Indigenisation: why banks deserve caution

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FOLLOWING on the piece he wrote last week in which he tried to explain the need for caution when securing shareholdings in foreign banks operating in the country, central bank governor, Gideon Gono, this week draws attention to the inadvertent dangers that could befall the economy if caution is thrown to the wind.
President’s advice
IT has been erroneously suggested in some publications this week that President Robert Mugabe has not given us direction on this important matter.
During his 89th birthday interview with ZBC’s Tarzan Mandizvidza, the journalist asked the president to comment on what he termed “public spat between officials of the same government over the issue of indigenisation and economic empowerment”, singling out differences over application of this policy to financial institutions and the response was:“Well, I suppose it is the application, how do we apply that principle (51/49%) of indigenisation and empowerment? When it comes to natural resources, that is very clear.
“When it comes now to areas of technology, in fact, the technology is borrowed, then you cannot apply the same principle (51/49) because the resource is not yours … Those who have brought the resource here own that resource. What you can say is you are participating in that resource … and this is a resource that is coming into the country and for that one, you can go 50/50 or you can agree on a ratio which is sustainable and equitable. It is not in every case that we must apply the 51/49.”
Now, what more clarity and guidance do we want? My interpretation here is that the 51/49 policy is not cast in concrete. Where it is necessary and pragmatic that we vary that approach through negotiation, we must not be afraid to negotiate and do so in a fair and sustainable way.
On February 23, at the national Heroes Acre during the burial of the late ambassador John Mayowe, Vice-President Joice Mujuru echoed the same position.
She called on the nation to appreciate that the concepts of indigenisation and economic empowerment were not mutually exclusive and that there is need to “be practical and flexible enough to know when to emphasise one or the other without compromising the broad thrust of the revolutionary initiative”. Again, interpreted simply, this means a one-size-fits-all approach to different sectors of the economy needs re-thinking.Advertisement

Back to the basics
Elementary commerce tells us that production is a function of four factors, namely land, (including all in or under it), entrepreneurship, (the desire to take calculated risks in anticipation of profits), labour (the human resources factor) and capital (technology and financial resources). All other components are variations of the same thing but in substance, nothing has changed.
The significance of this reality is to remind stakeholders that the legitimate battle for and subsequent acquisition and indigenisation of our land is fundamentally different in character, historical significance and justification from our efforts to indigenise capital, technology, or entrepreneurship, which is what the banking sector is.
Indeed, as we are already doing, we should open up the sector to many new players and we are on record calling on citizens with appetite for banking business to come forward to get new banking licences. The idea is to grow the cake, not to shrink it.
Principally, for example, whatever we decide to do with our land and other land based resources such as our mineral heritage, agriculture and tourism will not result in their physical relocation to another part of the world.
Indeed, the Great Dyke will not go anywhere but remain where it is until us, as Zimbabweans, decide on how we are going to exploit what is under it. The same applies to our land, and Victoria Falls, in case of tourism.
These resources were God-given within the geographical perimeters of our motherland and sons and daughters of Zimbabwe went to war and some perished in their just cause and quest to have these resources back into the hands of their rightful owners as our forefathers were violently and brutally dispossessed.
The same cannot, however, be said regarding entrepreneurship, technology, and financial capital. These factors can come and go where conditions are more favourable for them to thrive from one location to another, hence the need to treat them with caution and not as if we are dealing with land, minerals and other natural resources.
Where there is capital flight or technology withdrawal, the impact can be decisively negative not only at the micro levels of the individual companies but also at the macro levels of the economy.
It has been observed a country’s economic environment and attractiveness to potential investors is, among other factors, shaped by adherence to the global laws, norms and ethos relating to resources in a country including quality of labour, life and infrastructure. There should be respect for property rights, including trademarks, patents and intellectual property, international franchise and other agreements such as bilateral investment protection agreements and proximity to markets and general ease of doing business.
A country’s economic environment is, therefore, a delicate circle of cooperative factors which can only be ignored by those who mistakenly believe and forget that the world has become a global village which frowns upon certain actions beyond what is regarded as historically justifiable.
Brand equity
Financial institutions represent a combination of capital (financial and technological), entrepreneurship, brand equity and goodwill developed over years of consistent quality service and reliability.
If we are to take, for instance, the signage of an international bank without saying anything to the market, and put it onto a building of a struggling indigenous bank today, without question, that indigenous bank will swell with deposits.
The opposite will be the case if, for instance, we take down the signage of Museyamwa or Chikonamombe (indigenous) struggling banks and put it on the building of an international bank. In no time, we will witness a near-run on that bank. Such is the power of brands, reputation, networks and perceptions that need to be managed properly as we implement policy.
Alternatively, take down the Coca-Cola signage along Seke Road in Harare and replace it with Museyamwa or Chikonamombe logos, you will have a different market reaction to the product coming out of that bottling plant even when there has been no change in formula, quality, price or management.
Such is the need for structured, measured and sober approaches that must be adopted in acquiring stakes in capital, technology and entrepreneurship-intensive companies and sectors. A one-size-fits-all or a jambanja approach to indigenisation is ill-advised and inappropriate, especially in the banking sector.
It is also a fact that where there is perceived attacks on or against capital or, entrepreneurial or perceived attacks on intellectual property, brands, franchises and security of investments, the world is, because of globalisation, getting more united against such practices as countries believe that an attack on one is an attack on them all because of the common characteristics of these factors of production.
Our own friends, the Chinese, Russians, Malaysians, South Africans, Zambians and others always advise us against unstructured interventions.
Systemic importance
Citizens and nations of the world are now invested all over through a web of alliances and it is sometimes difficult to clearly unravel whose interests one is hurting when you tamper with financial institutions.
Due to their size, international connectedness and complexity of the services they provide to the local economy, international banks in Zimbabwe are of systemic importance to the economy and any disruption in their operations, intended or otherwise, could cascade into the entire sector with dire consequences for the economy, already reeling under serious liquidity constraints.
Recent events in Europe and elsewhere are full of cases where countries have been brought down to their knees, riots erupted and governments changed overnight as a result of widespread financial dislocations and chaos arising from the failure of just one large bank.
This is because banking institutions sit at the nerve centre of the economy and as was said by the chairman of the Bank of Credit and Commerce International investigating team in 1992: “The failure of any substantial company is likely to cause loss, and often hardship, to creditors, employees and shareholders.
But when the company is a bank these results are magnified because banks deal in other people’s money and the creditors will include the bank’s depositors and customers, who may lose almost everything they have.”
Potential dangers
The knock-on effects of a rusty, unstructured and one-size-fits-all approach to the indigenisation of foreign owned banks are real. A significant number of the foreign-owned banks may not accept having their names or brands attached to something they have no control over at managerial and shareholder levels.
Accordingly, they will either choose to disinvest or remove their logos from the risks involved with associating their brand or names without power to influence business methods, decisions and direction of the bank.
I am aware some among us couldn’t care less if they go but as governor, with specific responsibilities to the sector, I care a lot.
There will be a significant down-grading of the rating of the local out-fit with the result that lines of credit, deposits, and other facilities currently being provided from a common pool of head-office resources will be reduced to the detriment of the local customers and economy. It takes time for a bank to rebuild lost confidence and trust.
There is a risk of drying up external lines of credit which are currently benefitting the country, especially in the critical tobacco and cotton sectors.
There is also a danger of needlessly attracting hostile sanctions on our financial sector as reckless and forced indigenisation of the financial sector can lead to unintended consequences. The land reform programme taught us how our detractors can turn bilateral disputes into international conflicts.
There is a further risk of financial isolation coming through disconnection from global payment platforms such as the Society for Worldwide Interbank Financial Telecoms (Swift), which is the gateway for all of the country’s foreign payments. Once the country is off Swift, even the local payment system which also runs on the Swift platform will collapse with far-reaching and serious consequences for the economy.
The Swift network is the channel through which all financial communications between banks are transmitted and disconnection from such a platform is equivalent to a wholesale embargo on all economic transactions, including critical transactions such as those involving medical, food, fuel and other such critical imports.
Under an environment of isolation, local banks would not be able to import cash and neither would they be able to repatriate. Local banks may actually see their correspondent bank relationships suspended or terminated. This is even more dangerous given our current situation where we do not have our own currency to fall back on.
Financial sanctions would affect international trade and lead to low foreign exchange generation, worsening the country’s balance of payments position.
Disruption of the activities of the few international banks we have in the country would have a significant effect in disturbing the conduits through which diaspora remittances are channelled further worsening our already precarious market liquidity situation.
Reaction of friends
Protection of property and intellectual rights, symbols and other forms of capital, entrepreneurial and technological ownership and inventions is something we cannot as Zimbabweans ignore or go against without risking international punishment, including from our “friends” who are fast becoming more like everybody else.
A case in point is where one of our oil-supplier friends at country level in Africa, upon learning that Standard Chartered Bank was being targeted for immediate compliance with indigenisation, instructed that all their money (a 10-figure amount) which was in another foreign-owned bank be repatriated to their country immediately fearing their bank would be next. Such is what we call the contagion-effect.
It took a lot of effort to persuade and assure the authorities in that friendly country that their money was still safe. The liquidity crisis and inter-bank disruptions which would have followed as a result of that single withdrawal would have caused a deep crisis and a negation of our efforts as a country to raise funds for such critical programmes as elections, food imports and civil servants pay, among others.
It is a chilling thought to imagine what would happen if we fail to pay our civil service, including law enforcement agents and security forces.
Proper timing is also very important when it comes to policy implementation because where the sequencing is wrong, uncoordinated and heavy-handed the results are often the opposite of the expected.
We do not have the luxury or security of our own currency to fall back on in the event of trouble; unemployment at record levels; threatening shortages of food, fragile balance of payments position, increasing company closures; low foreign direct investment inflows and insufficient exports to boost the country’s liquidity position.
These could be some of the catastrophic consequences of an unstructured indigenisation intervention which is not strategic, especially in the financial sector outside the framework suggested by the president. Ultimately, real indigenisation will come when Zimbabweans form and own their companies 100% across all sectors of the economy.