THE International Monetary Fund has raised a red flag over the opaque ownership structure of some local financial institutions, warning that such shareholding may trigger systemic risks in the fragile financial services sector.
Official figures show that the banking sector of Zimbabwe consists of 13 commercial banks, five building societies, and one savings bank that, in total, account for ZW$969.245 billion in assets (31 March 2022). Of the 19 banks, nine banks have foreign shareholding, with a market share of over 60%. Other banks are local, or state-owned, in part or whole.
At the request of the Reserve Bank of Zimbabwe (RBZ), the IMF Monetary and Capital Markets (MCM) Department conducted a virtual mission from 3 May to 10 June 2022 to assist the RBZ on strengthening the consolidated supervision framework. The main focus was to support the RBZ in updating the RBZ supervision framework, enhancing prudential reporting on a consolidated basis, strengthening the assessment of banking groups’ risks, and intensifying cross-border and interagency cooperation.
“The RBZ should reinforce its guidelines and legal authority to require banking groups to make material changes to their structure or operations to ensure that effective consolidated supervision is not hindered by opaque or complex structures,” the IMF said in its latest technical assistance report on financial sector stability.
“Large and complex banking organisations can present organisational structures or operations that are not transparent and do not allow for effective identification, monitoring and oversight. Complex layers of ownership and intragroup exposures or dependencies can create channels of risk transmission or operational dependencies that challenge effective supervision.
“The Banking Act requires the RBZ to consider whether the structure or governance of a banking group ‘hinders effective supervision’ in deciding to license a banking institution. The RBZ’s powers to require operational or structure changes to address equal hindrances to supervision presented by group structures should be made prominent in the banking laws and the guidelines to address challenge presented by financial conglomerates and mixed activity groups.”
Section 8(3)(d)(2) of the Banking Act provides: “…where the applicant is part of a group of companies, the structure and governance of the group does not hinder effective supervision of the applicant or endanger the stability of the financial system…”
The report also noted that the top 10 financial institutions in Zimbabwe are banks operating within banking groups (foreign or domestic) and include both non-bank financial entities and non-financial commercial entities.
“The banking sector in Zimbabwe is concentrated in the top five banks (almost 60 percent of total assets) and two of the top ten banks are identified as members of ‘mixed conglomerates’, which are banking groups that contain commercial enterprises as affiliated subsidiaries of a parent or bank holding company,” the report reads.
“Foreign-owned banking groups are required to establish local subsidiaries for local banking, non-bank and other operations. Overall, the vast majority of banking assets are housed within group structures that contain entities which are also subject to non-bank regulation (e.g., insurance and securities.”