CONTENTS

1 CAUSES OF THE PROBLEMS EXPERIENCEDIN 2004 AND 2005 .. 53 TROUBLED BANKING 1 Discount House Limited (CDH) .. 1 Discount House Limited .. Bank Limited .. 1 Bank Corporation Limited .. 1 Bank Zimbabwe Limited .. 1 Bank of Zimbabwe Limited .. 1 Bank Limited .. 2 Merchant Bank .. 2 Discount House Limited .. 2 Banking Corporation Limited .. 2 Discount House Limited .. 2 Building Society .. 2 84 MEASURES PUT IN PLACE BY THE RESERVE BANK TO DEALWITH TROUBLED BANKS .. 2 Orders .. 2 and Liquidations .. 3 Bank Resolution Framework .. 3 to the Market .. 3 35 LESSONS FROM THE FINANCIAL CRISIS .. 3.

2 3 4 Corporate .. 3 .. 3 5 Importance of Public Disclosure .. 3 3 6 Prompt Corrective .. 3 6 Supervisory .. 3 66 ENHANCED SUPERVISORY PROCESSES .. 3 Based Supervision .. 3 Corrective Actions .. 3 Supervision .. 3 Technology Certification .. 3 & Cooperation with Other Regulators .. 4 Building .. 4 021. 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 the end of 2004, ten banking institutions had been placed under curatorship, twowere under liquidation, and one discount house had been closed.

3 The banking publicendured tremendous psychological, emotional, social and financial is our considered view that the public has the right to know what transpired and theprogress made to date in rehabilitating the troubled banking 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 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 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.

4 Stringent supervision has alsoenhanced the standard of market discipline in the banking 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 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 of the remaining banking institutions will make recommendations onwhether their respective institutions should be resuscitated or liquidated, beforethe expiry of the current curatorship MAJOR CAUSES OF THE PROBLEMS EXPERIENCED IN2004 AND number of banking institutions with deep-rooted structural anomalies, inadequaterisk management systems, poor corporate governance practices.

5 Liquidity andsolvency challenges failed to adjust to the difficult macroeconomic environmentobtaining in 2003 and liquidity and solvency problems that were being faced by some banks wereunderpinned by a number of problems as fully discussed Inadequate Risk Management financial institutions were operating with inadequate risk management systemsand poor management information 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 Poor Corporate 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 banking institutions unethically maintained two sets of financial records.

6 Oneset for regulatory convenience at licensing, and on an ongoing basis another setreflecting the correct profile of the Diversion from Core Business to Speculative 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 In addition, some banks abused liquidity support from the Reserve Bank to fundnon-banking subsidiaries and associates requirements. This stifled economic activityin the real 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.

7 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 Creative financial institutions were misrepresenting their financial condition, whilesome were tampering with the information systems to conceal losses by creatingfictitious assets and understating expenses and Overstatement of banking institutions were overstating their capital positions by under-providingfor non-performing loans, while others falsified transactions to 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 High Levels of Non-performing Insider corporate governance practices, weak underwriting and monitoring standards,as well as ill-planned growth contributed to excessive levels of non-performinginsider Some banking institutions disregarded set prudential lending limits notably toinsiders and related parties.

8 In some cases, interest was not charged on insider loansand the loans were eventually written off without board 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 Unsustainable 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 were5experiencing an asset price bubble.

9 Significant losses were recorded when assetprices 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 Chronic Liquidity 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 Deposit flight to banks largely perceived as less risky exacerbated the liquidity crisisfor smaller banks following the placement of a number of banks under TROUBLED BANKING Century Discount House Limited (CDH) discount house was closed on 2 January 2004 after a determination by theReserve Bank that the institution was insolvent and was facing serious insolvency was a result of imprudent lending to ENG Asset Management (Private)

10 Limited, whose holding company had acquired CDH Limited from Century HoldingsLimited without regulatory At the time ENG Asset Management (Private) Limited was an unsupervised 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 Rapid Discount House Discount House Limited was registered as a discount house on 15 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 capital shortfall emanated from a high volume of imprudent.