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Biti moves to stabilise banking sector outlined

Biti moves to stabilise banking sector outlined

Friday, 17 February 2012 11:09

Chris Muronzi

FINANCE minister Tendai Biti and Reserve Bank governor Gideon Gono on 
Thursday announced reforms which they expect to improve liquidity and 
stability in the banking sector, including, among other things, ordering 
financial institutions to remit offshore funds and barring bank shareholders 
from day to day management positions.

The move to remit funds kept in offshore accounts is meant to address 
liquidity problems in the financial sector and the economy at large.

“With effect from March 1, 2012, banks will, therefore, be required to 
maintain in their Nostro Accounts a maximum of 25% of their balances 
off-shore,” said Biti.

“The maximum rises to 30% from June 1, 2012.  This would also be in 
acknowledgement of the absence of a prudent statutory liquidity ratio.”
A Nostro account is an account held in a foreign country by a domestic bank, 
denominated in the currency of that country. Nostro accounts are used to 
facilitate settlement of foreign exchange and trade transactions.

Biti said amounts in excess of the set thresholds would have to correspond 
to a bank’s demonstrable pending international payment obligations.
Allaying fears, Gono said the offshore balances will continue to be eligible 
for liquid asset ratio requirements.

Gono cited an improvement in liquidity already, saying the Reserve Bank 
would lift the previously announced cash withdrawal limits with effect from 
March 1 2012. Banks were encouraged to continuously apply the Know Your 
Customer (KYC) principle in order to avoid the abuse of cash. The bank was 
further urging the use of plastic money and cheques.

Gono alluded to an improvement in the RTGS where he said average RTGS 
balances had maintained a sustained increase from US$91,8 million in 
December 2011 to US$119,3 million in January 2012 and further to US$153,5 
million for the first half of February 2012. The central bank governor 
disclosed that as at February 3 2012  the total banking sector deposits were 
US$3,45 billion whilst total loans were US$2,78 billion.

Taking a cue from Biti’s decision to further support the RBZ’s lender of 
last resort function, Gono said based on the size of the country’s GDP, it 
was estimated that an amount of US$150 million was required for the smooth 
functioning of the Lender of Last Resort. Against this background, 
government would avail an additional US$23 million by the end of next week 
towards the Lender of Last Resort Fund, to bring the total to US$30 million. 
Gono said the US$150 million required could not besustained by Treasury 
alone given the current challengesfacing government.

Efforts were underway to mobilise additional resources in excess of US$73 
million. In this regard, the Reserve Bank would coordinate the establishment 
of a Special Purpose Vehicle (SPV) where financial institutions and 
otherinvestors will contribute to the Lender of Last Resort Fund.
The SPV would be owned by the contributors who would be shareholdersand will 
also be represented in the board running the affairs of the fund chaired by 
the Reserve Bank.
Following the resuscitation of the Lender of Last Resort the RBZ was 
encouraging banks to improve on the subdued deposit rates currently 
prevailing in the market. The RBZ was imploring banks to take a cue from its 
Overnight Accommodation rate on the directionof their lending rates.

The RBZ is to also launch instruments to be issued against its statutory 
reserve liabilities, with features such as prescribed asset status; liquid 
asset status; half-yearly coupon; tax exemption; tradable; and overnight 
accommodation status. The paper has varying tenors of between two and four 
years and interest rates of 2,5% to 3,5% per annum respectively. Another 
option is a 15 year bond at 3% per annum.  Treasury willimmediately 
establish a Sinking Fund to cater forservicing of interest payments and 
maturities, Gono said.

In announcing measures to stabilise the banking sector yesterday, Biti said 
the proposed Banking Act review would focus on capital adequacy of banks and 
governance deficiencies in the banking sector.He said there was need to 
ensure that bank shareholders had no role to play in the management of 
banking institutions so as to limit the incidence of insider loans, abuse of 
depositors’ funds and conflict of interest.

Biti also said the Securities Act; Microfinance Bill; Insurance Act; and the 
Pensions and Provident Funds Act would be reviewed but did not elaborate on 
the nature of the changes.

Biti reiterated that banks would be compelled to merge in line with 
government’s goal of a strong financial services sector.

“It is regrettable that five banks still remain under-capitalised in spite 
of moving the deadlines for compliance several times,” said Biti. “Given the 
importance of having a strong and secure banking sector that is immune to 
systemic risk, I have mandated the Reserve Bank to develop a framework for 
mergers between the banking institutions.”He, however, said the modalities 
of mergers framework would be announced in due course.

Meanwhile Biti also announced government would issue infrastructure 
development bonds with almost the same features as the treasury bills save 
for the tenor, which will be for five years with an interest rate of 10% per 


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