Zimbabwe: Call for Reform in Financial Services

This article looks into calls for reform in the regulatory framework (structure) of financial services in Zimbabwe following a wave of corporate failures and scandals that we have been witnessed in this sector since the financial services debacle of 2003/2004 to date.

Financial services are broad and include banking, mortgage lending, mobile money transfers, remittances, funds investment, trading in securities, insurance services, pension funds management, asset management, medical aid insurance and so on.

The financial crisis of 2003/2004 which witnessed the collapse of financial institutions such as ENG, Barbican Bank, Trust Bank, CFX Bank, Century Discount House, NDH, Intermarket Holdings, Genesis Investment Bank and more recently the closure of Renaissance, Capital Bank, Allied Bank, Royal Bank, Kingdom Bank etc has had tremendous impact on our financial systems and cannot be ignored.

The rise in mobile money transfers also poses regulatory challenges (often nervousness) as mobile moneytransfer operators now handle more money transfers (estimated at US$6 billion annually) than banks yet these operators are not regulated as tightly as banks are.

The debate on reform in financial services regulatory framework in Zimbabwe is aimed at seeking for solutions that create efficient, reliable, and stable financial services and markets, which will boost investor confidence in the financial system and also protect investor assets and savings.

Some regulatory framework changes have been made (i.e. creation of Insurance and Pensions Commission (IPEC) and Securities and Exchange Commission Zimbabwe (SECZ), but are these fragmented regulatory interventions effective or are they serving the best interests of Zimbabwe in a dynamic and fluid global environment?

Instead of further fragmenting the already fragmented regulatory framework, should we not be establishing a Unified Regulatory Framework given the new challenges imposed by complex banking systems, phenomenal growth in mobile money transfers and international remittances, insider trading, externalisation of funds, money laundering etc?

I recall having written on the same topic in 2004 when SECZ was established and debating whether we need a fragmented or unified financial services regulatory framework in Zimbabwe.

In view of its importance and relevance today, I have deliberately brought it to the fore again and include some issues I previously raised.

The contents of this article are entirely personal opinions.

Before I proceed, I would however, like to commend John Mangudya, the governor of the Reserve Bank of Zimbabwe (RBZ) for sterling efforts he is making in addressing some of the challenges highlighted above and below in the banking sector.

Fragmented regulatory framework

Our regulatory framework for financial services is fragmented. There are multiple regulators for different financial sectors and sub-sectors.

Examples:

• Banks, building societies, micro finance lenders etc are supervised by the RBZ in terms of the RBZ Act: 22:15. Prior to January 2004, the Ministry of Finance issued banking licenses while RBZ was responsible for supervision.
• Depositors (compensation) are protected by Deposit Protection Board, established in terms of the Deposit Board Protection Act 24:29.
• Insurance firms/brokers and pension funds are regulated by IPEC. Previously they were supervised by the Commissioner of Insurance and Registrar of Pension and Provident Funds (under Finance Ministry).
• The Securities Act (Chapter 24: 25), created SECZ to regulate marketing and trading in securities, provide framework for a central depository system etc. SECZ supervises the Zimbabwe Stock Exchange (ZSE), asset management and stockbroking firms and transfer secretaries.
• ZSE regulates the trading in securities and supervises listed companies (issuers) and stockbroking firms.
• Mobile money transfer operators: Econet, NetOne and Telecel are regulated on the aspect of mobile money transfers by the Postal Telecommunication Regulatory Authority of Zimbabwe (POTRAZ) and RBZ.

Others: the National Social Security Authority (NSSA) fall under the Ministry of Labour; development funds i.e. the Zimbabwe Manpower Development Fund (ZIMDEF) is regulated by the Minister of Higher Education through the Zimbabwe Manpower Development Act (Chapter 28: 02); the Small Enterprise Development Corporation (SEDCO) is regulated by the Minister of Trade and Industry through the Small Enterprises Development Corporation Act (Chapter 24: 12).

Problems associated with fragmented regulation

In summary, these include the following:

• Duplication (overlap) of functions among regulators.
• Uneconomic uses of limited national resources as governance and management structures have to be created for each regulator.
• Increase in bureaucracy as market has to meet requirements of different regulators.
• Market confusion as to which regulator is responsible for what aspects of regulation.
• Complexity of the regulatory system arising from existence of multiple regulators.
• Creation of legal loopholes in the monitoring system, which weakens supervision and enforcement.
• Ineffective control/regulation of diversified financial groups, institutional investors (i.e. NSSA) and mobile money transfer operators (Econet), medical aid societies etc.
• Higher compliance costs for companies.
• Lack of accountability for market failures. Who is to blame for failures in mobile money transfers, POTRAZ or RBZ or failure of NSSA?
• Inadequate consumer/investor protection (concerns: inadequate depositor protection, insecurity public concerns in mobile money transfer platforms?).
• Omission of some players from regulation i.e. medical aid societies, investments advisers.

Some of the challenges associated with a fragmented regulatory framework are discussed below.

Diversified financial groups

Diversified financial groups (DFGs) are typically large corporations operating within a complex structure and active in many sectors of the financial services such as banking, corporate finance, insurance, investment services, stock broking, property etc.

Regulating DFGs (i.e. Old Mutual, First Mutual, CBZ Holdings, ZB Holdings, FBC Holdings etc), with activities that cut across sectors poses serious challenges to regulators under a fragmented regulatory framework. The question that comes to mind is: Which regulatory authority has more regulatory powers over DFGs?

The regulation of these DFGs' is better served in a unified (single) regulatory framework, which will be able to take stock of all their diversified financial activities and regulate them as single entities.

Currently DFGs' are regulated on a functional basis with different aspects of their financial activities regulated by different regulatory authorities.

Institutional investors

Institutional investors (i.e. pension funds, insurance companies, investment banks, mutual funds, unit trusts etc) also pose regulatory challenges since they operate outside the stringent RBZ banking regulations yet ironically they hold huge public funds more than banks do across financial markets.

Institutional investors i.e. NSSA, insurance companies and pension funds, hold huge financial assets as percentage of our gross domestic product. They are the biggest investors on the ZSE, owning more than 80 percent of listed ZSE stock.

Additionally, they are the biggest property owners in Zimbabwe property and control huge investments on behalf of the public (working people and pensioners).

Because they hold and invest funds (savings) on behalf of members of the public, their investment activities as fiduciaries, have to be closely monitored.

The danger posed by this sector is that it operates outside stringent banking regulations.

The governance problems at NSSA show all is not well in oversight over the authority.

Oversight over institutional investors appears lax. They need stringent oversight to avoid the danger of speculative investments (resulting in loss of public funds), market manipulation and focus on non-core investment activities.

Because of the role they play in the financial services and economy at large, their regulation is of utmost importance for financial markets stability.

Mobile money transfer operators

Mobile money transfer operators (MMTOs) fall in their own category and pose serious regulatory challenges.

Regulation for this sector is not as mature as that for banks.

Take Econet for example. How is it classified? It's in telecoms, money transfer (EcoCash), banking (Steward Bank), insurance and so on.

Mobile money transfers accounted for US$6,1 billion as at end of December, 2014.

Questions often asked are: How secure is the system? Is there effective consumer protection or control over additional products offered (insurance, medical cover etc) and tariff charges etc? Additionally, who has more regulatory clout over MMTOs, RBZ or POTRAZ?

Other financial services providers

There are other institutions such as ZIMDEF, SEDCO who control/invest public funds for development activities which are outside the net.The other sector that also requires stringent regulation is medical aid societies who collect and invest public funds in exchange for providing medical services.

Professional firms such as accounting firms, law firms who give professional financial advice and occasionally carry out financial investments on behalf of their clients, should also have the financial aspects of their business regulated as a public protection measure.

Allen Choruma is an independent researcher and writer on corporate governance.

SOURCE:FINANCIAL GAZETTE