What Caused The Zimbabwe Banking Crises of 2003-4?


Extracts from Entrepreneurship On Trial. 2011 By Dr T. A. Makoni


The Central Bank in December 2003 accused bankers of speculative activities and

unethical behaviour and directed them to unwind their positions overnight. A punitive overnight central bank accommodation at 400% p.a. was introduced. However once the market players had been forced to unwind their positions overnight, the offloading of their investments e.g. properties, land, vehicles, stock exchange holdings, flooded the market leading to a crash of the stock exchange and the property market. Economists call this an asset price burst. This action had the following consequences, which were detrimental to banks’ health:

1. bankers sought to withdraw their investments with asset managers, leading to the collapse of ENG and the other asset managers. The ensuing market panic further increased the exposure of the banks.

2. the value of collateral that bankers held collapsed while the inflationary push and

interest rate hike increased their indebtedness. An asset- liability mismatch resulted. It can be argued that until this stage there was minimal asset- liability mismatch in the industry.

3. the bankers had to withdraw credit or call in loans. However borrowers were subject to the vagaries of a run away economy and most had no means to either immediately repay the loans or increase their collateral. This automatically increased the incidence of NPL (non-performing loans). Prior to this action, the servicing of these loans had not been a problem.

4.the credit squeeze imposed by the RBZ led to a credit crunch, further reducing the banks’ earning capacity.

5.the resultant massive depositor flight further worsened the banks’ liquidity positions as no bank would have a near 100% liquidity cover.

6. to survive the liquidity crisis, banks had no choice but to resort to the exorbitant central bank accommodation. The conditions for accessing this fund were forced CEO departures and some stringent requirements to surrender tradable securities to RBZ. The surrender of securities further reduced their earning capacity and hence compromised their ability to pay back the loans. The forced departure of CEOs sent a wrong signal to the market. How then could a bank mobilise deposits when messages were being sent out by the regulator that it was unsafe? How does a lender of last resort claim to be trying to save a bank which has a liquidity crisis by imposing harsher repayment terms than the market?


The Central Bank hiked interest rates resulting in commerce having difficulty to obtain financing from commercial banks since an increase in the RBZ repo rate translates into an across the board rate hike in the financial system. In effect, it increases the cost of funds to bankers. Simultaneously the RBZ offered the Productive Sector Financing at concessionary rates to industry at 30% p.a. compared to 400% p.a. from commercial banks. Consequently the central bank became a competitor to the banks. Banks lost their best customers, the corporate customers, to the RBZ and yet they had to survive the squeeze. Consumer spending was restricted, with the net result that banks’ income dwindled.

The central bank also increased the statutory reserves from 20% to 30% for commercial banks, in the face of tightening liquidity. (RBZ, 2003a:16). This action converted profitable banks into loss- making entities. Increasing statutory reserves means that one is reducing the amount of depositor’s funds that banks can invest profitably since statutory reserves are monies surrendered to the reserve bank at zero interest. This amounts to a significant withdrawal of funds from the financial system during a liquidity crisis. Worse still, the Central Bank obtained this money from banks at no interest robbing them of an earning capacity, then lend it back to them as overnight accommodation at punitive rates of 400% p.a., or else used it as a competitive tool against the banks by lending it to corporate customers as productive sector facility. The higher the statutory reserves, the higher the percentage of depositors’ funds that is unproductive. Consequently banks were forced to lower the interest rates on deposits sabotaging the deposit mobilisation exercise that would improve their liquidity. Paradoxically, the central bank was at the same time accusing banks of not passing on the profits from trading to the customers. This resulted in unnecessary losses being incurred by the already struggling banks. By forcing banks to lower their lending rates while increasing the repo rate, the RBZ narrowed the profit margins of already constrained banks. In a telling admission the central bank on June 29, 2006 conceded to the fact that increasing statutory reserves makes the market illiquid by saying, “ we are making these progressive reductions (in statutory reserves) in the spirit of releasing more financial resources on banks’ funding positions so as to enable the industry to increase its contribution to the economic turnaround programme” 37The reductions were meant to “reduce the cost of funding for banks”.

The question is “Why was this not noted in 2003?” It is conceivable that a decision by the central bank to allow interest rates to go beyond the reasonable ALCO assumptions of the banks, which the monetary authorities had access to and a decision not to intervene when some players decided to ring fence distressed financial institutions directly precipitated the fall of the failed banks.

The interest rate structure in 2003/2004 period contributed directly towards the failure of banking institutions, as there was a huge disparity between the Treasury Bill rate, the interbank rate and the bank accommodation rate.

Bank balance sheets are largely financed by Treasury Bill issues and the situation in 2004 was such that the interbank market rate and the bank accommodation rates were both effectively yielding interest rates which were higher than the TB rate, creating a scenario where banks were funding balance sheets at an interest rate that was significantly above the yield of the underlying assets.

During that period, treasury bills were yielding an average of 70% while interest rates on the interbank market was 800% compounded daily and 300% compounded daily on the bank accommodation rate front.

Interestingly this view was confirmed in early 2006 as the top five major banks were reeling under the same interest regime threat. Those banks accumulated costly Treasury Bills portfolios from the central bank’s tight monetary policy regime. Many of them lost their capital due to the mismanagement of interest regime. This was exacerbated by the high statutory reserve requirements that shifted huge amounts of deposits away from the banking system to the central bank at no interest. Effectively as in 2003 these bankers were effectively paying out above 58% of all their deposits at no interest to the RBZ. As was the case with entrepreneurial banks in 2003 these top banks held huge costly TBs with yields averaging 300% but had to finance their positions at rates in excess of 850% through the overnight accommodation. The long term paper in terms of TBs was difficult to redeem prior to maturity resulting in banks being forced to seek recourse from the central bank’s accommodation window to fund short positions. Obviously this created a huge funding gap between their financing cost and the cost of their TB assets. As what happened in 2003 this scenario would wipe away the capital of these top banks and posed a real threat of bank failures. The Bankers Association of Zimbabwe had to appeal to the RBZ for relief. After considerable pressure the central bank reduced statutory reserve requirements and made amendments to the two year TBs. The questions that immediately emerge are:

1. why was the interest regime not cited or recognised as a cause of capital depreciation and potential bank failure for entrepreneurial bankers in 2003 but was recognised as such in 2006?

2. why did the Bankers Association of Zimbabwe not mount an appeal with the central bank then as it did in 2006? And

3. why did the central bank not consider relief measures to prevent potential failures such as reduction of statutory reserves or altering the interest rate regime in 2003?

The anticipated failure of some of the locally owned banks became a self- fulfilling prophecy after some of the older, foreign owned financial institutions refused to lend money to the distressed local banks, further exacerbating an already dire situation. The foreign owned banking institutions placed funds with the central bank despite there being demand for funds from the locally owned banking institutions. Given its responsibility of maintaining financial sector stability, the acceptance of the funds by the central bank, in direct competition with the locally owned banks sent a signal to the market that monetary authorities tacitly approved the ring fencing of the distressed banks, which led to a run on deposits and further forced the distressed institutions to seek accommodation at punitive interest rates.

From the above analysis it can be concluded that banks in 2004 were forced to finance balance sheets which consisted of low yielding assets with extremely expensive funds, effectively creating a scenario where bank’s share capitals where exposed. The central bank, being the supervisor of the banking sector had access to the ALCO assumptions of the distressed institutions and yet allowed interest rates to rise to levels that, on the basis of the ALCO assumptions, were guaranteed to result in a failure of the institutions concerned.

The effective devaluation of the Zimbabwean dollar through the newly introduced foreign currency auction system equated to a significant erosion of the banks’ capitalisation. Furthermore the central bank increased the banks’ minimum capital requirements. This further strained the struggling banks.

In early 2004 the RBZ leadership directed that there be a re-classification of nonperforming loans from six months to three months. This directive took away the breathing space from borrowers and had an adverse impact on their ability to pay back the loans. Banks were simultaneously burdened by the implementation of tight prudential requirements with a heavy debt provisioning cost. This in effect reduced profitability for banks and increased the burden on commerce.

The RBZ, citing international best practice, issued stringent corporate governance directives that forced owner managers out of their businesses despite the controversies, contradictions and lack of consensus that fill the literature on corporate governance. Barth et al (2001:3) after empirical research on bank regulation and supervision, categorically state, “There is no evidence that the best practice currently being advocated by international agencies are best, or even better than alternative standards, in every country”

In simple language, best practice is not generalisable. Worldwide there are numerous examples of banks with owner managers e.g. Sandy Weil was a major shareholder and CEO of Citicorp, with strong managerial control, for years. Locally the RBZ itself has the Governor as both CEO and Board Chairman. As at the end of 2006 the Board of Directors of the RBZ (RBZ, 2004) comprised four executive directors (the governor and his three deputies) and four independent directors. How then can the RBZ be modelling corporate governance to the financial services to which it directs that good corporate governance requires a preponderance of independent directors and a non-executive chairman of the board? The RBZ has on numerous occasions violated issues of corporate governance, e.g. the laid down procedures for the Troubled Bank Act, was not adhered to the schemes of meetings required before taking over banks, etc

The OECD issued its Principles of Corporate Governance in 1999 and comments thus about these principles (This comment applies to both the Kings Report and the Cadbury Reports on Corporate Governance): “Corporate governance arrangements and institutions vary from one country to another, and experience in both developed and emerging economies has shown that there is no single framework that is appropriate for all markets, so the Principles are not prescriptive or binding, but rather take the form of recommendations that each country can respond to as best befits its own traditions and market conditions
As Raymond Ackerman, pioneering founder of Pick & Pay, RSA so cogently argues, “corporate governance around the world is being subjected to a scrutiny so remorseless and to regulation so onerous that executives everywhere wonder if it will be possible to continue running their companies at all.”

Most of the over regulation on corporate governance is an overreaction to abuses –which of course need to be curbed “but not with measures so Draconian that they threaten the very existence of the organisations being disciplined”

In one seminar I attended on Corporate Governance one of the local gurus on this issue highlighted the need for entrepreneur-owners not to be involved in the management. In doing this he gave the examples of Anglo-American Corporation were the son of Nick Oppenheimer is no longer involved in management and of Duly’s where the surviving members of the founding family are still major shareholders but not involved in management. What was lost to the expert was the fact that it took Duly’s 75 years and Anglo-American a similar time period before the founding shareholder’s families could relinquish control to professional managers. And yet we require this of five to ten year old institutions. Something is wrong with our logic or analysis of data.

In the Zimbabwe Allied Banking Group (ZABG) which was formed under the auspices of the RBZ and appears to be basically controlled by it, corporate governance issues were breached with impunity. The RBZ directed that no one involved in a failed bank should occupy a senior managerial role in the financial services and yet about five top executives of ZABG, including the CEO, were involved in the so called failed banks. There were reports of directors of ZABG who have or had running contracts with the bank, in contravention of the guidelines on corporate governance. The heavy involvement of the central bank in ZABG when it represents the major shareholder is akin to the heavy managerial control of owner managers that it deplored at indigenous banks.

The central bank insisted on banks focusing on core business and issued stringent guidelines. However Barth et al (1999:6-12), after carrying out an extensive cross country research on bank regulation, conclude that:

1. Countries with greater regulatory restrictions on securities activities e.g. real estate, insurance and securities, of commercial banks, have a higher probability of suffering a major banking crisis

2. There were no beneficial effects observed from restricting the mixing of banking and commerce. In actual fact, forbidding this is associated with a greater financial fragility and bank instability.

3. Restricting banks to core business raises the net interest margin, resulting in negative bank efficiencies.

In summary, it can be justifiable that the real trigger for the banking crisis in Zimbabwe was the overzealous actions of the central bank which raised questions as to the real motives of the authorities in the whole exercise. Lack of good faith is apparent if one would consider the issues of unfair treatment of banks in similar situations e.g. Metropolitan Bank was implicated in corporate governance failure and alleged fraudulent activities through GMB bills but no corrective action was taken against it. CFX was allowed to continue trading even though it was under a curator. The formation of ZABG under the supervision of the central bank itself has been fraught with alleged violations of the law and corporate governance issues.

It has been argued that, although the financial sector was fragile, it would not have had to go through the crisis the way it did had the new central bank leadership used a different approach. Unfortunately, it took a warpath. A different approach used in similar cases yielded better results. In Malaysia and Norway, for example, the bad debts were ringfenced and acquired by a state agency, which enabled the banks to survive and be recapitalised.

One does not help a wounded friend by offering an extortionary loan that violates the laws of the land e.g. the prescribed rate of interest and the in duplum rule.

The regulatory authorities in Zimbabwe caused a depositor flight, refused to accommodate banks, issued stringent regulations and directives, which weakened the banks’ profit margins as well as restricting their ability to mobilise resources. They further plunged the financial services sector into chaos by withdrawing huge amounts of funds from the financial market during a tight liquidity crisis, further worsening the situation.

In Zimbabwean jurisprudence the burden of proof lies with the prosecutor and not the prosecuted i.e. people are assumed innocent until proven guilty. However the RBZ approach was to assume, before trial, that the owner managers were guilty of fraud. The RBZ acted in bad faith by penalising people who were not proven guilty. Interestingly, since the first alleged bank fraud involving United Merchant Bank (UMB) in 1995, there has been no successful prosecution of any alleged managerial abuse in the banking sector.

The massive use of the media clouded objectivity as the central bank had the entrepreneurs tried in the court of public opinion. Courts of public opinion are mostly based on emotions and one-sided information. Consequently the threshold for conviction is much lower than in formal legal systems. Once a person is perceived as convicted and viewed as a villain in the court of public opinion it is extremely difficult to shed the label.

The norm in the court of public opinion is that organisations are quickly presumed guilty until proven otherwise. The media particularly presents organisations as defrauding the public without full facts.

On the basis of available evidence it can be argued that by its actions, the Central Bank initiated a well calculated and premeditated collapse of the distressed institutions, with the intention of creating the Zimbabwe Allied Banking Group as well as reshaping the profile of players in the financial services. Retrospectively it is observed that the reshaping of the financial sector resulted in government through Allied Financial Services, becoming the main beneficiary of the financial crisis as it wormed itself into being a significant shareholder in most of the financial institutions. The government got a major stake in ZABG, CFX, NDH and in Intermarket through the questionable takeover by ZB Holdings (formerly Finhold) which is majority owned by government. Reports indicate that banks like Time Bank which refused to accept some shareholders identified by the central bank paid a huge price as they were cajoled, ridiculed, persecuted and finally had their licenses withdrawn.

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  • Reply Kudzai Mangwanya September 3, 2011 at 7:36 am

    Having worked in the banking sector during the peroid of huge disparities between repo rate,tb rate and interbank…..living in a hyper-inflationary climate in my homeland Zimbabwe,l urge u to read this.Brillant!!!!Surely my nation will restored to its former glory and beyond.

    • Reply nurturingchampions September 3, 2011 at 12:04 pm

      glad you found this useful. be blessed. Yes our nation has a brighter future. lets work to make that an quick reality.

  • Reply William Tafadzwa Dangare November 2, 2011 at 6:26 pm

    what a nice analysis but as a banking and finance student i would like to hear from you on how to maintain bank soundness

  • Reply Tinashe Inspired October 25, 2012 at 12:25 am

    Very informative! I always wondered what happened? Lack of respect for corporate citizens by authorities is disastrous to the economy.

  • Reply msarurwa courage May 3, 2013 at 7:38 pm

    what neccesited the increase in the minimum capital requirements in june 2012

    • Reply nurturingchampions May 4, 2013 at 7:28 pm

      Thanks for that question.It is difficult to say but from a preliminary analysis it looks to me like another ploy by RBZ to eliminate indigenous bankers. I am not sure that there is a meaningful rationale for a small market like ours with no institutional investors to have these high capitalizations. Imagine that to get any investors you have to get outsiders from Zim which means in effect after the process there will be no local indigenous banks. I am surprised at the RBZ active protection on the international banks while attacking local banks.

  • Reply roy October 23, 2013 at 10:31 pm

    thank you for such a glorious information and for such enlightment ,,,lm rilly helped on my assignment l was carrying out however l still hve some few fairly unanswered questions like the ones you ask in your report ,,,why the BAZ lodged the complain as as far 2006,,why the intrest regime not cited as a cause of capital depreciation, why theresreve bank not consider relief measures,,would be glade if u shade some more light on those questions or maybe u adressed them but ddnt understnd them well

    • Reply nurturingchampions October 26, 2013 at 3:28 pm

      These questions were rhetorical. They demonstrate the uneven playing field that entrepreneurial bankers were faced with.

  • Reply Lewis Tony Mutungura November 1, 2013 at 10:47 pm

    Your analysis really helped me in reviewing literature for my dissertation,but l would like to ask,can we consider the collapse of the banking sector as the main reason why the microfinance sector became popular?

    • Reply nurturingchampions November 2, 2013 at 8:33 am

      Am glad you found teh material useful. My view is that microfinance became popular because banking was to rigid and non responsive to the needs of people. At that time with hyperinflation coming the returns on microfinance were imitating inflation and in some cases were positive. Also note that at that stage microfinance was unregistered and unregulated and is it allowed the owners to do as they wish as compared to the highly regulated banking sector. You will recall that microfinance institutions became popular between 2000-2004. But mostly in 2003 before the banking crisis erupted.

      • Reply Lewis Tony Mutungura November 2, 2013 at 9:43 am

        Thank you Dr Makoni,but what to you foresee the future for microfinance firms if the banking sector is to be fully restored to what it was before?,will they be side-lined?

        • Reply nurturingchampions November 2, 2013 at 9:57 am

          Thanks for your inquiry. I believe that there is still a future for microfinance. Recently a new law has been established to create what are called microfinance banks with full deposit taking capacities. I believe these will play a prominent role as long as we have a huge informal sector which distrusts conventional banking with its rigidities. However the microfinance institutions which focus on consumer lending may struggle going forward. Microfinance worldwide still is attractive but remember these normal;y lend small amounts usually less than USD200 per person. But in Zim people do not want these small amounts but would prefer borrowing above 500 into thousands. This is why they then struggle with the high interest rates which normally would be comfortable for smaller loan amounts. Imagine 20% on $100 as compared to the same interest on 2000 bucks.

      • Reply Lewis Tony Mutungura November 2, 2013 at 10:48 am

        Thank you very much Dr for the quick and insightful response,l am currently working on a dissertation on the co-existence of MFIs and banks given a sound banking sector

      • Reply Lewis Tony Mutungura November 2, 2013 at 10:51 am

        If you have any material that you think can be of help l would be grateful if you could email me

  • Reply Lewis Makosa November 18, 2013 at 11:26 pm

    Well balanced facts that have been hidden all along.

  • Reply Jonathan December 7, 2013 at 2:03 pm

    What do you think are the factors that caused more bank failures after dollarisation especially after a raft of measures put in place by RBZ after the lessons of 2003 -8.? The post- multi currency era saw the demise of Interfin, Royal Bank, Renaisance and yesterday Trust Bank.

    A lot of questions come to mind:
    – could these bank failures have been avoided?
    – how effective is RBZ in monitoring banks?
    – enforcement of the regulatory framework
    – Generally and specifically for each failed banks, wha ar the major causes of the collapse of these institutions?
    – what can be done to avoid future bank failures?

    • Reply nurturingchampions December 11, 2013 at 8:28 am

      Thanks for your questions. My detailed contribution to the question are found on a book I published and is on amazon.com at the following link http://www.amazon.com/Entrepreneurship-Trial-Concepts-Principles-Zimbabwe/dp/1490943064/ref=sr_1_3?ie=UTF8&qid=1386742334&sr=8-3&keywords=DR+T.+A.+Makoni
      Most of your questions are answered simply as follows: The greatest cause of banking collapse was the regulator who was a threat to indigenous banks for reasons best known to the Governor who was then in office. RENaissance Merchant bank was put under a curator who within weeks indicated that the bank was sound and did not need curatorship but still was bundled into a new structure which defied an agreement that then shareholders hard reached with foreign investors for more funds than were availed by NSSA. Royal Bank was closed even when the RBZ was aware and was in receipt of confirmation of an investment that was being done by CBA from Kenya. The RBZ had actually met the investors and encouraged them. Trust Bank as was reported recently in the Press had actually reached an agreement with an international investor who was coming in as an anchor shareholder. So the closure of these banks all happened at a time when investors had confirmed to RBZ that they were willing and at an advanced stage of investing. I am tempted to conclude that the closures where actually intended to frustrate the potential investors. It should be remembered that during his 2012 December Monetary Policy statement the then Governor clearly stated that he had one more year and threatened that more bankers will leave before him.
      I believe his requiring a capitalisation of $100 million in an economy with no meaningful institutional investors was clearly aimed at destroying local banks. Obviously the market could not sustain those levels of capitalisation which forced banks to partner with international investors. So if you were allowed to partner an international investor who becomes an anchor shareholder you cease to be a local bank. See what happened with Kingdom Bank now AfraAsia Bank.

      I hope these gives an indication of my thoughts on these matters.

  • Reply lovemore March 25, 2014 at 4:07 pm

    thnks Dr for your article but my question is what other factors have contributed to the 2003/4 banking crisis apart from the central bank’s shortcomings

    • Reply nurturingchampions April 1, 2014 at 6:53 pm

      Thanks. The space is too small to cover all. I have detailed the main causes in my book located at Amazon.com called Entrepreneurship On Trial. Thanks

  • Reply chigwende March 25, 2014 at 4:10 pm

    thank you Dr but i would like to know with the recently published level of nonperforming loans how are they affecting external credit lines

    • Reply nurturingchampions April 1, 2014 at 6:55 pm

      Thanks for yours. I have not been following recent developments but am sure the eft would be negative. However it seems that some of the banks with high non performing loans also have strong balance sheets and have been able to access African regional banks based credit lines.

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