Banks face crisis of confidence.

The banking system in Zambia is facing a major crisis of confidence following the failure of two more banks over the past two months. The last three years witnessed an explosion of new banks all eager to cash in on government bonds but now the boom is over, and the cracks are beginning to show.

The collapse of two more indigenous banks at the tail end of last year has plunged the indigenous banking sector into a massive crisis of confidence. Commerce Bank was placed under receivership by the Central Bank on November 29 while Co-operative Bank closed down on December 5 without even notifying Bank of Zambia (BOZ) (the Central Bank) as required by law. This brings to four the number of indigenous banks that have gone under in the past eight months.

The blow is being felt most severely by the ordinary Zambian who is already reeling under the Structural Adjustment regime. Worse, the manner in which the banks have collapsed, the allegations of high-level fraud and the Government's attitude to it all is seriously undermining confidence in the entire banking system.

One example was the rather belated effort by BOZ Governor, Dr Jacob Mwanza, to alert depositors to the impeding danger. At a press conference, he stated: "Once banks are there, they fall... We have to get used to this. Like any other business, from time to time you get failures but it does not mean that when a bank is small it will collapse."

This was small comfort to depositors who woke up the next morning to news that the Co-operative Bank had wound up business.

The Central Bank has come under heavy criticism for failing to efficiently monitor and supervise commercial banks. But it counters that no amount of supervision will ever prevent banks run by unprofessional and irresponsible managers and directors from failure.

As if to underline the point came the disclosure that the Registrar of Banks, Mr Felix Kani had demanded the removal of Mr Musa Siame, Chairman of the Commerce Bank. Mr Siame had been the principal shareholder in another indigenous bank, African Commercial Bank (ACB) which had also collapsed. According to highly placed bank sources he is alleged to have sold all his shares and withdrawn all his money a few days before the closure of ACB. The Central Bank which had advanced ACB several million Kwacha to support its weak liquidity position had been left high and dry.

In a letter dated November 22 addressed to Commerce Bank's Managing Director Mr Rashid Khan, Mr Kani said: "Events at the African Commercial Bank and the current liquidity problems that have beset your bank and the suspected involvement of your Chairman, Mr Musa Siame, have put in question Mr Siame's personal reputation and suitability to remain Chairman of your bank. I ask your board of directors to remove Mr Siame with immediate effect."

A week later, on November 29, Commerce Bank was put into receivership by the Central Bank. Unlike the case for the other banks that had failed: Capital Bank, Meridien BIAO and ACB, there was no evidence of insider borrowing at Commerce Bank or Co-operative bank, although police confiscated the passport and an undisclosed amount of money from Commerce Bank boss Mr Khan.

Later, opposition UNIP Member of Parliament Mr Ken Ngondo, a former BOZ Executive, charged that Mr Siame had externalised over K3bn and demanded that he should be arrested and charged. It is not yet clear whether this was depositors' money from Commerce Bank or proceeds from offloaded shares in ACB. BOZ refuses to comment on the matter.

The Government too disavows responsibility for the mess. Outside Parliament, Finance Minister Ronald Penza blamed the press for sensationalising the banking crisis and causing the run on deposits at Commerce Bank. Yet in his official Ministerial statement to Parliament he tied the failures to market forces.

More than a dozen banks entered the market over the last two years in a headlong rush for high-yielding Treasury Bills (the bonds issued by the Central Bank to soak up excess liquidity). Between 1992 and 1993 these instruments made banking the most profitable business, paying interest above 100%. Now banks are on a diet.

Interest on Treasury Bills has dropped to less than 30%, many companies are technically bankrupt and job loses are the order of the day. Nervous depositors have reacted by shifting their accounts from small indigenous banks to international banks like Barclays, Standard Chartered and Stanbic.

The reputation of indigenous banks has seldom been worse. The President of the opposition National Democratic Party, Mr Tenthani Mwanza protests: "The trend of closing banks is becoming bad for the economy. Government must know that this brings uncertainty and doubt to the financial sector. Nobody knows which bank will collapse tomorrow. Only foreign banks will remain and they have their own interests to serve."

No explanation

There has been no official explanation of Co-operative Bank's troubles. Although BOZ acknowledged that it was aware of the bank's liquidity problems, it described the 'voluntary' closure as "illegal". Under the Banking and Financial Services Act, banks must seek permission to effect a closure.

Co-operative Bank was primarily intended to serve rural and peri-urban co-operative unions involved mainly in agricultural and small scale enterprises. It operated largely as a credit union and most of its borrowers were farmers bankrupted by a persistent drought which hit the country twice in the last three years. Savage competition from subsidised imports from South Africa has compounded farmers' woes. Unlike in the past, the Paris Club, the World Bank and IMF have ordered the Government to stop guaranteeing farmers' loans.

Until this spate of bank failures, disclosure rules were never enforced to allow depositors to judge which banks were risky. So overwhelming was the secretiveness that banks could not even disclose the number of accounts they held. Now, BOZ has invoked a rule requiring banks to publish their monthly statements quarterly.

Critics however maintain that unless these statements are audited they are useless; managers can manipulate them. Others fret that uniform disclosures may endanger small banks. "Small banks, unlike the big ones, have very few big clients and some disclosure, say of the level of depositors, may make some big depositors realise that the bank owes its survival to them and many in turn try to arm-twist the bank," a Lusaka financial analyst wrote in The Post newspaper.

Mr Zahid Nizam, founder of Credit Africa Bank (CAB), which is facing a court case for allegedly bribing a manager at National Airport Corporation to open an account, also turned the heat on the media.

He claims he has evidence that some banks paid journalists to spread false rumours. CAB was recently listed by the weekly Chronicle newspaper along with Safe Deposit, Indo-Zambia, Prudence and Manifold Investment as candidates for imminent closures.

More worrying is that the upheavals in the banking sector might affect the emergent securities business. Nearly all securities firms licensed by the Security and Exchange Commission (SEC) are connected to commercial banks. Although official records list different names of shareholders, insiders maintain that several banks and their securities businesses can be traced to a few wealthy families.

Another factor causing nervousness about indigenous banks is money laundering. Speculation on who is who in the drug trade is rampant in Lusaka. "Large amounts of ill-gotten money have been deposited in our banks without anyone getting concerned," complained the anti-vice Drug Enforcement Commission Director Raphael Mungole. He adds: "In order for banks to avoid being subjected to investigations with the attendant adverse publicity, and also to prevent loses which ensue, banks should enhance their internal security initiatives. Banks must demonstrate forcefully to customers, potential customers and to the public at large that they do not intend to be used as depository or transfer facility by criminal elements."

That is easier said than done. For now, depositors are not taking chances. "Whom can we believe? It was the same Penza and BOZ who assured everyone that depositors' money was safe with Meridien and ACB. Where is it today?" demanded a rueful Mr Joachim Banda, a small-time Lusaka trader who lost his all when the banks went down. This is the nub of the crisis.