Commentary: Banking in Zimbabwe. The licence explosion

In this series, we have looked at Zimbabwe’s building societies and banking in the earlier days. This episode covers the licence explosion after the mid-1990s. The next issue will look at the history of merchant banks, discount houses and will round off with the current state of the banking sector.

HARARE – The tight commercial banking system in Zimbabwe, which saw just five commercial banks in the country by the mid-1990s, suddenly exploded between 1995 and 2009. A total of 15 new commercial banks were licenced and opened their doors. Seven were later closed, voluntarily for a few, but some because they had collapsed.

By the time the new and much higher capital requirements had been implemented in the mid-2010s, the eight survivors were solid and an accepted part of the financial landscape, along with the older five.

The eight are, in alphabetical order of present names, AFC Commercial Bank, Banc ABC, Ecobank Zimbabwe, FBC Bank, Metropolitan, Nedbank Zimbabwe, NMB Bank, and Steward Bank, with the present names.

Four of these banks arose out of merchant banks or discount houses: Nedbank Zimbabwe, BancABC, NMB Bank and Ecobank Zimbabwe, although Ecobank only spent two years as a discount house. A fifth, Steward, started life as a micro-finance institution, spent a bit of time as a subsidiary, fortunately an independent one to one of the banks that later failed. It then became the last of the new commercial banks.

AFC Commercial Bank has roots that go right back into the depths of State financing of Agriculture via the old Land Bank and the Agricultural Marketing Corporation.

Besides these six, with their roots in different types of financial institutions, there are two which were founded as commercial banks by local shareholders, FBC Bank and Metropolitan – however it may be viewed. The seven failed or closed banks were all in this category. We had the interesting position that those new commercial banks that acquired a commercial banking licence to upgrade older operations all survived, while only 22 percent of the straight foundations made the grade.

The decision to allow a plethora of new commercial banks, after what amounted to a century of a very tight licencing regime, was driven by a number of factors.

The need for indigenisation!

For a start all five existing commercial banks had been founded by external owners, although in the 1980s at least a local company registration was created and, as in the case of Barclays, a small percentage of shares were sold after a local flotation. Political considerations saw the external South African shares of Zimbank sold to the Government, although the bank had been floated on the stock exchange in 1967. The Government was forced to take over BCCI Zimbabwe as CBZ, and again it was floated but not until 1998. But basically banks were externally owned, or Government-owned with the commercial banking sector having no real private sector Zimbabwean ownership.

In particular there was a desire for indigenous Zimbabwean ownership. By the time the licence explosion occurred most of the top posts in the five commercial banks were filled by black Zimbabweans, in many cases the top few levels by people of almost the same age and at least a couple of decades from retirement, so promotion for many was likely to be very difficult.

But the point was that there was a reasonable pool of Zimbabwean banking talent and that a fair number of very able bankers would be available to staff, and even own, new banks.

Secondly it was felt that the arrangements between the five commercial banks were ultra-cosy, with minimal competition and almost identical services and charges. Generally banking was seen as exceptionally stable and serene, with what almost amounted to guaranteed profits. Government pressures to extend branch networks did produce results, but even here, the banks tended to consult and co-operate to work out who would open each new branch in the required locations.

It was decided to make opening a bank much easier, and in retrospect the low capital requirements and what turned out to be inadequate ownership rules, with even single individuals or very small groups allowed to own almost all the shares of a bank, creating dangers.

Since no one, at least since the early 1980s when BCCI with what became CBZ, had ever opened a new commercial bank in Zimbabwe, some of the start-up precautions that were seen later to be absolute necessities were not imposed at the beginning. CBZ, had been a special case and turned to reasonable account after a Government rescue.

A complication that sticks out, is that the sudden explosion in commercial banking licences was simultaneous with ESAP, and could be thought of as part of ESAP. With fast growing inflation rates, what was seen later as the start of the hyperinflationary period, grew worse during the heyday of the new licencing regime.

But again, there was little experience of a competitive market economy and zero experience of high rates of inflation. These were simply extra challenges for the new banks.

The 90s survival series

One advantage that the new banks that had roots in some older financial institution, whether merchant bank, discount house, acceptance house, micro-finance operation or even a Government parastatal, is that they had customers ready to hand when they opened their doors as a commercial bank. They needed many more, of course, but having some already gave them word-of-mouth recommendations and also a higher level of trust.

In 1997, FBC was the first of the eight survivors to open as a commercial bank, named then as First Banking Corporation. It was a direct commercial banking newcomer, set up by a consortium of people involved in banking, but fairly well known in business circles. So it was backed with business banking as well as salary banking. It acquired a bit of a reputation for seeking new business aggressively, and this worked.

The holding bank was floated on the ZSE in 2001. In 2004, the bank was renamed FBC Bank as the holding company FBC Holdings was created. It has diversified by buying a building society and the then Eagle Insurance and adding other subsidiaries.

As a sign of its continued growth and strength, the bank now being the largest of the 90s eight, FBC bought out the operations of Standard Chartered in Zimbabwe. FBC is now one of the largest banking group in Zimbabwe, and can be able to claim the title of the oldest, if it wants to date itself from the arrival of John Boyne on the stage coach. NSSA is its largest shareholder, although neither a controlling nor majority shareholder, just an investor in a listed company.

‘99 was a very good year’

1999 was a busy year for new banks. Three of the eight survivors opened their doors as commercial banks that year.

Metbank kicked off in April when Metropolitan Bank was founded by Enoch Kamushinda with the then PTC Pension Fund as the other shareholder. Kamushinda had built up a large property portfolio in the 1980s and 1990s which he used to back his bank. Metbank ran into difficulties over capital as the capital requirements were raised, but in the end brought in external investors, mainly ‘Malaysian’.

In June 1999, AFC Commercial Bank opened as Agribank in the middle of the licence explosion as the Government wanted a commercial bank to work with farmers. Built on the Agricultural Finance Corporation and with roots going back to 1925 and the foundation of the old Southern Rhodesia Land Bank, this bank with 100 percent Government ownership was from the start stable outfit and just limited by the number of farmers with spare money who were not already a customer of another bank.

In December 1999, NMB, a discount house set up in 1992, was licensed as a commercial bank. The founders were a fairly tight group of Zimbabweans, with family and in-law ties. It was listed, while still a merchant bank in 1997, which helped create the capital base and spread the ownership. The bank had a slightly rocky progress to meet the rising capital requirements, but succeeded with some good interventions.

In 2003, the oldest merchant bank, Merchant Bank of Central Africa founded in 1956, was converted into a commercial bank by the Old Mutual and Nedbank group, as MBCA. This gave Old Mutual a hi-lo market bracket with CABS using its building society licence to offer the fullest range of services such a licence allowed. In 2018, the bank changed its name to Nedbank Zimbabwe, reflecting the name of its majority shareholder, although Old Mutual Zimbabwe was number two on the list.

In 2004, what is now Ecobank Zimbabwe, opened as a commercial bank. This bank was founded as Premier Discount House in 2002. The founding consortium brought in extra shareholders and moved to Premier Banking Corporation with a commercial banking licence in 2004.

But as the capital requirements were tightened the owners needed to look at a more imaginative solution. Ecobank of West Africa wanted to enter Zimbabwe and through a significant US$10 million investment bought a majority stake in Premier. Premier was rebranded as Ecobank in 2011, and later, in 2015, Ecobank acquired the last significant block of shares it did not own and now holds more than 99 percent of the bank.

The last two of the eight newcomers became commercial banks in 2009.

Banc ABC went right back to the 1950s, with the 1956 foundation of First Merchant Bank. In 1999, the owners of what was FMB Holdings and number of other discount houses and financial businesses in Zimbabwe and Botswana, such as UDC, Bard and UCL of Botswana, combined all the businesses into African Banking Corporation Holdings using the FMB merchant banking licence. The 1999 primary listing on flotation was in Botswana and the Zimbabwe secondary listing in 2000.

As capital requirements increased during the 2000s, all the semi-autonomous bits were combined to meet the merchant banking requirements. A decision was taken to move the bank up the market to a commercial bank, and BancABC was licenced as a commercial bank in 2009, near the end of the licence explosion after a very detailed inspection by the Reserve Bank of Zimbabwe which was now very careful in how it performed licencing.

The last born!

In February 2009, what is now Steward Bank became a commercial bank called TN. The bank traces its ancestry to a small micro-finance company, Calmor, set up in January 1995. Trust Merchant Bank acquired 40 percent of Calmor in 1997 and renamed it Trustfin. In the early 2000s, Trustfin was registered as a financial house. It was sufficiently independent of Trust Bank as it survived the collapse of that bank when it was placed in curatorship in 2004. TN Financial Holdings acquired 75 percent of the equity in 2006. TN upgraded the licence to a commercial banking licence in 2008 but it was only the following year that commercial banking operations started. By this stage the Reserve Bank was active in pre-approval processes.

TN Holdings went public at the end of 2009 through a reverse takeover of Tedco. TN had become very active after dollarisation in the credit furniture business, something Teddy Cohen the founder of Tedco had been doing in the 1960s and 1970s, so the reverse takeover followed the business. TN bank pushed debit cards more strongly than most banks at this stage, and was an important part of the rapidly growing TN Holdings. Then came the brick wall.

By 2012 the pent-up demand for credit furniture by those with incomes from the formal sector had largely been met, and there were few new customers. Older customers were still paying off, and new businesses, with the then Innscor taking a lead, were competing. This created problems as bank capital requirements were raised.

TN Bank was demerged from TN Holdings, which became Lifestyle Holdings, and was listed separately on the ZSE in 2012 and Econet Wireless Zimbabwe injected US$20 million in return for a 45 percent shareholding. The next year the Reserve Bank allowed Econet to buy the rest of the shares, and in 2013, TN Bank was delisted from the ZSE and a few months later Econet bought out the last of the minority shareholders and renamed the bank Steward Bank. It became an Econet bank, grouped with the rapidly growing Ecocash business and when the telecommunications and financial businesses of Econet were split, Steward went with Ecocash Holdings, for a while under a different name, where it remains.

The failures

Meanwhile, a group of other banks had been founded and had failed or decided to close. One, Barbican, was asked to close when the Reserve Bank thought its capital base was too small, and did so, paying off depositors and creditors and ending without owing anything.

The first of the new commercial banks, Kingdom set up by Nigel Chanakira in 1995 almost managed the same, after Chanakira had in effect sold a controlling shareholding of the bank earlier to AfrAsia Bank of Mauritius, something in later years he regretted. The sale went through because of rising capital requirements and this appeared to be the only way to get the additional capital. AfrAsia in the end pulled out of Zimbabwe, abandoning the bank.

The other five banks that failed all went into curatorship, with depositors suddenly finding the doors locked. The new Deposit Protection Corporation, only set up in 2003, became responsible for the liquidation of assets and has paid off the smaller depositors although some larger creditors never received full value. These five banks were Trust, Royal, Interfin, Genesis and Allied, along with three lower level discount houses, Sagit, Century and Rapid. An attempt to combine some into the Zimbabwe Allied Banking Group under Reserve Bank direction, failed when original shareholders launched legal challenges.

In several cases, investigations found that a major factor in failure was a tendency for some of these banks to be lending depositor funds to directors and their businesses irresponsibly. The failures were pushed by the rising inflation rates and the growing capital requirements. This led to new banking rules that saw maximum percentages of shares that a single individual could own in a bank, better governance requirements, and growing capital requirements.

The upshot is that there have been no new commercial banks since the licence upgrades of BancABC and Steward Bank in 2009, and those two upgrades came after a very detailed Reserve Bank investigation in both. – finx