In this posting we discuss how bankers in Zimbabwe raised funds during a decline phase. Be blessed.
The financial service entered a decline phase starting December 2003 after the inauguration of a new and austere monetary policy. The once exuberant sector passed through agony as most of its asset/liability assumptions proved unsustainable.
Ideally, the business risk in this phase is low but in Zimbabwe it was high as investors fled the industry which was portrayed as highly vulnerable as the Central Bank openly declared war against financial institutions. Financial risk was high and debt financing was not an option as a source of funding since interest rates continued to rise while profit margins were severely eroded. The Central Bank continued raising the statutory reserve thresholds while increasing the capital requirements for banks. Speculative activity and foreign currency arbitrage activities were now forbidden. The public was wary of the banking system for fear of a systemic risk that might cause a collapse of banking institutions. Dividends were suspended in an effort to conserve cash resources. Future growth prospects were negative.
This scenario contradicted the theory from first world literature. Ordinarily, debt financing would be ideal in this phase, with significant dividend payouts.
Under pressure, the banks embarked on cash conserving strategies such as retrenchments and asset disposal. Interfin Holdings disposed of a high performing asset, Datvest Asset Managers, to CBZ in an effort to raise cash and save the bank from high interest rate penalties. Royal Bank had to sell back to Barclays one of the buildings that it had purchased in Bulawayo. Kingdom Bank almost lost its flagship regional bank in Botswana and consequently disposed of its shareholding in Investrust Bank in Zambia, put its plans to acquire a commercial license in Zambia on halt and then channelled the proceeds of that investment to resuscitate the Botswana venture.
Other banks which were allegedly connected to the Central Bank governor were saved from demise as a newly expanded Productive Sector Facility was predominantly channelled through them, thereby improving their liquidity position. This in effect became cheap funding that removed a debt trap for them. For example Premier Bank and CBZ, which were experiencing liquidity challenges due to their exposure to parastatals and local authorities, were saved by the inauguration of a facility for cheap funds from the Central Bank which was availed to these quasi- government institutions.
Kingdom Bank reverted to its key competence of strategic private placement. In late 2004 it released a strategic equity holding of about 10% to Econet Wireless, a blue chip counter, whose Group CEO was a personal friend of Kingdom’s founding CEO and board member. This strategic placement increased the bank’s ratings and saved it from collapse as it gained market confidence. In Econet it gained a friendly equity shareholder and customer with huge cash reserves and this made it easy to mobilise deposits and avert a liquidity crisis while circumventing a potential deposit flight. In fact around November and December 2004, the peak of the banking crisis, both Econet and Meikles directed their subsidiaries and business units to deposit all cash with Kingdom in an effort to save their investments. This was a blessing to Kingdom. The secondary benefit was that as Kingdom pursued a historic rights issue, it had large equity shareholders who had the capacity to both follow their rights and underwrite the rights issue. The third benefit to Kingdom was that it created options for innovative and strategic service delivery channels through the use of cell phone and internet based banking.
Another advantage with rights issues is that the entrepreneurs can maintain control by deliberately choosing their investor profile.
A financial strategy which was used by entrepreneurial banks at this time was a heavily discounted rights issue. Kingdom Bank and NMB used this strategy and it led to a turn around of their fortunes. Interfin Merchant Bank followed suit.