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BELLY UP . . . AfrAsia Zimbabwe was capitalised at $6,01 million, way below the December 2014 benchmark of $50 million and even below the initial $25 million hurdle set soon after the dollarisation of the economy, according to the 2015 Monetary Policy Statement

The year 2015 appears to be one of the worst for the banking sector especially if one infers the events that have taken place between the month of January and February alone.

In early January, ailing Allied Bank voluntarily surrendered its banking licence while Interfin was placed under provisional liquidation.

The latter’s decision for provisional liquidation arose after the expiry of the recuperative curatorship which it had been placed on since June 2012.

As we approached the end of January, the only merchant banking shop in town, Tetrad Investment Bank, was placed under judicial management.

This was a first in the sector as most banks were traditionally placed under curatorship.

During the month of February, the Reserve Bank of Zimbabwe also advised the banking public that AfrAsia Zimbabwe had voluntarily surrendered their banking licence.

Subsequently, the bank was placed under provisional liquidation. Reasons advanced by the central bank were that the institution was grossly under-capitalised and facing chronic liquidity challenges.

According to the 2015 Monetary Policy Statement, AfrAsia Zimbabwe was capitalised at $6,01 million, way below the December 2014 benchmark of $50 million and even below the initial $25 million hurdle set soon after the dollarisation of the economy.

In light of this, the registrar determined that cancellation of the licence was in the best interests of the institution’s depositors, creditors and members.

In all these four events, it is clear that depositors and creditors (including labour in situations where salaries were outstanding) have been the biggest losers.

This miserable reality has been coming on the back of indigenous bank owners who have been the ultimate winners, most of them reportedly living large despite having clearly abused huge depositor’s funds.

Be that as it may, the recourse being taken by AfrAsia Zimbabwe Bank of heading for provisional liquidation heralds a possible constructive twist in the sectors’ regulatory framework towards failed banks and may mitigate losses to depositors who have always been on the receiving end.

Traditionally, distressed banks have been placed under curatorship first before being handed over for provisional liquidation and final liquidation.

The simple reason of curatorship being that of trying to provide a new lease of life to an already failed, insolvent institution.

RBZ described it as follows when it placed Interfin: “The primary purpose of placing the banking institution under curatorship was to protect depositors and preserve assets of the banking institution, with the intention of resuscitating the banking institution to become a viable concern.”

A number of case studies have miserably shown that curatorships do not work as no bank has ever recovered after such futile exercises.

Interfin being the last or recent example whilst other banks such as Renaissance, Royal Bank and Trust were once placed under this option to no avail.

Reality seems to be knocking the minds of regulators, depositors and the public at large that only the “appointed curators” benefit from such schemes at the expense of depositors.

Against such a background, though it is not clear whether it is the RBZ which ordered for provisional liquidation or the bank itself, this appears to be the right call in the domestic set up.

The major reason being that it increases the chance of depositors and creditors recovering at least something relative to a scenario where liquidation is instituted after curatorship.

For every dollar deposit, depositors are better off if liquidation is pursued first rather than after the curatorship process.

Assuming it was AfrAsia Zimbabwe’s call for provisional liquidation, we are of the view that it was a perfect move as the investment proved costly after the $30 million injection failed to close the hole and bring normalcy back to the ailing institution.

Consequently, making a decision to exit implies that they are going to significantly minimise their overall losses. This is essential as some allege either that the group had been sold a dummy by Nigel Chanakira as their total liability currently stood way above $100 million; or rather an incomprehensive due diligence exercise had been done.

On the other hand, assuming it was the RBZ’s call for the decision, it somehow safeguards its reputation.

This is increasingly spot-on as placing AfrAsia under curatorship would have culminated in a scenario where the RBZ made or repeated the same mistake of curatorship over and over again.

We are of the view that this may be a paradigm shift by the new governor away from theoretical practices and coming up with feasible and customised measures of dealing with troubled banks.

Such a move also made reasonable sense as it now appears that most bankers having been delaying the inevitable by convincing the RBZ of their search for investors.

A classic example is that of Interfin which according to the RBZ notice cited that its curator considered 12 potential investors yet none of them had positive results, subsequently deteriorating the already dilapidated situation.

The Deposit Protection Board also benefits from this move as time is always of the essence.

For instance, had Interfin been placed under provisional liquidation in 2012, disposal of assets would have yielded to better proceeds compared to the current situation where the economic fundamentals and liquidity position in the economy has worsened.

Another interesting view about the provisional liquidation route is the fact that though not desirable due to the longer time it takes, is a better devil compared to mergers which have been advocated for weak banks.

Merging weak banks from our perspective would not improve the sector as most of these players are the reasons why the overall non-performing loan (NPL) ratio has ballooned according to the central bank.

In addition, it is also dawning on investors that they are better off setting up a new shop than taking over distressed banks with high reputational, operational and any other risk one can ever think.

Overall, whether the provisional liquidation call for AfrAsia has been sheer coincidence on the part of the RBZ or not, we see the move as a new wave in cleaning up the sector.

Other developments such as the setting up of the ZAMCO in dealing with non-performing loans and operationalisation of the interbank market will also enhance the recovery of the sector.

In conclusion, as most indigenous banks are folding with seven now being the number since 2009, the next million dollar question remains on whether the sector is overbanked or not. – Wires.