By Gideon Gono

Debate on indigenisation of Zimbabwe’s financial sector has occupied centre-stage for the last two or three years with the Reserve Bank of Zimbabwe (RBZ) expressing unhappiness over the “one-size-fits-all” method of implementing this long-overdue and desirable programme.

Strategists the world over are familiar with the saying that “the devil is in the detail”, in this case of implementation, while those in the legal fraternity will warn you against ignoring “the small print”.

This installment seeks to highlight our experiences and why the financial sector ought to be treated with caution and why the “one-size-fits-all” approach to indigenisation of the financial services sector is considered to be inappropriate, disruptive and dangerous, hence our view that any “deals” that foreign banks in this market voluntarily or involuntarily enter into and sign-off without our prior approval will remain “deals on paper” — basically null and void.

Role of RBZ in indigenisation

Like any national programme, the indigenisation and economic empowerment programme must be implemented in a manner that respects the entire legislative mapping of Zimbabwe as represented by various pieces of legislation on our books that seek to create checks and balances against potentially domineering legislative elephants in the living room, so to speak.

The following are some of the critical pieces of legislation and regulatory frameworks to be respected: Banking Act, Chapter 24:20; Reserve Bank Act, Chapter 22:15; Exchange Control Act, Chapter 22:05; Public Finance Management Act, Chapter 22:19; Procurement Act, Chapter 22:14; Arbitration Act, Chapter 7:15; Bilateral Investment Promotion and Protection Agreements; Competition Act, Chapter 14:28 and Corporate Governance Framework for Parastatals of which National Indigenisation and Economic Empowerment Board is part of.

In view of the above plethora of legal instruments, the current seemingly unilateral approach to implementing the indigenisation can only lead to fictional results akin to the mining deals involving Zimplats, Unki and Mimosa which will have to be renegotiated and submitted to us for approval for them to become “real”.

In the banking sector, and as the law stands, it is only the central bank that has been conferred with legal powers to issue or withdraw banking licenses and that is the practice the world over.

Furthermore, as a central bank, we are duty-bound by local Banking Act (Chapter 24:20) and RBZ Act (Chapter 22:15) as well as international laws and conventions, to check, verify and certify that people wishing to be shareholders or group of shareholders of any financial institution in our backyard are identifiable men and women or institutions of impeccable credentials.

My position on indigenisation

I am on record, as far back as 2007, as having been one of the first public officials to hail the government for passing the then long-overdue Indigenisation and Economic Empowerment Act.

The central bank’s voice on this subject is, therefore, as old as the enactment of the law itself. On October 1 2007, while presenting my monetary policy statement, I said: “As monetary authorities, we fully support the noble objective of empowering the majority of Zimbabweans through the introduction of enabling statutes that expand wider, the involvement of the people in the mainstream economy.

“Noble as this objective is, our well-considered advice to legislators and government in general is that a fine balance should be struck between the objectives of indigenisation and the need to attract foreign investment.

“Specifically, the local-foreign ownership thresholds must be taken and implemented as down–the-horizon targets, as opposed to excitable but impractical overnight conversion events.”

I also went further in the same statement to give advice to government well before the current officials in the Ministry of Youth, Indigenisation and Economic Empowerment had been appointed.

“Of particular concern to us as monetary authorities would be any attempts to forcibly push the envelope of indigenisation into the delicate area of banking and finance. To this end, we call upon those with interests in the financial sector to approach the central bank with their applications for new banking licences.

“It is important to note that this comment comes against a background of reported incidences involving well-connected personalities who are positioning themselves to muscle into certain mining, manufacturing, financial and other entities that are currently performing well and contributing to the foreign currency inflows of the country.”

It is against the above background that the entire new board of the central bank unanimously passed a resolution in support of the indigenisation at its meeting of July 31 2012 which resolution, as governor, I disseminated to the public through the my monetary policy statement of the same date, stating:

“That the Reserve Bank of Zimbabwe supports the government’s indigenisation and empowerment policies as enunciated in relevant statutes and regulations. It is fully supportive of the need to ensure that the indigenous people of Zimbabwe are capacitated to engage in the entire spectrum of Zimbabwean economic activities including the financial services sector. However, the bank has reservations concerning implementation of the policies.

“That the Reserve Bank is conscious of the sensitivities surrounding the economy, particularly the banking sector and mining sectors. It supports the implementation of indigenisation and economic empowerment regulations in the various sectors and is of the view that they should be done in a manner that preserves confidence. Any adverse developments in the banking sector could grind economic activity in Zimbabwe to a halt.

“That this is particularly so, given that regional and international banks in the local banking industry play a pivotal role in providing the vital link between the domestic economy and the international community, particularly through correspondent banking relationships.

“In this context, the need to reconcile the indigenisation regulations and other Acts of Parliament cannot be over-emphasised. As such, the implementation of the indigenisation and economic empowerment provisions has to be done in harmony with the Banking Act and Regulations, RBZ Act, Exchange Control Act and Regulations, Companies Act, Mines and Minerals Act, Zimbabwe Investment Act and other existing legislations.”

Thus acknowledging the above as given, it is a total misrepresentation of my position as governor to suggest that I or my management team and board are opposed to the indigenisation programme. Nothing can be further from the truth.

Banking sector architecture

From the early 1990s, the financial sector is one of the sectors which benefitted immensely from liberalisation of the economy. From a sector which was largely dominated by a few foreign-owned institutions to the current standing where the majority of banks (71%) are locally-owned.

Currently, there are 24 banking institutions in the country, of which only seven (29%) are foreign-owned and internationally active banks. The international banks are among the country’s systemically important banking institutions whose condition needs to be safeguarded at all times.

In the interest of clarity and common understanding, a systemically important institution is one whose size, complexity, scale of operations and connectedness to the local and foreign financial and other economic systems is such that an event within or surrounding it would have far reaching implications for others and economic sectors within a given jurisdiction.

There are 24 mainstream banking institutions namely commercial banks (17), merchant banks (2), building societies (4) and savings bank (1).

In addition, there are 164 licenced microfinance institutions (MFIs), 53 money lending institutions (MLIs) and 16 asset management companies (AMCs) in Zimbabwe spread throughout the country giving the following outlook as illustrated above:

If we are talking about sectoral institutional ownership and outlook regardless of size, the above picture tells a story which we cannot ignore when it comes to how open the financial sector is to new indigenous entrants.

As for size, it is a function of age, market confidence, capitalisation, reputation, stability, and international connections, among other factors.

The seven foreign owned banks (3%) command US$250 million (36%) of the sector’s US$700 million paid-up capital of which 64% (US$450 million) is held by 97% of the market players who are indigenous.

In terms of deposits, indigenous banks cumulatively hold about US$3 billion (70%) in total deposits, while the foreign-owned institutions hold US$1,3 billion (30%) of total deposits as at March 29, 2013.

In terms of the loan book, out of a total market book of US$3,6 billion, indigenous owned banks had a loan book of about US$2,7 billion (75%), while the seven foreign-owned banks have extended loans of about US$900 million (25%).

From the above, it is clear that the “rush” to indigenise the banking sector is more driven by emotions and an uninformed perspective than by necessity.

When all is said and done, on banks we should all ask ourselves the question: Whose money do we want to indigenise? No wonder over US$2 billion is circulating in the informal sector, thus adversely causing serious liquidity challenges for the economy, apart from chasing away investors. We are shooting ourselves in the foot through such ill-advised demands.

What needs to be done

There is need for more creativity, co-operation confidence and leverage strategy to secure more benefits for indigenous people through foreign networks and associations.

As chief superintendent of the Zimbabwe’s banking sector, I’m on record emphasising that foreign-owned banks will need to comply with the country’s indigenisation laws over a mutually agreed period of time and in proportions that allow foreign shareholders to feel comfortable that they can still leave their names, brands and systems attached to the same indigenised institutions.

In other words, we need to “hurry slowly”. We can achieve the desired benefits through other creative means such as lending quotas, mobilisation of support lines of credit and supply-side empowerment.

It is important that the process does not disconnect the local institutions from their original parentage as doing so would be to throw away serious associational benefits to the country that come with those connections.

The benefits I am referring to include, among others, access to lines of credit, latest technology platforms, training and exposure to international best practices, strength through adequate capitalisations as and when required, access to international networks as well as customer confidence arising from the mere knowledge that local outfits are part of an international balance sheet of both financial and technical capabilities, products and a recognised brand network that can be counted upon in international business transactions, travel, investment advice and general services.

Historically and even today for instance, close to 90% of all lines of credit for our tobacco auction-floor purchases, cotton and other external funding requirements come through these foreign owned banks and trying to change their ownership in a unstructured and reckless manner can only be counter-productive at a time when indigenous owned banks, save for a few, are struggling to meet basic minimum standards of capitalisation, international networks, brand recognition internationally and capacity to mobilise meaningful international lines of credit for the country’s needs.

My next installment will show the potential impact and far-reaching consequences to the economy of unstructured and emotive interventions on banks if that is allowed to happen.

Dr Gideon Gono is the governor of the Reserve Bank of Zimbabwe. This article was originally published by the Zimbabwe Independent