INTERNATIONAL ASSOCIATION OF DEPOSIT INSURERS Resolution of Problem

INTERNATIONAL ASSOCIATION OF DEPOSIT INSURERS Resolution of Problem Banks: Purchase and Assumption Option Session 19: Recent Bank resolution Experience- Zimbabwe Presented By W MANDIZVIDZA Deposit Protection Board Zimbabwe Abuja , Nigeria May 9 th – 13 th , 2011

OUTLINE • Introduction • Rationale for Setting up Deposit Protection Scheme. • Causes of the Banking Crisis • Bank Resolution Methods Adopted • Challenges Faced By DPB and Central Bank • Enhanced Supervisory Processes • Concluding Remarks

Introduction • Since independence in 1980, Zimbabwean banking sector was relatively stable. • After 1995, banking sector started exhibiting distress signals when 6 institutions were identified to be clearly insolvent(CBZ , Zimbank , ZBS , United Merchant Bank , First National B/S & Universal Merchant Bank). • Government responded by bailing out 3 of the affected banks( CBZ, Zimbank & ZBS).

Introduction(cont) • One bank was liquidated in in 1998 (United Merchant Bank) , whilst 2 banks were placed under curatorship (Universal Merchant Bank and First National B/S). • During this period there was no explicit deposit compensation arrangements in place and the winding up of banks was governed by the Companies Act. • The liquidation of banks through the provisions of the Companies Act, proved cumbersome , time consuming and did not accord depositors priority in claims settlement.

Establishment of Deposit Protection Scheme • Depositors endured undue hardships as they could not easily access their funds upon bank closure. • It is in light of these events that the government saw it fit to establish an explicit Deposit Protection Scheme. • This led to formation of the Deposit Protection Board(DPB) in July 2003.

Establishment of Deposit Protection Scheme(cont) • DPB is currently operating as a pay box and its role during the 2003 -2006 crisis was confined to reimbursing depositors in the event of a bank failure. • The Central Bank played a more prominent role during the 2003 -2006 financial crisis. • DPB started operations at a time when the financial sector was in the middle of its worst financial crisis since the country attained its independence in 1980.

Number of Institutions affected by the Financial Crisis • The year 2004 saw 9 Financial institutions being placed under curatorship/receivership, • 2 discount houses were liquidated in 2004 ( Rapid & Century Discount Hses) • Whilst, a Finance House (Sagit Finance) was liquidated in 2006. • First time since independence to have more than 10 distressed institutions facing collapse.

Causes of the Banking Crisis 2003 -2006 A number of factors contributed to the crisis. • Unstable macro economic environment-inflation 7 % in 1980, 622% in Jan 2004 and by Jan 2006 inflation had risen to 1281 %, whilst the economy shrank 8. 5 % in 2003 and a further 4. 5% in 2004. • Diversion from core business to speculative activities; purchase of bricks, cars, real estate , shares etc • Inadequate risk management systems • Poor corporate governance structures- poor board oversight , dominance by a few shareholders & improperly constituted boards.

Causes of Banking Crisis(cont) • High levels of non performing insider loans • Overstatement of capital – under providing for non performing loans. • Chronic liquidity challenges- flight to quality, deposit flight from indigenous banks to international banks perceived as less risky • Lax prudential supervision

Measures Put in Place by the Reserve bank to Deal with Troubled Banks • Troubled bank Fund • Corrective orders • Troubled Bank Resolution framework

Troubled Bank Fund • At the height of financial crisis, RBZ created the Troubled Banks Fund (TBF). • The purpose of the fund(public funds) was to resolvency and liquidity deficiencies in banking institutions. • Some of the institutions which accessed the funds, not only failed to repay the loans, but also failed to recapitalize- cost of funds 900 % per annum by December 2003.

Corrective Orders The nature of corrective orders issued included; • Operational restructuring- revisiting business strategies &shedding unprofitable business units; • Suspending a director, officer or employee, • Amending , suspending or canceling a license(Time bank license cancelled in May 2006). • Penalties/fines RBZ would periodically assess the progress of remedial actions.

Troubled Bank Resolution Framework • When faced with the imminent closure of no less than 9 institutions, it was not practical for the RBZ to close all the institutions as it would have led to serious losses to depositors. • The RBZ then formulated a Troubled Bank Resolution(TBR) Framework to address problems in the banking sector in a holistic manner. • Depositors had lost confidence in the banking sector during this period.

Troubled Bank Resolution Framework Objectives of TBR Framework • Strengthen the banking system and promote sound banking practices; • Restore stability of the financial sector; • Preserve indigenization of the financial sector

The Troubled Financial Institutions(Resolution) Act[chapter 24: 28] • Promulgated in January 2005, to provide for the administration of troubled financial institutions. • Enables the RBZ to issue an order declaring a financial institution insolvent, and to proceed to appoint an administrator. • The powers of the administrator included reconstructing the troubled institution , amalgamating /merging the institution with one or more other institutions or winding up the troubled financial institution.

Troubled Bank Resolution Framework Resolution Techniques applied: • Amalgamation/merging of institutionsinitiated by RBZ • Restructuring/reconstruction of institutions • Liquidation and depositor reimbursements

Troubled Bank Resolution Framework Amalgamation of institutions- ZABG • The Reserve Bank created a special purpose vehicle , Allied Financial Services, which facilitated the conversion of debt in troubled banks to equity. • 3 banks (Trust, Royal & Barbican )were then consolidated into a single entity known as the Zimbabwe Allied Banking Group(ZABG) which was granted a business license and commenced business on 31 January 2005. • RBZ ceded debt to government, and government became the biggest shareholder.

Troubled Bank Resolution Framework Re -structuring • Intermarket Bank merged with Intermarket discount house, group restructured and debt converted to equity. • CFX bank merged with CFX Merchant bank following debt equity conversions. • Boards were reconstituted and branch networks reduced to improve efficiency. • NDH recapitalised and resumed operations in May 2006.

Troubled Bank Resolution Framework Liquidation and depositor reimbursements • This was a last resort measure taken by the Central Bank when all other resolution options had failed. 3 deposit taking institutions were liquidated; • Century and Rapid Discount Houses in 2004 and Sagit Finance House in 2006.

Troubled Bank Resolution Framework DPB’s role during Liquidation • DPB’s role was confined to compensating depositors up to the insured amount in the event of a bank failure. • DPB handled the payouts for the three liquidated institutions. • Payout turnaround time averaged 2 months. • Payouts handled to date have been for relatively small banks( 300 – 3000 accounts).

Troubled Bank Resolution Framework Reserve Bank /Liquidator Roles during Liquidation • The Reserve bank is responsible for closing the bank and appointing the liquidator who will later be confirmed by the High Court. • The liquidator is responsible for liquidating assets of the closed bank and pay liquidation dividends to creditors. • The Liquidator ensures that DPB receive a verified deposit register to facilitate deposit insurance payments.

Challenges faced by DPB • Lack of access to depositor records before bank closure. • Inability to pay depositors during curatorship-legal constraints, affects payout turnaround time • Low deposit insurance cover : -resulted in low response rate, averaged 45%; - failed to stop bank runs during financial crisis.

Challenges Faced By the Central Bank Legal Challenges • 2 of the institutions which were amalgamated into ZABG(Royal & Trust Banks), challenged the legality of their amalgamation into ZABG. • The banks were engaged in a drawn out legal battle with the RBZ, where the banks appeals were initially dismissed by the RBZ but the banks were finally relicensed in September 2010 after appealing to the Finance Minister.

Challenges Faced By the Central Bank(cont) Curatorships/Judicial management • Whilst curatorship was meant to preserve depositors funds, it had the unintended consequences of denying depositors access to their funds for long periods of time. • Many depositors were questioning the wisdom of placing banks under curatorship. • Depositors lost confidence in financial sector.

Enhanced Supervisory Processes • • • In response to the challenges in the banking sector, the RBZ had to refine its supervisory approaches by introducing; Risk based supervision; Prompt corrective action programmes; Consolidated supervision Compulsory credit rating of banks Issuing corporate governance guidelines

Concluding Remarks The various strategies pursued in finding permanent solutions to troubled banking institutions are now bearing fruit as evidenced by the following observations: • Our economic environment has stabilized since introduction of multicurrency regime in 2009 - annual inflation now around 3% as compared to 230 million % in June 2008! • No bank failures of deposit taking institutions since 2006 to date. • As 31 March 2011 there were 26 deposit taking institutions as compared to 39 banks in 2003 before the financial crisis.

Concluding Remarks(cont) • Proper Corporate governance structures- boards now properly constituted, board oversight significantly enhanced. • Consolidated Supervision- Asset management companies now regulated by RBZ, which was not the case during the financial crisis when they were used as conduits for non core activities. • Enhanced risk management systems-capacity of banks to control and manage risks has been enhanced since the introduction of Enterprise Risk Management to monitor, manage and treat material risks.

Concluding Remarks(cont) • To overcome some of the bank resolution challenges faced during the financial crisis, the Deposit Protection Corporation Bill is before Parliament and it seeks to provide DPB with bank resolution powers and effectively complement the supervisory efforts of the Central bank. • Progress has also been made on the economic front to stabilize the economic environment and the key lesson for us is that the financial sector cannot thrive in a hyperinflationary environment whilst at the same time deposit insurance becomes ineffective.

CONCLUSION The challenges presented by the 2003 -2006 financial crisis, has presented opportunities for us to fine tune our processes, which we believe is a positive thing as it strengthens regulatory and supervisory preparedness and capacity to deal with similar challenges.

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