eBusiness Weekly
Blessing Nyatanga
Introduction
According to research, it has been ascertained that Zimbabwe recorded more than 20 bank failures with most of these attributed to poor governance and non-compliance as far as the regulations are concerned in accordance with the Banking Act.
Corporate governance is vital to achieving and maintaining public trust and confidence in the banking system. Poor corporate governance can contribute to bank failures, which can, in turn, pose significant public costs and consequences.
Banks with effective corporate governance will be more performance oriented than poorly governed banks. Corporate governance enables a company to maximise the long term value of the company, which is seen in terms of performance of the company.
This article will attempt to ascertain the level of compliance and governance in financial industry and focus will be centred on a few of the failed banks.
A case of Kingdom Bank
It is fundamental to note that Kingdom Bank fell short as far as compliance and governance is concerned judging from a convention that created a framework for modern prudential risk management in the world of finance.
Known as the Basel framework numbered as Basel I, II and III, these measures were meant to make financial institutions more stable, particularly those handling public funds.
The concept at this point is simple, the bigger the equity a bank has the bigger the shocks it can take.
Blessing Nyatanga
Over the years, the RBZ has raised bank capital requirements. The axe fell for Kingdom Afrasia when they failed to meet the December 31, 2014 capital requirement of US$25 million. The bank had a capitalisation of only US$6 million at the time.
At this point, the bank resolved to voluntarily surrender the licence. The failure of Kingdom Bank was a case of non-compliance with capital requirements and poor governance.
A case of Trust Bank
Trust Banking Corporation (Trust Bank) began operations in January 1996 as a merchant bank and converted its licence to a commercial bank in 2000. From prior examinations over the years, the bank was subjected to a number of on-site examinations which noted a number of deficiencies in asset quality, liquidity and internal controls, among others.
The October 2003 on-site examination determined that the banking institution was still exposed to high liquidity risk, poor accounting systems, was engaging in non-banking business via a wholly owned subsidiary TMB Nominee and this exposed the bank to high reputation risk.
The disparity indicated that the bank was misrepresenting the gravity of the problem in order to continue accessing RBZ lender of last resort facilities under the pretext that the problems were of a temporary nature.
The investigation attributed the bank’s liquidity problems to a number of factors including the following (technical, cosmetic and fraudulent management rapid expansion of the bank with no proper internal controls and early warning systems) and poor management information systems which compromised the integrity of the bank’s financial records.
Poor asset and liability management manifested through the investment of short-term funds in illiquid assets. The bank was, thus, operating outside the confines of the Banking Act and Regulations through engaging in non-banking activities via a wholly owned special purpose vehicle known as TMB Nominees.
A case of Interfin Bank
Interfin Bank collapsed mainly due to high levels of non-performing insider loans.
The insider and related party loans amounted to $90,6 million as at January 27, 2015 with almost all the loans non-performing. It was ascertained that there was an erosion of capital through provisioning shortfall of $44,32 million in 2012, which was a result of failure by the bank to set aside adequate funds to cushion it from losses arising from bad and doubtful loans.
There was an ineffective risk management process which led to a high rate of non-performing loans. This was coupled with the fact that some loans were advanced without security and became difficult to collect.
The NPLs, affected the liquidity position of the bank which culminated in a failure to pay maturing liabilities, leading to some of the bank’s depositors and creditors instituting legal action against the institution.
On June 30, 2012 the bank had a negative core capital of $92,9 million while its shareholders failed to inject the required $142,9 million in order to comply with the minimum capital requirements which was $50 million at the time. This proved another dire case of non-compliance as governance issue on capital adequacy requirements took toll.
Recommendations
Compliance with the Banking Act
It is imperative for authorities to ensure financial institutions are in line with the legal frameworks governing their operations. Failure to comply, stiff measures should be in place to discourage non-compliance. Governance should be monitored within each sector with clear penalties or sanctions.
Train staff about compliance policies and procedures
Providing banking compliance training to employees about relevant policies and procedures is the best way to reinforce them. This should ensure your employees go through the requirements so that they know what they need to do to comply, and why it is important that they do.
You can then test your employees’ levels of understanding by quizzing them and offering revision and refresher training as needed. When there are new and emerging compliance issues that employees should be aware of, you can create new training modules.
Have employees acknowledge compliance policies
A good way to keep employees accountable is to have them sign and acknowledge that they have read and understood and agree to abide by particular policies and banking procedures. You can do this annually, as well as when there is an update to a policy or procedure.
This will provide you with a digital audit trail that you provided the employee with the information and that they acknowledged and agreed to follow. They can’t then claim they didn’t know what was expected of them if a negative situation arises.
Create a culture of good governance and compliance
Positive company cultures see good outcomes. When you create a culture that values compliance, ethics, transparency and integrity, it will help to ensure you have a well-managed and high-functioning organisation.
Leadership is important and as such the most senior managers need to lead by example and set expectations. They set the standard that employees will follow and will help to establish the idea within the financial institution that compliance is everyone’s responsibility.
Offer Incentives for Ethical Behaviour
Incentives are a great way to motivate your workforce to maintain a culture of compliance. When a manager notices an employee “doing the right thing”, they must stop and acknowledge it instead of letting it go unnoticed.
Small incentives such as publicly praising an employee for good practice, giving an afternoon off, or other bonuses can be a great way to encourage collective ethical behaviour.
Blessing Nyatanga holds a Bachelor’s Degree in Banking and Investment Management from NUST.0784909184/[email protected]
