one of the main problems around 2004 was that the interbank market rate and the bank accommodation rates were both effectively yielding interest rates which were higher than the TB rate, meaning that banks would be funding balance sheets at an interest rate that was way above the yield of their underlying assets.
Currently, a significant number of financial players hold Government-issued TBs, as they have become the main debt instrument available in the market after Government converted its legacy debt into short-dated Government security
And the issue of TBs remains is a bone of contention within the financial services sector.
The International Monetary Fund (IMF) has suggested that local banks’ increasing collection of TBs could have sector-wide repercussions.
“Staff noted that given the heightened sovereign risk and insufficient RBZ reserves to honour its obligations with banks, bank assets in the form of RTGS electronic balances and T-bills pose liquidity and solvency risks. While foreign-owned banks’ appetite for T-bills is on the wane, these banks hold a large share of their assets in RTGS electronic balances, as they deal with exporters subject to repatriation.
“Domestically-owned banks hold the bulk of T-bills, in some cases as part of their capital. Against this backdrop, the upcoming reforms to bank regulations requiring the valuation of assets at market prices would create recapitalisation needs for several banks. Based on the official indicators, the authorities are less concerned about bank liquidity and solvency.
“They argued that high deposits (due to the RBZ credit to the government and to the withdrawal limits) boost bank liquidity, and large holdings of T-bills raise bank profitability. They are hopeful that discounts on the quasi-currency instruments will disappear once dollar liquidity returns to normal levels.
“Staff argued that reliance on financial indicators that do not fully factor in emerging pricing and liquidity risks could imperil bank soundness analysis,” said the IMF after its Executive Board concludes an Article IV Consultation with Zimbabwe in July last year.
Treasury has since 2015 moved to ease market concerns over TBs issuances, stating in 2016 that going forward the issuance of new TBs would be guided by projected cash-flows, and last year that it had placed a moratorium on the issuance of TBs
Analysts at IH Securities have however noted an increase in banks’ holdings of TBs last year.
“All banks recorded an incline in TBs with the highest growth rate coming from MBCA Bank at 719,1 percent. The banks’ appetite for this government paper increased further in FY17 as the banks saw this as a safer asset in the absence of quality borrowers. Government is said to be honouring coupon payments as well as maturity of TBs therefore the perceived risk was reduced in FY17 which then saw more banks taking up the TBs.
“International banks that in the past had tried to stay away from the paper saw a significant uptick in TB growth for example Stanbic, Standard Chartered and MBCA, up 186,2 percent, 94,8 percent and 719,1 percent respectively. In the last couple of years, banks have done well to keep TBs as a percentage of total assets below 30 percent, however, 2017 saw 6 banks, namely Agribank, StanChart, Ecobank, Steward Bank, CBZ and Steward Bank breaching that 30 percent mark, with Steward Bank going to 54 percent,” said IH Securities in its Zimbabwe Banking Sector Report 2018.
They raise a major concern that the proliferation of TBs (with banks holdings as much as $1,75 billion in TB stock by mid-last year) that banks’ proclivity for TBs insofar as they “earn steady interest” and are “more secure” than lending could be crowding out private sector lending.
Clearly, the consequences of an unstable financial sector are broader, especially for a country like Zimbabwe.
The local financial services sector need to expedite its compliance with the Basel requirements as they can reduce the probability of a financial crisis and the output losses associated with such crises.
