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CONTENTS

1. INTRODUCTION ................................................................................................3

2. MAJOR CAUSES OF THE PROBLEMS EXPERIENCEDIN 2004 AND 2005 ...............................................................................................5

3 TROUBLED BANKING INSTITUTIONS ...................................................... 103.1 Century Discount House Limited (CDH) .......................................................... 103.2 Rapid Discount House Limited ........................................................................... 113.3 Barbican Bank Limited ....................................................................................... 123.4 Trust Bank Corporation Limited ........................................................................ 143.5 Royal Bank Zimbabwe Limited .......................................................................... 163.6 Time Bank of Zimbabwe Limited ....................................................................... 183.7 CFX Bank Limited .............................................................................................. 213.8 CFX Merchant Bank .......................................................................................... 243.9 National Discount House Limited ..................................................................... 253.10 Intermarket Banking Corporation Limited ........................................................ 263.11 Intermarket Discount House Limited ................................................................ 273.12 Intermarket Building Society ............................................................................. 28

4 MEASURES PUT IN PLACE BY THE RESERVE BANK TO DEALWITH TROUBLED BANKS ............................................................................ 29

4.1 Corrective Orders ............................................................................................... 294.2 Curatorship and Liquidations ............................................................................. 304.3 Troubled Bank Resolution Framework .............................................................. 304.4 Guidelines to the Market .................................................................................... 33

5 LESSONS FROM THE FINANCIAL CRISIS ............................................... 34Capital… ............................................................................................................. 34Corporate Governance… ................................................................................... 34Liquidity….......................................................................................................... 35Importance of Public Disclosure ....................................................................... 35Curatorship…..................................................................................................... 36Prompt Corrective Action… .............................................................................. 36Supervisory processes….................................................................................... 36

6 ENHANCED SUPERVISORY PROCESSES ................................................. 376.1 Risk Based Supervision ...................................................................................... 376.2 Prompt Corrective Actions ................................................................................ 386.3 Consolidated Supervision................................................................................... 386.4 Information Technology Certification ............................................................... 396.5 Coordination & Cooperation with Other Regulators ........................................ 406.6 Capacity Building ............................................................................................... 40

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1. INTRODUCTION

1.1 The Zimbabwean society at large is fully aware that during the last quarter of 2003and the first quarter of 2004, a number of banking institutions faced seriouschallenges that ranged from chronic liquidity problems, deep-rooted riskmanagement deficiencies and poor corporate governance practices.

1.2 By the end of 2004, ten banking institutions had been placed under curatorship, twowere under liquidation, and one discount house had been closed. The banking publicendured tremendous psychological, emotional, social and financial ruin.

1.3 It is our considered view that the public has the right to know what transpired and theprogress made to date in rehabilitating the troubled banking institutions.

1.4 Contrary to what some misinformed members of the public have been made to believeby self-deluding, unrepentant shareholders, the nature of the supervisory action takenfor each institution was commensurate with the severity of deficiencies identified.

1.5 In pursuit of its core mandate of maintaining financial stability, the Reserve Bankhas a statutory obligation to take prompt and appropriate supervisory actions onthose institutions that are determined to be unsafe and unsound in order to forestallcontagion repercussions in the financial sector.

1.6 The Reserve Bank’s relentless efforts to enforce strict supervision and surveillance,without fear or favour, have resulted in banks adopting sound risk managementpractices and good corporate governance standards. Stringent supervision has alsoenhanced the standard of market discipline in the banking sector.

1.7 The various strategies pursued in finding permanent solutions to troubled bankinginstitutions are now bearing fruit. We wish to inform the market that three (3) bankinginstitutions namely Intermarket Building Society, Intermarket Banking Corporation,Intermarket Discount House, have commenced full scale operations, followingsuccessful implementation of rehabilitation strategies.

1.8 The successful turnaround of these institutions, once again, proves beyond doubtthat the Reserve Bank is not just there to close indigenous banks. We wish to reassurethe public that where deficiencies have been resolutely addressed we will not keepany bank under curatorship for any day longer than is necessary.

1.9 Curators of the remaining banking institutions will make recommendations onwhether their respective institutions should be resuscitated or liquidated, beforethe expiry of the current curatorship period.

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2. MAJOR CAUSES OF THE PROBLEMS EXPERIENCED IN2004 AND 2005

2.1 A number of banking institutions with deep-rooted structural anomalies, inadequaterisk management systems, poor corporate governance practices, liquidity andsolvency challenges failed to adjust to the difficult macroeconomic environmentobtaining in 2003 and 2004.

2.2 The liquidity and solvency problems that were being faced by some banks wereunderpinned by a number of problems as fully discussed hereunder.

2.3 Inadequate Risk Management Systems

2.3.1 Most financial institutions were operating with inadequate risk management systemsand poor management information systems.

2.3.2 As a result some banks failed to timeously identify, measure, monitor and controlmaterial risks. Consequently, controls were inadequate to mitigate the risks the bankswere exposed to, leading to their failure.

2.4 Poor Corporate Governance

2.4.1 The financial sector was replete with poor corporate governance structures,characterised by improperly constituted boards of directors, poor board oversight,inexperienced management, and undue influence or dominance by a few shareholders.

2.4.2 Some banking institutions unethically maintained two sets of financial records; oneset for regulatory convenience at licensing, and on an ongoing basis another setreflecting the correct profile of the institution.

2.5 Diversion from Core Business to Speculative Activities

2.5.1 Holding companies were being used to evade regulation as depositors funds werechanneled to associate companies and/or related parties such as asset managementor investment companies, which were not regulated.

2.5.2 In addition, some banks abused liquidity support from the Reserve Bank to fundnon-banking subsidiaries and associates’ requirements. This stifled economic activityin the real sector.

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2.6 Rapid Expansion

2.6.1 Rapid and ill-planned expansion drives which were not synchronized with the overallstrategic initiatives of the institutions concerned exposed some institutions to greaterrisk of loss. Consequently, the capital bases of these institutions could not sustainthe excessive expansion programme. In a few cases, the rapid expansion was fundedby depositors’ funds as opposed to equity.

2.7 Creative Accounting

2.7.1 Some financial institutions were misrepresenting their financial condition, whilesome were tampering with the information systems to conceal losses by creatingfictitious assets and understating expenses and liabilities.

2.8 Overstatement of Capital

2.8.1 Some banking institutions were overstating their capital positions by under-providingfor non-performing loans, while others falsified transactions to concealundercapitalisation.

2.8.2 In some instances, banks were involved in illicit and unethical practices involvingthe use of depositors’ and borrowed funds to create an illusion of adequatecapitalisation thereby violating the Banking Act and the Companies Act.

2.9 High Levels of Non-performing Insider Loans

2.9.1 Poor corporate governance practices, weak underwriting and monitoring standards,as well as ill-planned growth contributed to excessive levels of non-performinginsider loans.

2.9.2 Some banking institutions disregarded set prudential lending limits notably toinsiders and related parties. In some cases, interest was not charged on insider loansand the loans were eventually written off without board approval.

2.9.3 As a result of illicit dealings with insiders and related parties and/or due tooperational losses, a number of banking institutions failed to meet the prescribedprudential capital adequacy ratios.

2.10 Unsustainable Earnings

2.10.1The high paper profits that were recorded by some banks prior to 2004 were largelya result of revaluation of assets in sympathy with inflation and exchange ratedevelopments in the market. In some cases, banks declared dividends from theunrealized profits arising from investments in long-term assets which were

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experiencing an asset price bubble. Significant losses were recorded when assetprices crashed.

2.10.2 In a bid to enhance earnings in the face of increased competition and high operationalcosts, imprudent financial institutions engaged in non-core activities which werenot sustainable and in some cases, non permissible.

2.11 Chronic Liquidity Challenges

2.11.1 In a number of cases, the Reserve Bank noted that some banking institutions did nothave comprehensive liquidity and funds management strategies and policies. Poorboard oversight and lack of adequate liquidity risk management systems furtheraggravated the liquidity problems. Long-term non-performing assets were recklesslyfunded through short-term liabilities, in an enviroment of rising interest rates.

2.11.2 Deposit flight to banks largely perceived as less risky exacerbated the liquidity crisisfor smaller banks following the placement of a number of banks under curatorship.

3 TROUBLED BANKING INSTITUTIONS

3.1 Century Discount House Limited (CDH)

3.1.1 The discount house was closed on 2 January 2004 after a determination by theReserve Bank that the institution was insolvent and was facing serious liquidityproblems.

3.1.2 The insolvency was a result of imprudent lending to ENG Asset Management (Private)Limited, whose holding company had acquired CDH Limited from Century HoldingsLimited without regulatory approval.

3.1.3 At the time ENG Asset Management (Private) Limited was an unsupervised entity.

3.1.4 The discount house was later placed under liquidation, and the liquidator is suing thedirectors of Century Discount House in their personal capacities for gross negligencein running the affairs of the institution.

3.2 Rapid Discount House Limited

3.2.1 Rapid Discount House Limited was registered as a discount house on 15 October1997.

3.2.2 The institution was placed under curatorship on 26 April 2004, following adetermination by the Reserve Bank that it was insolvent and was not operating inaccordance with sound administrative and accounting practices and procedures.

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3.2.3 The capital shortfall emanated from a high volume of imprudent, unauthorized non-performing insider loans.

3.2.4 Further, the institution had departed from its core business of money marketinvestments and was issuing loans to companies connected to the directors andshareholders. The said loans were deliberately disguised as NCDs issued to variouscounterparties.

3.2.5 Efforts by the curator to pursue new investors failed due to the level of insolvency,whilst the existing shareholders were unwilling or unable to put up the requiredcapital. As a result, the discount house was placed in compulsory liquidation on 1December 2004.

3.2.6 The liquidator has instituted proceedings against directors for negligent conduct ofbusiness in terms of Section 318 of the Companies Act [Chapter 24:03].

3.3 Barbican Bank Limited

3.3.1 Barbican Bank Limited, a wholly owned subsidiary of Barbican Holdings Limitedwas licensed as a commercial bank in December 2002 and commenced operationsin July 2003.

3.3.2 The Bank faced serious liquidity challenges largely emanating from the funding ofsister companies such as asset management companies and group subsidiaries inSouth Africa as well as non performing insider loans.

3.3.3 The bank engaged in fraudulent foreign exchange activities to fund operations offoreign subsidiaries. The bank used local depositors’ funds to support its operationsin South Africa, London and Zimbabwe.

3.3.4 Poor corporate governance practices were at the centre of the challenges that facedthe bank. There were no separate and independent boards for each subsidiary and theholding company. In addition, there was over domineering by the Chief ExecutiveOfficer who was one of the major shareholders.

3.3.5 The group mixed banking and non-banking business despite an earlier undertakingby management to desist from the practice after being warned of the dangers ofsuch practice by the Reserve Bank.

3.3.6 The bank also abused Reserve Bank liquidity support by funding non-banking activitiessuch as purchase of shares in various counters on the stock exchange.

3.3.7 A Corrective Order was issued to the bank on 13 January 2004, to address theidentified deficiencies and irregularities.

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3.3.8 The Reserve Bank subsequently determined that the institution was insolvent andilliquid. The board and shareholders failed to resolve the challenges faced by thebank resulting in the Reserve Bank placing the institution under curatorship on 15March 2004.

3.3.9 The Curator confirmed that the bank was both insolvent and illiquid and henceexplored possible ways to recapitalize the bank.

3.3.10Shareholders subsequently made half hearted proposals which fell short of fullyaddressing the liquidity and solvency challenges facing the bank.

3.3.11 In view of the above, recommendations were made to incorporate assests of thebank into Zimbabwe Allied Banking Group (ZABG) in January 2005, as part of theimplementation of the Troubled Bank Resolution Framework.

3.3.12 The Reserve Bank has extended curatorship to 28 February 2006 to facilitatefinalization of outstanding issues.

3.4 Trust Bank Corporation Limited

3.4.1 Trust Bank Corporation Limited began operations in January 1996 as a merchantbank and converted its licence to a commercial bank in 2000.

3.4.2 The bank was facing serious liquidity and solvency challenges emanating from rapidexpansion without a corresponding increase in capital, as well as high levels of non-performing loans.

3.4.3 Poor corporate governance structures, which resulted in poor asset and liabilitymanagement also contributed to the bank’s demise. The bank was also engaging innon-banking activities through a Special Purpose Vehicle (SPV), TMB Nominees.

3.4.4 These challenges were a reflection of technical mismanagement which eventuallyunleashed cosmetic and desperate management practices.

3.4.5 Following the findings of an onsite examination by the Reserve Bank, an independentinvestigation of the bank was commissioned which confirmed that the bank wasfacing liquidity challenges.

3.4.6 The bank’s capital deficit was a result of huge losses stemming from poor assetquality and the inhibitive cost of refinancing huge liquidity net mismatches.

3.4.7 Various merger initiatives, with a number of local and regional investors failed tosail through, largely as a result of the huge capital deficit.

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3.4.8 Due to the incessant challenges at the bank, Trust Bank’s board and managementwere restructured, by order of the Reserve Bank. In addition, the Reserve Bankappointed a full time supervisor on 20 January 2004 to monitor the situation at thebank on an on-going basis. However, the financial condition of the institutionworsened as there was no tangible progress made on the re-capitalization thrust.

3.4.9 Consequently the bank was placed under the management of a curator on 23September 2004.

3.4.10 In line with the Troubled Resolution Framework the assets of the bank were sold toZABG. The alternative strategy, straight liquidation of the bank, was consideredundesirable due to potential prejudice to the depositors and creditors whomcuratorship is designed to protect.

3.4.11 Trust Holdings Limited, the shareholder of Trust Bank Corporation Limited, iscontesting the disposal of assets to ZABG by the curator. The curatorship periodhas been extended to 28 February 2006, in order to allow for the finalization of theappeal noted by the shareholder of the bank to the Reserve Bank of Zimbabwe, againstthe curator’s actions.

3.4.12 Royal Bank Zimbabwe Limited

3.4.13Royal Bank Zimbabwe Limited commenced commercial banking operations on 8May 2002.

3.4.14Royal Bank Zimbabwe Limited was placed under curatorship on 4 August 2004,after it was determined that it was facing chronic liquidity problems and was insolvent.

3.4.15The capital deficit was mainly attributed to non-performing loans, the bulk of whichwere insider loans.

3.4.16The bank failed to inject the required capital and liquidity to meet maturing liabilitiesand extinguish the Reserve Bank liquidity assistance facility.

3.4.17The directors engaged in malpractices which included granting of insider loans, illegalforeign currency dealing, siphoning of depositors funds and poor corporategovernance practices.

3.4.18The Directors recapitalized the bank using depositors’ funds in violation of both theBanking Act and the Companies Act.

3.4.19 Technical mismanagement by the bank led to cosmetic management tendenciesinvolving hiding past and current losses to buy time and remain in control whilelooking and waiting for solutions.

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3.4.20Negotiations were pursued with potential investors to inject capital but these talkscollapsed after due diligence exercises unearthed the true extent of the huge capitaldeficit and poor corporate governance practices which rendered the bank unviable.

3.4.21 It was against this backdrop that the Reserve Bank placed the bank under curatorship.

3.4.22Royal Bank’s assets were sold to ZABG in January 2005 after it was determined thatit was the most appropriate solution compared to an outright liquidation of the bank.

3.4.23The Reserve Bank extended the period of curatorship for the bank from 31 December2005 to 28 February 2006, in order to allow for the finalization of the appeal notedby the shareholders of Royal Bank, to the Reserve Bank of Zimbabwe, against thecurator’s decision to dispose of the bank’s assets.

3.5 STATUS OF APPEALS

3.5.1 Stakeholders will be aware of the appeals to the courts against actions taken by thecurators in respect of some of the banking institutions amalgamated into ZABG, andthe subsequent direction by the Supreme Court that the former shareholders of thesaid banking institutions appeal to the Reserve Bank.

3.5.2 Whilst fully respecting the legitimacy of court rulings, as the Central Bank, we haveseen it fit that we recognize ourselves as interested parties in the matter under appeal,as we are in essence the principals to the curators.

3.5.3 In the interest of fairness, transparency and objectivity, we are pleased to report thatthe Bank has constituted an independent panel to make an in-depth enquiry andassessment of the entirety of what transpired in the institutions concerned, leadingto the curatorships and eventual amalgamation into ZABG.

3.5.4 The independent panel comprises:

• International experts on corporate governance;• Former Central Bank Governors from the region;• Retired High Court Judges;• Imminent business persons; and• Tested legal practitioners.

3.5.5 The findings and recommendations of the panel will then form an integral part of theeventual determination, which will be made public for the benefit of stakeholders.

3.5.6 Time Bank of Zimbabwe Limited

3.5.7 Time Bank of Zimbabwe Limited commenced operations in May 1997.

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3.5.8 The bank was placed under curatorship on 7 October 2004 after a determination thatthe bank was insolvent, was not operating in accordance with sound administrativeand accounting policies, and was experiencing serious liquidity challenges.

3.5.9 The chronic liquidity challenges experienced by the bank emanated from poorcorporate governance practices and weak risk management systems. All key decisionscentered on one senior member of management, rendering the board ineffective.

3.5.10The bank engaged in schemes that involved the booking of fictitious loans in orderto inflate the bank’s balance sheet as well as provide an artificial basis for postingnon-existent income.

3.5.11This cosmetic management was characterized by chronic insider manipulation andfraudulent misrepresentation. It is against this background that depositors’ fundswere siphoned under a well orchestrated and calculated fraudulent intricate web ofrelated company transactions.

3.5.12The period of curatorship was extended to 28 February 2006, to facilitate finalizationof outstanding issues by the curator.

3.6 CFX Bank Limited

3.6.1 CFX Bank Limited was established following the merger between Century HoldingsLimited and CFX Financial Services in July 2004. Prior to the merger Century BankLimited had been operating as a commercial bank since 2001.

3.6.2 CFX Bank was placed under curatorship on 17 December 2004, following adetermination that the institution was insolvent and facing serious liquidity andprofitability challenges.

3.6.3 There were a number of underlying causes to liquidity challenges faced by the bank.There was rapid expansion through acquisition of branches disposed of by otherbanks using depositors’ funds instead of shareholders’ funds. The problems alsoemanated from purchasing of foreign currency on the parallel market which was notaccounted for in the banks records.

3.6.4 In addition, cosmetic management was evident as reflected by bank managementwho were manipulating computer generated financial statements in order to concealaccumulated and monthly losses. Management also resorted to the creation offictitious assets in order to conceal the losses and funding gaps on illegal foreignexchange deals. The utilization of depositors’ funds to acquire fixed assets furtherexacerbated the liquidity problems. The huge non-performing insider loans alsocompounded the problem.

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3.6.5 The institution was adversely affected by poor corporate governance practices, asevidenced by numerous unauthorized excesses and imprudent write-offs of intereston insider loans.

3.6.6 The problems at the bank were compounded by inadequate capitalization. The bank’sshareholders failed to come up with concrete recapitalisation plans.

3.6.7 In January 2004, the bank was issued with a Corrective Order which, among otherissues, required it to improve effectiveness of risk management systems, submit aplan to maintain sufficient capital, tighten controls on insider lending, and to takenecessary steps to address its chronic liquidity problems.

3.6.8 A targeted on-site examination conducted on 15 December 2004 determined thatthe bank was insolvent and had a huge accumulated loss.

3.6.9 The bank’s internal auditors and independent external auditors also confirmed theaccumulated losses and manipulation of management accounts.

3.6.10 As a result of these losses, the bank was found to be insolvent.

3.6.11These findings were subsequently corroborated by the curator’s reports. In addition,the curator determined illegal dealings by counterparties on the bank’s assets,inadequate capitalisation, imprudent insider dealings, illegal foreign currencydealings and ineffective risk management.

3.6.12 The major shareholders failed to raise the funds required to recapitalize theinstitution. Consequently, a scheme of arrangement with creditors of CFX Bankwas eventually concluded in order to salvage the bank. The said scheme involves amerger between CFX Merchant Bank Limited and CFX Bank Limited. Followingdebt-equity conversions, depositors and creditors are now collectively the largestshareholders in the bank. In addition to the debt-equity conversions, someshareholders have made a commitment to inject additional capital.

3.6.13Significant progress has been made in resuscitating the institution which is expectedto reopen once all regulatory requirements have been satisfied.

3.7 CFX Merchant Bank

3.7.1 CFX Merchant Bank Limited started operating in April 2002 following acquisitionof the failed Universal Merchant Bank Zimbabwe Limited.

3.7.2 The bank was placed under curatorship on 17 December 2004 following a

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determination that the bank was technically insolvent and was facing liquidityproblems. The liquidity problems emanated from huge exposures to the troubledCFX Bank. Exposures to CFX Bank rendered the merchant bank technically insolvent.

3.7.3 The merchant bank also used convoluted schemes involving the transfer ofdepositors’ funds to SPVs in order to create an illusion of meeting the deadline forReserve Bank minimum capital requirement that had been increased to $7.5 billionwith effect from 30 September 2004.

3.7.4 As already indicated, the merchant bank will be merged with the commercial bank.

3.8 National Discount House Limited

3.8.1 The discount house experienced severe liquidity challenges in December 2003,owing to its exposures to financial and non financial institutions. The discount housealso faced solvency problems emanating from non-performing insider loans.

3.8.2 In order to address the solvency challenges, NDH engaged in a two-prongedrecapitalization programme involving conversion of debt into equity and a subsequentmerger with a local financial services group. Notwithstanding the successful debt-equity conversions, the strategic partner pulled out at the last minute.

3.8.3 A consortium of new shareholders has however injected new capital, and the bankwill resume operations once all the regulatory requirements have been satisfied.

3.9 Intermarket Banking Corporation Limited

3.9.1 Intermarket Banking Corporation Limited commenced operations in January 2003.The bank was placed under curatorship on 12 March 2004, following a determinationthat the bank was in an unsafe and unsound financial condition.

3.9.2 The Group Chief Executive and major shareholder dominated the boards of theIntermarket subsidiaries, and influenced the direction of all major transactions forhis personal gain. Consequently, the board was ineffective, and management panderedto the whims of the CEO.

3.9.3 The challenges which bedevilled the bank included imprudent risk managementpractices and poor corporate governance arrangements, which heavily compromisedasset and liability management. Substantial loans were granted to the CEO and relatedparties, which loans turned out to be non-performing.

3.9.4 The bank was an active player on the foreign exchange parallel market, andexternalized most of the funds.

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3.9.5 The curator worked extensively on the restructuring of the Group, and completed ascheme of arrangement which entailed a conversion of debt in the subsidiaries toequity in the holding company, which was sanctioned by the High Court in July 2005.

3.9.6 The bank resumed full scale operations in January 2006 following the upliftment ofcuratorship on 31 December 2005.

3.10 Intermarket Discount House Limited

3.10.1Intermarket Discount House Limited commenced operations in January 1991. Thediscount house was placed under the management of a curator on 12 March 2004,following a determination by the Reserve Bank that the institution was facing severesolvency and liquidity problems.

3.10.2The institution was heavily involved in lending activities, which is non-core businessfor discount houses. The discount house had a huge non-performing book, whichwas largely linked to the CEO and related parties.

3.10.3Following proposals for a market solution to the problems of the Intermarket bankingsubsidiaries, the curator worked out a scheme which entailed the conversion of debtin the subsidiaries into equity in the holding company.

3.10.4 To date, successes have been registered in respect of the resolution strategy, as thedebt-equity conversion was sanctioned by the High Court, and the institution is nowadequately capitalized. Curatorship was uplifted on 31 December 2005, and thediscount house has since resumed full scale operations.

3.11 Intermarket Building Society

3.11.1 Intermarket Building Society was placed under the management of a curator on 12March 2004. This followed a determination that the Society was experiencing severeliquidity problems emanating from exposure to the troubled Intermarket DiscountHouse.

3.11.2 In resuscitating the building society, the curator worked out a scheme in terms ofwhich the inter-company debts within the Group were set off against the assets ofthe discount house, thereby addressing the liquidity problems that had led to theplacement of the building society under the management of a curator.

3.11.3 The building society commenced full operations following upliftment of curatorshipon 1 August 2005.

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4 MEASURES PUT IN PLACE BY THE RESERVE BANK TODEAL WITH TROUBLED BANKS

4.1 Corrective Orders

4.1.1 A Corrective Order is a plan imposed on a banking institution to correct deficiencies.It specifies actions, persons responsible, and a timetable and target levels forachievement.

4.1.2 The nature of Corrective Orders issued included appointment of advisor or supervisor,suspending a director, officer or employee, amending, suspending or canceling alicence, and closure and liquidation.

4.1.3 The implementation of a Corrective Order is monitored by the Bank Licensing,Supervision & Surveillance Division (BLSS) which assess the progress of remedialactions.

4.2 Curatorship and Liquidations

4.2.1 Failure by banking institutions to adhere to Corrective Orders and capital demandsleft the Reserve Bank with no option but to either place the affected banks under themanagement of a curator or to place the institutions under liquidation.

4.2.2 Curatorship is aimed at protecting the interests of depositors and creditors, whilethe curator determines the full extent of the problems faced by the institutions beforerecommending the way forward.

4.2.3 Where an institution is found to be insolvent, or no longer able to remain viable, theReserve Bank will cancel the licence and apply to the High Court for the placementof the institution under liquidation.

4.3 Troubled Bank Resolution Framework

4.3.1 At the height of the problems in the banking sector, the Reserve Bank created theTroubled Bank Fund to resolve solvency and liquidity deficiencies in bankinginstitutions.

4.3.2 A number of banking institutions that benefited from the Troubled Bank Fund notonly failed to repay the loans, but also failed to recapitalize, or to conclude variousmerger talks which they were pursuing. Capital Verification Exercises undertakenby the Reserve Bank confirmed that certain institutions had no capacity to inject therequired resources, despite being granted adequate time within which to do so.

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4.3.3 When faced with the imminent collapse of no less than nine banking institutions inthe year 2004, it was clear to the Reserve Bank that liquidation of these institutionswas not a feasible option as it would have resulted in serious losses to depositorswho stood to recover only a few cents for each dollar deposited in the troubledinstitutions.

4.3.4 At the same time, the resultant erosion of confidence in the banking sector couldresult in the loss of a vital source of credit, increased costs of deposit insurance,and ultimately destabilize the economy. The Reserve Bank then formulated acomprehensive Troubled Bank Resolution (TBR) framework to address problemsin the banking sector in a holistic fashion.

4.3.5 The TBR framework was designed to achieve the following objectives:a) Strengthen the banking system and promote sound banking practices;b) Develop permanent solutions for troubled banking institutions;c) Promote economic development and growth;d) Restore stability of the financial sector; and preserve indigenization of the

financial sector.

4.3.6 The resolution techniques applied were:a) Restructuring of the troubled institutions which included amalgamation of

institutions as well as mergers and acquisitions; andb) Liquidation

4.3.7 Outstanding balances owed to the Troubled Bank Fund were ceded to Allied FinancialServices (Pvt) Ltd, which is owned by Government to facilitate the conversion ofdebt into equity in the troubled banks.

4.3.8 Assets of three troubled banking institutions namely; Trust Bank, Royal Bank, andBarbican Bank, that qualified for amalgamation, were consolidated into a single entityknown as Zimbabwe Allied Banking Group (ZABG), which was granted a bankinglicence and commenced business on 31 January 2005.

4.4 Guidelines to the Market

4.4.1 Observations regarding the causes of the problems experienced in the banking sectorin 2003 and 2004 are that poor corporate governance and weak risk managementpractices were rampant in the sector. In a bid to further enhance corporate governanceand risk management practices and instill market discipline, the Reserve Bank issuedthe following guidelines:• Corporate Governance• Minimum Internal Audit Standards in Banking Institutions,• Framework on the Relationship Between Bank Supervisors and Banks’

External Auditors,• Accreditation of Credit Rating Agencies.

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5 LESSONS FROM THE FINANCIAL CRISIS

5.1 The supervisory authorities, the supervised institutions and their shareholders anddirectors, and other stakeholders have drawn some lessons from the problemsrecently. These include:

Capital…

5.2 Banks must maintain adequate capital which is commensurate with their risk profile.Fixed assets and other infrastructural developments should be funded by shareholders’funds. In view of the unstable operating environment, capital requirements for allbanks will be reviewed periodically.

Corporate Governance…

5.3 The Board of Directors must have adequate oversight over management and mustput in place effective risk management systems and internal controls. Non-executivedirectors must be equally accountable for the manner in which banking institutionsare run.

5.4 Bank ownership should be appropriately diversified, and shareholders must have thecapacity to meet the current and future capital needs of the institution.

5.5 There must be separation between shareholders and management in order to promoteeffective corporate governance.

Liquidity…

5.6 Banks must establish appropriate ALCO policy frameworks and enhance capacitiesin their Treasury Departments.

5.7 Banking institutions must put in place effective asset and liability managementcommittees and bench marks in order to competently manage liquidity and marketrisk.

Importance of Public Disclosure...

5.8 In order to promote effective market discipline, banks must adequately discloseinformation which will allow members of the public to make rational decisions.

External Auditors…

5.9 Banks’ external auditors should critically evaluate the risks faced by financialinstitutions, while leveraging off the work done by bank supervisors and internalauditors.

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Curatorship…

5.10 It was noted that curatorship should be for a limited period of time in order to maintainconfidence in the banking sector, and minimize financial loss to depositors. Goingforward, banks that do not demonstrate continued viability will be liquidated, withno recourse to curatorship.

Prompt Corrective Action…

5.11 Regulatory forbearance is costly and should be avoided. The Reserve Bank should,therefore, identify problems early, and take prompt and appropriate supervisoryaction. A firm but fair exit policy for failing/insolvent banks is critical for ensuringa safe and sound financial sector.

Supervisory Processes…

5.12 Another lesson learnt from the challenges experienced in the banking sector is thatsupervisory processes must not trail behind developments in the financial sector,but should stay abreast of same, to enable pre-emptive corrective measures to betaken.

5.13 In light of the above-mentioned lessons the Reserve Bank is enhancing its supervisoryprocesses on an on-going basis.

6 ENHANCED SUPERVISORY PROCESSES

6.1 Risk Based Supervision

6.1.1 Faced with new challenges in the banking sector, the Reserve Bank had to refine itssupervisory approaches. In this regard, the Bank has reinforced its framework forrisk-based supervision.

6.1.2 The risk-based supervision approach emphasises thorough understanding of thesupervised entity’s risk management processes. The scope and intensity of supervisionprograms and activities are then customised to suit the specific risk profile of theparticular institution.

6.1.3 In pursuance of the risk focused supervision approach, the Reserve Bank conductsregular prudential meetings with bank management and external auditors to discusskey challenges and developments. The frequency of such meetings depend on thedegree of supervisory concern in respect of a particular banking institution.

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6.2 Prompt Corrective Actions

6.2.1 The Reserve Bank’s thrust going forward is to implement prompt corrective actionprograms to deal with irregularities in the financial sector. Prompt Corrective Actions(PCAs) are automatic rules that serve to contain regulatory forbearance and aremeant to lead to prompt supervisory action.

6.2.2 PCAs call for the early identification of problems to ensure that preventive andcorrective measures are adopted timeously.

6.2.3 Among others, the framework provides for stress testing of individual bankinginstitutions and the entire market. In addition the Reserve Bank will also employcomprehensive early warning systems to identify problem banks for earlyintervention. The systems enable the Reserve Bank to detect financial weaknessesand vulnerabilities and to take pre-emptive steps to reduce the risk of bank failuresand financial crises.

6.3 Consolidated Supervision

6.3.1 The Reserve Bank is enhancing its framework for consolidated supervision in orderto effectively supervise banking groups in the wake of financial conglomeration.

6.3.2 Consolidated supervision entails a review of both banking and non-banking activitiesconducted by a bank holding company with a view to determine the extent to whichthe holding company and its subsidiaries or affiliates comply with prudentialregulatory requirements.

6.3.3 Consolidated supervision reduces regulatory arbitrage, and enhances adequate andeffective supervision of all entities belonging to a group. It also enables the ReserveBank to adequately evaluate the impact of non-banking risks in a financial group, onthe supervised entities.

6.4 Information Technology Certification

6.4.1 The Reserve Bank noted with concern that some of the challenges that led to thedemise of some institutions involved growing innovation by professional fraudsterswho intruded computer systems with the sole intention of manipulating outputs infulfillment of personal, selfish and often criminal ends.

6.4.2 The Reserve Bank, before approval of publication of banking institutions’ financialstatements, now requires banking institutions to furnish it with certification of theadequacy of Information Technology policies, risk management and security systems.This approach will facilitate validation of the authenticity and integrity of financialdata-bases in the banking sector.

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6.5 Coordination & Cooperation with Other Regulators

6.5.1 The Reserve Bank has established working relationships with other local and regionalregulatory authorities, consummated, in some cases, through memoranda ofunderstanding.

6.5.2 The memoranda of understanding enhance sharing of information, which is mutuallybeneficial to all parties, and help in reducing supervisory gaps, regulatory arbitrage,and enhance consolidated supervision.

6.6 Capacity Building

6.7 The Reserve Bank continues to enhance skills in Banking Supervision on an ongoingbasis. The Division now has a diversified skills base, which includes banking, finance,accounting, economic statistical modelling, IT and legal.

6.8 Supervisors have received specialist training in various aspects of banking operations.Further, Banking Supervision staff has access to international training by thesupervisory standard setting Bank for International Settlements (BIS). All theDivision’s staff members are linked to Financial Stability Institute’s comprehensive,web-based specialist training program for bank supervisors.

6.9 The comprehensive training and development initiatives will go a long way towardspreventing some of the challenges that bedevilled the banking sector, which includedcreative accounting and manipulation of data by some banking institutions to disguisetheir true conditions.

DR. G. GONOGOVERNORRESERVE BANK OF ZIMBABWE24 JANUARY 2006

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APPENDIXNo Commercial Banks

1. Agribank

2. Barclays Bank

3. CBZ Bank Limited

4. FBC Bank Limited

5. Intermarket Banking Corporation

6. Kingdom Bank

7. Metropolitan Bank

8. MBCA Bank

9. NMB Bank

10. Stanbic Bank

11. Standard Chartered Bank

12. ZABG

13. Zimbank

Under Curatorship

CFX Bank

Time Bank of Zimbabwe

Merchant Banks

1. ABC Corporation

2. Genesis Merchant Bank

3. Interfin Merchant Bank

4. Renaissance Merchant Bank

5. Premier Merchant Bank

Under Curatorship

CFX Merchant Bank

Finance Houses

1. ABC Asset Finance

2. Sagit Finance House

3. Trustfin

4. ZDB Financial Services

Discount Houses

1. ABC Securities

2. Discount Company of Zimbabwe

3. Highveld Financial Services

4. Intermarket Discount House

5. National Discount House

6. Tetrad Securities

Building Societies

1. Beverley

2. CABS

3. Intermarket Building Society

4. FBC Building Society

Under liquidation

FNBS

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MONEYLENDING INSTITUTIONS1. Acceptable Benefits Consultancy.

2. All Angles Investments

3. Alstroemeria Investments

4. Amazah Enterprises

5. Arch Financial Services (formerly The Message Centre)

6. Arkversion Enterprises

7. Asaha Finance

8. Ashbourne P/L

9. Av-Moore Enterprises

10. Balm Finance

11. Batsi Financial Services P/L

12. Baur Investments

13. Baystock P/L

14. Beatnog Finance

15. Becnet Financial Services

16. Belnesia Investments

17. Blow Finance

18. Blue Carp Capital Finance

19. Bobs Microfinance

20. Booby Cay Investment

21. Bowlex Investments

22. Brambloch P/L (Get Finance)

23. Bripen Investments

24. Bulawayo Soft Loan Scheme Pvt. Ltd.

25. Burgnote Investments (formerly Jocend Finance, E& J Finance)

26. Cabvale Investments

27. Calsev Finance

28. Career Pursuit Consultancy

29. Casdec Finance

30. Casrow Investments

31. CFC Shoniwa Enterprises

32. Chrutley Marketing

33. Cloudnet Investments P/L t/a Fezis Society

34. Codelodge Financial Services P/L

35. Convince Investment P/L

36. Deepwaters

37. Dixfal Finances P/L

38. DPC Finance

39. Dramatic Investments P/L

40. Dunogy Finance

41. Easy Money Fin. Services

42. Elidave Financial Services

43. Elija Pawn Brokers P/L

44. Enashy Investments

45. Equalizer Finance

46. Eugman Trading P/L

47. Extracity Serv. P/L

48. Fantac Investment P/l

49. Fawkes Capital

50. Ficil Investments

51. Finance Emporium

52. Finance Resource Centre

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