The Case of Indingenous Banks and Proposed Way Forward

The Introduction.

 The government of Zimbabwe has set indigenization and empowerment as critical strategic goals under the ZiMasset framework. They have also set themselves the goal of creating SMEs. There is no doubt that SMEs are the major drivers of economic growth through innovation and employment creation. However we have seen local banks being decimated. The investment in BancABC while being laudable is one aspect of the emasculation of the local banks shareholders.

 In this paper I explain the situation of indigenous banks, their role in empowerment and a way to encourage more of them.


  1. The Purpose, Need and Rationale,

 The Purpose: The purpose is to advocate for more economically enhancing policies andpositions to empower indigenous banks and show how they are better positioned to advance the cause of indigenisation and empowerment. Finally the paper recommends a way to strengthen these indigenous banks as part of the empowerment agenda.

 The Rationale: A closer look at the banking sector and its history will show that theliberalisation of the financial sector embarked on from 1993 onwards resulted in a mushrooming of indigenous banks. This was immediately followed by a significant growth in economic activities by indigenous people and local entrepreneurship thrived from 1994- 2004. The monetary policy for the last eight years has in effect created a policy inconsistency as it reversed indigenisation in the financial services which in turn decelerated indigenisation nationally as banks were sources of funds for entrepreneurship. This monetary policy position was in my opinion misinformed on the causes of the banking crisis of 2003-2004. I have written extensively on the analysis of the actual causes of this crisis elsewhere on this Blogsite as well as in my book – Entrepreneurship on Trial. The rationale behind this paper is that the local indigenous banks are the engine for economic growth1. The indigenous banks should therefore be protected and empowered for them to accomplish this goal. I propose a way of doing this without causing too much challenge to the economic infrastructure in this paper.

There has been a successful concerted effort to reverse the gains of indigenisation by the previous monetary authorities. For example they clearly supported and defended multinational banks while making indigenous banks vulnerable. For instance asking local banks to be capitalised to the level of $100 million when there are no institutional investors with capacity in the country to invest in these banks was tantamount to signing the death penalty for indigenous banks. The recent monetary policy shift to reschedule compliance with these capitalisation plans are laudable and are definitely a step in the right direction.

The other issue is that by asking shareholders in local banks to not have any managerial involvement the monetary authorities hamstrung the industry and stopped its development. Why would someone invest in starting a bank and then not be involved in running it. There is no incentive for investment here as the decision did not consider the life cycle of the business or the fact that a banker who starts a bank cannot work for another bank as he would be conflicted. In effect this decision rendered any person who starts a bank unemployable as a banker and yet unable to generate income from his own investment. This resulted in people trying to form holding companies which would be involved in other activities so that the founders can generate income. Obviously they could not depend on dividends which are erratic. Before providing some recommendations let me explore the benefits of indigenous banks by reviewing their impact from 1994-2004 on the national economy.

 Impact of Indigenous Banks to the National Economy Diversify Economic Base

 Entrepreneurial banking activity in Zimbabwe created a profitable industry that became the beacon and pride of the nation at that time. This helped diversify the nation’s economic base.

 Indirectly, as bankers competed they made financing structures available to different entrepreneurs from different sectors. This improved access to funding and financing structures for both management buy outs/ins and green field ventures. New industries that sprang up due to the availability of funding played a prominent role in the diversification of the national economic base. Arguably the traditional banks at that time, having been the preserve of the non-black community, would have turned down the application for funding due to lack of collateral. Entrepreneurial organisations enhance the diversity of a nation’s economic base while providing it with the opportunity to respond to a variety of global market conditions. Consequently entrepreneurship increases the nation’s global competitiveness.

 Zimbabwean banking became the envy of the region as it outbid even RSA based banks on major regional projects. This validation is evident when one considers that most bankers who left the country were absorbed into the neighbouring countries’ financial sectors. An informal survey indicated that a significant number of these have distinguished themselves in those countries.

 Engine for Economic Growth

 The success of entrepreneurial banks inspired the entrepreneurial spirit in other sectors of the economy. Other entrepreneurs emerged. The economic growth generated by entrepreneurial bankers became the core engine for a virtual cycle. The success of the initial pack of bankers created more growth as other bankers and entrepreneurs flexed their entrepreneurial muscles. This explains the explosion of entrepreneurial activity between 2000 and 2005. The bankers made access to capital finance easier at the time when the hyperinflationary environment made borrowing fashionable, due to negative real interest rates prevailing on the market. The successful bankers in turn invested portions of their newly acquired wealth in other entrepreneurial ventures, as either informal and angel investors to business concerns run by close family and friends, or as venture capitalists as they sought equity in green field investments from other industries.

 For example, despite the negative perceptions so generated, the demutualization of FML would not have been possible without the participation of Trust Bank as a strategic partner and the funding afforded Capital Alliance by a consortium of indigenous banks. A number of bankers have re- invested part of their wealth into other sectors of the economy, e.g. horticulture, hotel and leisure etc.

 During the foreign currency crisis of 2002-2003, the entrepreneurial bankers kept industry and the government supplied with the precious commodity. The availability of foreign currency through Century Bank, NMB and Intermarket’s interventions during that time, were critical to the survival of the economy when the formal market dried up. It is a pity that these bankers were later considered criminals after saving the nation then. Trust Bank has been much maligned for creating innovative structured finance instruments that saved Willowvale Motor Industries and Willdale Bricks. Trust consequently saved precious jobs and safeguarded theviability of these organisations. Ill-informed allegations of speculative investments were circulated by the Central Bank, yet an RBZ sponsored investigation cleared Trust of any misdemeanour, and this was not published.

Certain segments of society which had no access to banking products that were reserved for the elite were given a fair chance to access them. Many indigenous people had minimal collateral and hence failed to get loans from established multinational banks.

However the entrepreneurial banks assessed not only the collateral but also the viability of the project and thereby created structures to fund the projects based on viability and other forms of security. This increased access to financial products, resulting in many people’s lives being improved.

 Employment Creation

 During the period 1995-2005, the economy was in turmoil and a significant number of large companies were rationalising and restructuring. Other companies closed down due to viability challenges while numerous multinational conglomerates either trans-located to neighbouring countries or moved a significant portion of their productive capacity outside Zimbabwe. This led to massive retrenchments and the unemployment rate rose past 70%. The entrance of entrepreneurial bankers led to a fast growing financial sector, which created jobs. At a time when most industries were shrinking, the financial sector contributed to the reduction of unemployment. Another effect of this was the retention of critical banking skills in the country.

 Some bankers who had left the country returned and used their skills to help develop the economy. This was at a time when the country suffered a huge haemorrhage of its skills as professional and skilled people left the country. However the blooming banking sector, driven by entrepreneurs, had drawn people back to the country.

 Due to intense competition for critical staff, banks offered incredible benefits to key employees e.g. significantly reduced financial loans for purchases of houses and vehicles.

 This in turn improved the demand for rental properties and vehicles, resulting in an explosion of vehicle sales, construction and real estate industries. The downstream benefit was increased employment opportunities in these industries as well.

 Indirectly, these bankers preserved jobs by providing sources of bridge funding for distressed firms to restore their viability, thus circumventing retrenchments. Informal sector funding provided home-based businesses for the livelihoods of those who had been retrenched.

It can be argued, therefore, that banking entrepreneurship slowed down the rise in the unemployment rate as well as creating secondary wealth (social benefits, housing etc), benefited downstream industries e.g. car dealerships and construction industries, and drove salaries and wages up.

 Local Control and Accountability

 Developing countries complain of exploitation by multinationals as most of the financial resources and profits leave the country. Politicians and activists were baying for the blood of executives from multinational banks e.g. Barclays and Standard Chartered, arguing that their activities were not benefiting the local economy, nor were they accountable to the Zimbabwean people. The rise of entrepreneurial local bankers created local control and accountability of banks.

 The prevailing situation now is that the national political agenda is subject to the same multinational banks who have no interest in promoting empowerment and indigenisation. While the multinational banks have huge deposits they have not released these funds into the market to fund the productive sector despite government insistence. They obviously are accountable to foreign interests and not to local interests. Banks play an intermediating role by mobilising deposits and then releasing them to fund those who need them. But I have heard the MD of one of the top three multinational banks claiming that while they sat at about 200 million dollars in deposits, they would not released it to the market because it was not their money. Yet no bank owns the money in its deposits. Is it possible there is a collusion between multinational banks and multinational companies not to release the deposits for financing industry and hence sabotage the economy? It has to be noted that immediately post July 31st election results a significant flight of funds out of the country was noted out of eth multinational banks. Does this not constitute the main reason for the liquidity crunch that hit the country then. This was money from multinational companies and investors. This clearly demonstrates that that overdependence on large conglomerates or multinational banks supported by international finance is unhealthy. Their funds can be moved any time in protest to government positions or in sympathy to policies of their home governments. An example is huge corporations which either slow down operations, withdraw investments or transfer manufacturing capacities to cheaper economies at will, especially when the local economy is in turmoil or there is political risk, as in Zimbabwe. The larger conglomerates may be affected by political decisions or legislature in their countries of origin.

 For example US based corporations may be dissuaded from doing business with a country perceived by the US State Department to be a rogue regime. When a developing country’s economy is heavily dependent on these conglomerates, they become beholden to their shareholders and sometimes even national politics can be controlled by these conglomerates.

This poses both a policy risk and a security risk. I do not believe we are managing these well at the moment with the accepted demise of local banks.

 Up to 1994 Zimbabwe’s banking industry was controlled externally. The multinational banks started downsizing, due to the political risk associated with their perceived improperly handled land reform programme. Lending was reduced and industry was affected. The emergence of the entrepreneurial bankers covered the gap left by these multinational banks. For example in some small towns, there was a threat of the communities being left without banks once the larger banks withdrew. However, entrepreneurial banks like Royal and the former Century saw the opportunity and moved in, alleviating the problem.

 But with current policy we are moving ourselves as a nation into the same position of vulnerability again.

 Increased Tax Revenue for the State

 The success and profitability of the banking sector, driven by the entrepreneurial bankers, contributed significantly to the national fiscus through taxes. Corporate, income, property, social security and sales taxes rose, to the benefit of the national economy.

 Inspired by the super profits in the banking sector, the State imposed a 5% banking levy on bank profits. Indirectly, as funding became available, people could afford to purchase more goods, resulting in increased sales tax.

 The improved revenue collection by local and national government from the entrepreneurial activity resulted in the government reinvesting some of these proceeds to improve the social and economic infrastructure e.g. in education and health.

 Context of Recommendations

 Obviously as a country with the collapse of indigenous banks we are losing the aforementioned benefits and creating serious policy failure and security risks. The benefits explained above show that local banks can be a major force towards both indigenisation, empowerment and local control of the economy.

 It should be emphasized that indigenisation and empowerment manifest in three ways for ZiMasset to succeed as follows:

 a)      An increased control of the equity of current companies through the 51% equity. However as long as the multinationals have managerial control one can have equity but no dividend is declared and so no immediate economic benefit is achieved. Through the management contracts the multinationals can ensure they are receiving their economic benefits through the contract and not through dividend declaration.

 b)     Through creation of SME entrepreneurial ventures which have been recognised worldwide as the major source of economic growth. This enables new venture creation which in most cases can be 100% owned or at least majority owned by locals. The President has alluded to this as another aspect of indigenisation and empowerment. However the best way to fund this as noted in the benefits of local banks is from the indigenous banks. So we need these to drive this aspect of our economic policy.

 c)      By ensuring that multinational companies are required to allocate a certain quota (e.g 30%) of total deposits into local banks. These long term deposits will stabilise the banks and become available to fund the entrepreneurial activities mentioned in b) above. Similarly multinational banks should be required as a matter of policy to allocate a similar percentage of their deposits into financing indigenous entrepreneurial ventures which are already viable.


 In light of the above discussions and in view of the causes of the banking sector crisis, here are my recommendations to the policy makers in terms of local banks and the ZiMasset Policy:

 a)      Both monetary and fiscal policy should ensure that they support the emergency of local entrepreneurial banks as these are critical to the economic well being of the country. The rescheduled capitalisation requirements is s step in the right direction,. However the instruction to scale down to microbanks is not recommendable as these are expenses sources of financing which will hamstring entrepreneurial ventures. We need to do everything in our power to save local banks. In terms of capitalisation it may be prudent to consider designating investments into indigenous banks as prescribed assets by institutional investors like Pension Funds and Insurance companies. This in our view will redirect their investments funds productively rather than investing in buying existing commercial rental real estate as they are currently doing.

 b)     It  is  advisable  to  stabilise  indigenous  banks  by  legislating  that  part  of  indigenisation requirements for international companies is that they deposit a certain portion of their total income into local banks. This has already been explained above. Local banks have been suffering from high cost short term deposits which cannot be used to generate income and grow capital while financing local ventures. These long term deposits will stabilise the banks, provide liquidity and at the same time will be used to finance entrepreneurial ventures by the banks and so help reignite the economic growth. This policy intervention will increase funds available for financing productive sector while stabilising local banks and reducing vulnerability of the economy to multinational institutions whose core loyalties are outside Zimbabwe.

 c)      In terms of capitalisation of local entrepreneurial banks it may be prudent to consider designating investments into indigenous banks as prescribed assets by institutional investors like Pension Funds and Insurance companies. This in our view will redirect their investments funds productively rather than investing in buying existing commercial rental real estate as they are currently doing.

 d)     On a similar note efforts should be expended to ensure that the primary banking accounts of multinationals are based in Zimbabwe as this avoids the issue of manipulating prices be selling to their outside Zimbabwe subsidiaries and well as depriving the nation of taxes due to price manipulation.

 e)      The issue of multinational companies giving contracts to locals is also crucial ins indigenisation. When locals have no capacity then the policy should direct that any foreign company should work together with locals in order to capacitate them, effect skills transfer as well as empower local industry.


 We firmly believe that this policy initiative will greatly benefit both the country and local industry while facilitating the ZiMAsset goals. We would be interested to hear the thoughts and ideas of others on this paper.


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  • Reply tb April 3, 2014 at 4:33 pm

    Your sentiments are resonating deep within me sir.This year the indigenous banks have suffered.May Tetrad survive!

  • Reply stephen mashingaidze April 3, 2014 at 4:41 pm

    The above paper has highlighted critical issues but the Government and private sector in this case bank entrepreneurs are playing the cat and mouse game, increasing the capital threshold without considering the dynamics of innovation and technology is disastrous, foreign banks will continue to benefit and we have the asset strippers and policy makers who miss the understanding of trust and confidence in the banking sector. Restoring confidence requires a complete change of attitude by both investors and the regulators. To start with the informal sector is larger than the formal sector, ecocash is a great innovation and Zimbabwean banks must move away from traditional banking and regulators must create an enabling environment. Zimasset whilst a good starting point we need to restore confidence by bringing a team approach to this matter. I agree with all the five recommendations but this can be sustainable if the same Pension Funds and Insurance companies unlock value from non performing real estate assets. The Stock Exchange Valuation and pricing of shares and most assets of the Listed companies must be examined with a critical eye, where is the value creation that all policy makers and entrepreneurs are making noise about.Zimbabwe at this stage needs team players and focused public sector and private sector managers in tackling the desired strategic objectives of Zimasset and other policy initiatives. The economy is now a Digital one , and the Indignation policy must create capacities and ensure the implementation of the legal provisions does not encourage retaliatory behavior by international institutions.

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