RBZ blames delinquency for bank failures

RBZ deputy governor, Charity Dhliwayo

A SENIOR Reserve Bank of Zimbabwe (RBZ) official has blamed poor corporate governance for the collapse of many banking institutions in the country, saying delinquency by management and shareholders had ruined most financial institutions.

About 20 banking institutions have closed since 2000. The notable casualties include Trust, Genesis, Royal, Barbican, Renaissance, CFX and Time banks. Interfin Banking Corporation is currently under curatorship since 2012. Other notable casualties include United Merchant Bank , Universal Merchant Bank, First National Building Society and Zimbabwe Building Society, which was rescued by the central bank and eventually bought by FBC Holdings.

Speaking at an Internal Control Congress for Africa held in Victoria Falls, RBZ deputy governor, Charity Dhliwayo, said lack of separation of power between ownership and management provided fertile ground for a total breakdown in corporate governance and internal controls which led to the collapse of most banks.

She said a number of bank failures in Zimbabwe emanated largely from “too weak internal controls and corporate governance”.  Asset management and microfinance firms also folded during the same period due to weak internal controls, she said.

Dhliwayo said the introduction of the multicurrency regime brought to the fore a different set of challenges which necessitated the Reserve Bank and the banking sector to institute measures to strengthen the internal control environment. “The sector was rampant with shareholders who had become de facto executive directors and signatories in the banking institutions, where they exercised unfettered powers over operations,” she said.

She said there were ceremonial boards that merely performed a compliance role and tended to compound challenges at the ailing institutions by rubber-stamping management decisions without interrogating them. “There was a corporate sin of self-interest where executive directors indulged in self-seeking activities unrestrained by their independent non-executive directors on the board,” said Dhliwayo.

“This behaviour resulted in banking institutions indulging in regulatory arbitrage through abuse of group structures, and engaging in non-permissible activities through SPVs (special purpose vehicles). Some insider loans were disguised as placements while others were written off unprocedurally,” she said.

She said an “indebted director syndrome” had developed in the sector, with directors becoming biggest borrowers in their institutions. This position, she said, underscored the reason why directors of banking institution should maintain independence in execution of fiduciary responsibilities, something that was very difficult once they became borrower from the same in institution.

She said absence of value-centred leadership in owner-managed institutions had resulted in unprecedented levels of collusive behaviour by bank management in an attempt to disguise high level of non-performing loans, and conceal information on the true financial condition of their respective institutions.

She said recurring corporate governance weaknesses were compounded by lack of commitment to take corrective measures by boards and senior management.  “As a result of the total collapse of corporate governance and internal controls, the banking sector backyard is littered with failed banking institutions, asset management companies and microfinance institutions,” Dhliwayo said.

She said in banking, fiduciary duty assumes “an even higher status” than that of the ordinary corporate director as it is not only shareholder interests that are at stake but those of the public in the form of investors and depositors, who need to be protected.

“The scourge of non-performing loans that is affecting the banking sector has been compounded by weakness in the internal control in the lending procedures. Internal control overrides have compromised effective credit risk management rendering a number of loans uncollectible due to lack of sufficient documentation at loan origination,” she said.

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