The External Governance Architecture of Zimbabwe Banking and Financial Sector

Abstract

Zimbabwe has had an astounding number of bank failures with at least seventeen (17)
banking institutions having collapsed from 1998 to 2015. The common attributes in virtually all
the eighteen (18) banking institutions that collapsed during this period are that all of them
were indigenously owned, had high levels of insider equity ownership concentration, and were
structured as financial services conglomerates. These structures created perverse incentives
for insider lending, abusive related party transactions and an appetite for greater risk-taking
which ultimately precipitated the demise of these banking institutions. The fact that so many
banking institutions collapsed within a relatively short period is indicative of the shortcomings,
not only in the internal governance systems of the collapsed banking institutions but also in
the external monitoring and supervision system. This paper investigates the role played by the
weaknesses of the external regulatory framework in facilitating the collapse of so many banks.
It also investigates whether the Banking Amendment Act, 2015 has resulted in a more robust
and effective external governance framework for the all-important sector. The study
establishes that the pre-amendment regulatory framework was not well suited to regulate and
supervise financial services conglomerates, which had high levels of concentrated ownership
and owner management. The entry of Mobile Network Operators into the provisions of banking
and financial services further exposed the limitations of the pre-amendment regulatory
framework. The Banking Amendment Act, 2015 made some notable improvements but also
retained some of the shortcomings of the pre-amendment regulatory framework such as the
sectoral model of monitoring and supervision. The jury is still out on the effectiveness of the
changes made by the Banking Amendment Act, 2015 which largely depends on the quality of
enforcement.