Gono shakes the banking sector

Reserve Bank of Zimbabwe governor Gideon Gono cracked down on insolvent and corrupt financial institutions within days of assuming his post prompting some to accuse him of a vendetta since he had been in the sector before his appointment.

United States embassy officials said though the move was necessary it added even more turbulence to the rocky economy.

They said prior to Gono’s arrival, the financial sector suffered from limited oversight.

Only 15 of 70 asset management firms had bothered to register with the Ministry of Finance though this was a legal requirement.

The government was providing funds to the productive sector at low rates of 30 percent and home buyers at 50-85 percent when the inter-bank rate was 300 percent.

Full cable:

Viewing cable 04HARARE86, Banking Sector Shake-down

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150752Z Jan 04

UNCLAS HARARE 000086

SIPDIS

STATE FOR AF/S AND AF/EX

NSC FOR SENIOR AFRICA DIRECTOR JFRAZER

USDOC FOR AMANDA HILLIGAS

TREASURY FOR OREN WYCHE-SHAW

PASS USTR FLORIZELLE LISER

STATE PASS USAID FOR MARJORIE COPSON

¶E. O. 12958: N/A

TAGS: ECON EINV ETRD PGOV ZI

SUBJECT: Banking Sector Shake-down

Ref: Harare 73

¶1. Summary: New Reserve Bank (RBZ) Governor Gideon Gono

is cracking down on insolvent and corrupt financial

institutions. While we consider this a necessary and

healthy process, it adds even more turbulence to rocky

economy. End Summary.

¶2. These are the main events of the unfolding crisis:

– In his Dec 18 policy statement, Gono argued that many

financial institutions were using RBZ cover for

“speculative, personal consumption or asset acquisition

purposes.” As of Jan 1, the RBZ would “ensure that

liquidity assistance is granted only to solvent and

viable banks.”

– Police shut down ENG Asset Management when it stopped

allowing investors to withdraw assets, arresting some top

managers as well as ZANU-PF Mashonaland West Chairman

Phillip Chiyangwa (ref).

– As part of the same investigation, police arrested

three heads of First Mutual Limited, another asset

manager, for having allegedly invested shareholder assets

in ENG in exchange for kickbacks.

– Cashflow Financial Services and Topfin Investments, two

more asset managers, stopped paying investors.

– Commercial banks Trust, Time, Metropolitan, First and

Century were unable to comply with new RBZ liquidity

requirements. Many firms/establishments around the

country stopped accepting their checks.

– Under pressure from many quarters, Gono backtracked

over the weekend and agreed to provide a bail-out fund

for commercial banks. Many Zimbabweans were worried that

investors would flock to foreign banks Standard Chartered

and Barclays, turning back the indigenization process.

Comment

——-

¶3. Prior to Gono’s arrival, the financial sector suffered

from limited oversight. Only 15 of 70 asset management

firms had bothered to register with the Ministry of

Finance, a legal requirement. (Gono has taken over that

function.) The RBZ never enforced reserve minimums at

commercial banks.

¶4. That and poor GOZ policy brought about this

predicament. The GOZ provides funds for artificially low

lending rates to the productive sector (currently 30

percent) and home-buyers (currently 50-85 percent at

building societies). By comparison, the present inter-

bank rate is 300 percent after falling considerably. The

RBZ and lending institutions are not able to guarantee

that these loans – with 620 percent inflation, they

amount to free money – are not used for speculative

purposes. For many, the temptation has been too great to

resist.

Sullivan

(53 VIEWS)