5 Relevance of Banking Lessons for Africa: Zimbabwe’s Experience

Laura Wallace
Published Date:
January 1999
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Leonard Tsumba

The rapid technological changes that have taken place during the last two decades have seen the world increasingly shrink into the global village. Barriers to economic relations are progressively disappearing, giving rise to new regional economic blocs and to deeper integration among existing ones. These developments have further intensified the integration of national economies.

Underpinning this trend has been the implementation of macroeconomic reforms in most countries throughout the world—with most notable benefits accruing to those regions that embarked early and quickly in integrating their economic and financial systems with the world economy. These regions include South East Asia and some countries in Latin America and recently, Africa and the new European democracies.

In response to the economic reforms and liberalization of financial markets, the world has seen a massive growth of cross-border capital flows, although very little of these flows have found their way to sub-Saharan Africa. Indeed, while private capital flows to emerging markets rose to $235 billion in 1996 from $192.8 billion in 1995, those to Africa declined to $9 billion from $13.6 billion. The world has also seen a rapid removal of trade barriers, such as import licensing and other nontariff barriers, along with the deregulation of domestic controls—all aimed at creating an inviting business and investment climate.

As we, in Africa, begin to fully appreciate the implications of globalization and deal with the attendant challenges it poses, solutions remain elusive. The challenges we face include maintenance of an enabling macroeconomic environment, liberalization of our foreign exchange arrangements, deregulation of controls on investment, aggressive promotion of exports, and the further liberalization and development of our financial systems. Yet, if we are to assume our role in the international economy, it is time that we respond to these challenges.

Thus, it is critical that we integrate our financial systems with the developed international financial markets. Over the last decade, major strides have been made to upgrade our banking systems, but much remains to be done if we are to develop systems and practices that are compatible with international standards. While this is going to be the main focus of my presentation, I have taken the liberty of first addressing some of the challenges of globalization that require our urgent attention.

Challenges of Globalization

So what are these challenges? It is inconceivable that sound banking arrangements can be achieved under conditions of macroeconomic instability. Thus, a key success factor—and challenge—would appear to be finding the political will to adopt appropriate policy reforms to achieve price stability. Experience suggests that countries, such as Mexico and Thailand, that embarked on financial liberalization before undertaking other macroeconomic reforms have suffered from destabilizing capital flows, high interest rates, and corporate distress.

For Africa, no doubt the biggest macroeconomic challenge will be to tame inflation, which still acts as a major impediment to growth and further economic and financial integration. Countries such as Malawi, Tanzania, Zambia, and Zimbabwe in Southern Africa have, in the recent past, experienced inflation levels in excess of 15 percent. This has resulted mainly from the need to finance large budget deficits through domestic and foreign borrowing—a development that has trapped some of our economies in a vicious circle of high domestic and foreign debt. The resultant high taxation levels have undermined production and investment.

The only way African economies can hope to reduce investment risks, which accompany high nominal interest rates and the crowding out of the productive sectors, is to bring about stable but low inflation. Overall price stability is vital for the successful development of financial markets because of the linkages between expected inflation, real interest rates, and exchange rates, as well as the way these relationships affect the allocation of investment resources. Each country must first put into place the right fundamentals. This will require, of course, prudent fiscal and monetary policies.

Another challenge of globalization is liberalizing foreign trade. On this score, much progress has already been made throughout Africa over the past decade. Both foreign exchange allocation and the determination of the price of foreign exchange are now being undertaken in a market setting. This means that financial institutions have had to adjust their operations and banking practices to manage these new responsibilities, previously a prerogative of central banks.

Trade liberalization brings with it stiff competition from all corners of the world. For Africa to benefit from the new order, therefore, it must adopt aggressive policies to promote both nontraditional exports and economic activity in general—a challenge that unfortunately will take time to address. This is especially so, given the current glaring asymmetries in economic fundamentals between the industrialized and developing economies.

One solution might be for African governments and the private sector to form some sort of “smart partnerships” to ensure that the private sector is able to generate enough foreign exchange to meet the cost of capital goods imports, as well as to service external debts, without interfering with market arrangements.

Liberalized capital account positions ensure even freer capital mobility, but full currency convertibility remains a major challenge given the limited capacity of our financial systems to intermediate large volumes of international capital flows. Development of financial systems to cope with this can only come with further banking sector reform and sound supervision, supported, of course, by fiscal and monetary discipline.

The development of sound banking systems and practices, however, is meaningless unless undertaken in an environment conducive to both domestic and foreign investment. This means that governments need to adopt transparent, consistent, and predictable procedures and policies. A major objective should be the establishment of international standards, consistent with the expectations of foreign investors. Such standards include security of investment, and the timely and consistent enforcement of legal provisions.

Sound Banking Systems and Practices

African economies have much to learn from the experiences of some South East Asian economies that have benefited from the transformation of their financial systems. In spite of recent setbacks, these countries have been able to realize sizable capital inflows, in both equity and direct investment. Indeed, of the total $235 billion private capital flows to emerging markets, almost one-half ($106.8 billion) has gone to Asian economies.

For Africa, globalization and the opening up of economies has brought a rapid increase in the number and range of banking institutions, nonbanks, and products and services on offer to customers. In Zimbabwe, for example, the number of deposit-taking or banking institutions has jumped to 33 in 1998 from 18 in 1990. In Mozambique and Tanzania, the state monopoly of the banking industry has been removed, and the more enterprising private sector has been allowed to take over. Besides traditional banking services, tailor-made products are now offered at competitive prices, and the quality of customer care has generally improved.

But the important question is have these changes brought enhanced credit delivery systems? It is evident that in most African countries, new market participants have tended to operate on the margin. This means that new financial institutions have often come on board highly undercapitalized, lacking the capacity to challenge the already established institutions. With a lack of effective competition, antiquated banking practices have continued to exist, as seen by the super-normal profits characteristic of African banking. In Zimbabwe, for example, banks’ margins are significantly higher than those in the more developed financial markets.

There are also numerous bank failures resulting from aggressive banking and a scramble for market share in an environment of poor supervision, coupled with frequent interventions from political circles.1 There is imprudent lending, stemming from inadequate regulations and supervision—as well as limited experience among financial institutions in risk pricing and management, a lack of commercial orientation, poor corporate governance, and lax internal controls. And the problems are compounded by a weak physical and financial infrastructure, a low skills base, a weak human and institutional capacity, a low level of savings, a heavy debt burden, and small and fragmented markets.

Thus, the challenge facing authorities is to ensure that Africa reaps the promised implied benefits from deeper and more developed financial markets, and from more effective financial intermediation. No doubt the answer lies in better supervision, a sound legal and regulatory framework, an efficient national payments system, and capacity building.


In the normal course of operations, it is imperative that the authorities monitor closely the performance of the deposit taking institutions through both on-site examinations and off-site analysis and surveillance. This means focusing on the usual prudential standards relating to initial capital and capital adequacy, asset quality, management, earnings, liquidity, insider lending restrictions, legal lending limits, full disclosure, and internal governance—as failure to follow these standards will inevitably lead to bank failures and the danger of contagion risk. In setting the standards and the regulatory framework, the authorities should take into account the experiences of other countries and incorporate objective and internationally acceptable guidelines—which must then be strictly adhered to.

Affirmative action—an important issue in a number of African countries—needs to be handled carefully and through specific measures, without attempts to lower or vary agreed regulatory standards. It should be noted that the achievement of sound and safe banking is facilitated in an environment that is not characterized by political influence, whether this be at the registration or liquidation stage, or in regard to other banking arrangements.

The performance of the banking institutions depends, to some extent, on the growth and development of the financial markets. However, banks should themselves be in a position to disclose, in a timely manner, as much accurate information as possible to their stakeholders—the owners, directors, management, government, and the public at large. This will go a long way toward eradicating the moral hazard problem that is prevalent in Africa, where the public generally believes that bank deposits are either guaranteed by the government or that banks will not be allowed to fail. Similarly, the public should be encouraged to choose banks on the basis of safety.

While the primary focus, from a prudential supervisory perspective, is on the deposit taking institutions, sight should not be lost of complementary actions that need to be taken by the authorities on reforming the rest of the financial sector. This is necessary because developments in these areas could harm the overall soundness of the banking system.

Legal Framework

It is critical that governments adopt measures to strengthen the legal framework on which standards and supervision are based. In order to avoid overlaps and gaps, it is essential that the supervisory and regulatory functions are handled by one body, either within the ministry of finance or central bank; alternatively, this can be delegated to a specialist institution or organization. The main point is that there must be accountability and clarity of roles. Policymakers, in particular, should have a thorough understanding of banking supervision.

Legislative provisions should be comprehensive and transparent, focusing on issues such as licensing and de-licensing criteria, supervisory powers, lending guidelines, provisioning, capital adequacy, good management, and corporate governance.

Payment System

In the strategic area of clearing, payment, and settlement, the central bank must play an active, leading role and be seen to be driving the planning and implementation of a robust system. The goal is to minimize the potential systemic risk that can result from a failure to settle by any of the participants in the payments process—a development that would, doubtless, disturb the financial system, with disastrous consequences for the rest of the economy.

The central bank must also focus on the increasing number of nonbanks now getting involved in the payments process and, to some degree, in the banking business. Examples include building societies, discount houses, finance houses, money brokers, development banks, pension and insurance companies, and supermarket chains. This will entail proactive analyses of the likely impact of the banking activities of nonbank institutions.

Similarly, the central bank must ensure that the development of information technology systems in the banking sector is coordinated, as this has a direct bearing on the successful operation of the clearing and payments systems, as well as on prudential monitoring and surveillance. The central bank is, of course, expected to ensure that potentially risky developments, such as the anticipated year 2000 computer systems failure, are addressed by all the financial institutions in a timely manner, so as to avoid wholesale failures of the banking systems. In Zimbabwe, some of the major banks have taken steps to ensure that their computer systems are year 2000 compliant. Furthermore, they have embarked on awareness campaigns to safeguard their clients’ information technology systems against this anticipated problem.

Capacity Building

For Africa, a key strategic issue is the urgent need to develop the skills and competencies required to carry out banking operations efficiently and effectively. The problem is that the overall pool of expertise and skills is limited relative to the growth of the banking industry. This is exemplified by reliance of African financial institutions on the IMF and World Bank, as well as on consultants from industrialized countries.

African policymakers will, therefore, need to give a high priority to staff training and human resource development programs. This will strengthen the capacity to understand supervisory standards and regulations, and it will facilitate effective management, internal controls, and strict adherence to prudential requirements. The availability of adequate management skills should always be a key consideration when bank licenses are issued. And the supervisory function itself will, of course, need to be staffed by highly motivated and adequately remunerated professionals.


In conclusion, it is important that we take stock of the lessons that Africa can draw from the recent experiences in South East Asia. Five key lessons come to mind:

  • Governments must be committed to making a success of economic, social, and political reforms, so as to ensure a stable environment supportive of sustainable economic growth. In the absence of a stable environment, the banking system will continue to be under threat as it becomes difficult, if not impossible, to achieve conditions of soundness and safety.
  • Appropriate measures should be taken to facilitate the development of stable financial markets. The experience of South East Asian countries shows that problems can start in financial markets and this can adversely affect the banks, the productive sector, and the general economy. It is interesting to note that, in this case, contagion risk extended beyond local economies and severely hurt virtually all the countries in the region—with aftereffects felt in economies further away.
  • Effective external debt management is an essential and integral part of banking supervision, as an uncontrolled buildup of external debt can create undue pressures on the balance of payments. This, in turn, has a destabilizing effect on the overall economy as was recently seen.
  • Governments must show the political will to maintain an enabling legal environment and support the supervisory authorities and regulatory system by refraining from political interference in policy and operational decisions that should be the realm of the owners, directors, and management.
  • The recent experience of Asian economies shows clearly that the liberalization of controls and general opening up of economies under the reform process must be done under conditions of balanced and sustainable economic growth, otherwise an economy becomes dangerously overheated. This is usually characterized by distortions in asset pricing, large current account deficits, and a rapid buildup in short-term external debt.

Given Africa’s limited financial resources and its poor and shallow export capacity, we cannot do without aggressive market-oriented policies. Liberalization will improve the efficiency of our financial systems to mobilize and channel savings into the productive areas of our economies. But experiences from the developed world underscore that effective trade facilitation can only be achieved through a sound and efficient banking system. The prospects of an economic boom in Africa are immense. This can only happen, however, if there is full commitment and cooperation between governments and the private sector.


Recent cited examples include Zambia. See Carl-Johan Lindgren, Gillian Garcia, and Matthew I. Saal, Bank Soundness and Macroeconomic Policy (Washington: International Monetary Fund, 1996).

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