2011 ANNUAL REPORT TABLE OF CONTENTS ii. Governor’s Foreword .............................................................................. 5 Iii. Deputy Governor’s Remarks .................................................................. 7 Iv. Senior Division Chief’s Preview ............................................................. 9 1 Chapter One: Overview ................................................................................ 11 1. Macro-Economic Developments .......................................................... 11 Chapter Two: Major Developments And Activities In The Banking Sector18 2.1 Key Developments In The Banking Sector .......................................... 18 2.2 Financial Inclusion ................................................................................ 22 2.3 Developments In The Microfinance Sector ......................................... 22 2.4 Legal Developments .............................................................................. 23 2.5 Prompt Corrective Action ..................................................................... 23 2.6 International, Regional And Domestic Co-Operation ......................... 24 Chapter Three: Status And Performance Of The Banking Sector ................ 25 3.1 Highlights Of Banking Sector Performance ........................................ 25 3.2 Balance Sheet Structure ....................................................................... 25 3.3 Performance Of The Banking Sector ................................................... 29 3.5 Sectoral Analysis ................................................................................... 37 Chapter Four: Challenges In The Banking Sector And Lessons Learnt ..... 54 4.1 Introduction ............................................................................................ 54 4.2 Banking Sector Challenges .................................................................. 55 4.3 Failed Banking Institutions ................................................................... 58 4.4 Lessons Learnt ...................................................................................... 60 Appendices ....................................................................................................... 65 Vision of Bank Licensing, Supervision & Surveillance Division To become an effective, efficient and dependable regulatory and supervisory authority of the financial sector, supportive of economic development in Zimbabwe. Mission of Bank Licensing, Supervision & Surveillance Division To promote and maintain the safety and soundness of the financial system through proactive and rigorous regulation and supervision in line with international best practice. Objectives of Bank Licensing, Supervision & Surveillance Division The objectives of the Division are to: enhance and maintain the safety and soundness of the financial system through effective risk-based supervision; periodically review regulatory and supervisory regulations, policies and procedures in line with international best practice and the macroeconomic environment; promote public confidence in the financial system by ensuring a consistent, objective and transparent regulatory and supervision process; minimise moral hazard and supervisory forbearance through taking prompt supervisory action against weak and troubled financial institutions in order to protect the integrity of the financial system; promote sound corporate governance practices and adoption of adequate risk management systems; foster a culture of strict compliance with laws, rules regulations, policies, procedures, guidelines and international best practice; and building supervisory capacity through structured training and development programmes to enhance the skills base. 3 I. PURPOSE OF THE REPORT The purpose of this annual report is to provide an analysis of the condition and performance of the banking sector in Zimbabwe for the year ended 31 December 2011. This report presents an overview of the supervisory operations and activities during the period under review. The report also provides an update on major developments in the banking sector since inception of the multiple currency system in February 2009. 4 II. GOVERNOR’S FOREWORD 1. The Zimbabwean banking sector continued on a recovery path, during 2011, prompted by the multi-currency regime, which stabilised the economy, dissipated inflation and ushered in renewed confidence in the banking sector. The new environment translated into improved financial intermediation, as evidenced by the growth in loans advanced to various sectors of the economy 2. Notwithstanding the significant progress in the economic turnaround, the banking sector faced numerous challenges in the operating environment, which constrained efforts towards attainment of financial stability. 3. The operating environment was characterised by transitory deposits, absence of an active inter-bank market, lack of an effective lender of last resort function and market illiquidity. Market illiquidity, which was largely indicative of subdued export earnings and limited access to external lines of credit, starved productive sectors of the economy of much needed working capital and retooling. 4. Increasing exposure to liquidity risk was evident in the last quarter of 2011, when the sector faced challenges in facilitating cash and electronic payments prompted by increased demand and increased volume. 5. Against this background, the envisaged recapitalisation of the Reserve Bank by the Ministry of Finance in order to revive the lender-of-last resort function is most welcome as this will go a long way in alleviating the liquidity constraints and revive the inter-bank market. 6. The issue of banking sector capitalisation came to the fore in the interests of maintaining financial stability in the absence of a meaningful lender-of-last resort function. 7. During the year under review, the Reserve Bank witnessed the resurgence of malpractices in the sector, including corporate governance violations and abuse of depositors’ funds, a development that posed significant threat to public confidence and financial sector stability. 8. In this regard, the Reserve Bank introduced a number of enhancements to its supervisory activities aimed at ensuring effective supervision, foster and maintain financial stability and provide assurance to all stakeholders on the soundness of the financial sector. 5 9. The effects of the Global Financial Crisis and the Eurozone Crisis on the world economy highlighted a number of supervisory shortcomings relating to supervision of complex financial products, supervisory co-operation and the need for robust capital and liquidity standards. 10. To this end, the Reserve Bank continues to work with banking institutions towards full implementation of Basel II and its enhancements contained in Basel III. The Reserve Bank will also refine its supervisory methodologies and techniques, including reviewing minimum capital requirements and financial sector legislation and guidelines, as well as heighten efforts towards implementation of a broad based financial stability thrust in financial sector supervision, in line with international best practice and lessons learnt from the Global Financial Crisis and Eurozone Crisis. 11. Once again, I acknowledge all our stakeholders, whose support has contributed to the fulfilment of the Central Bank’s mandate of promoting financial stability. Dr. G. Gono Governor 6 III. DEPUTY GOVERNOR’S REMARKS 1. During the period under review, the Reserve Bank, through Bank Licensing Supervision and Surveillance Division (BLSS), carried out its supervisory mandate with focus on promoting and maintaining the safety and soundness of the financial system, through proactive regulation, in line with international best practice. 2. The banking sector was generally safe and sound. However, one institution was placed under curatorship in June 2011, following a determination of corporate governance malpractices and gross abuse of depositors’ funds. 3. During the year, banking institutions focused on strengthening their capital positions in order to underwrite more meaningful business, improve profitability and grow their market shares. 4. In this regard, and in the in the interests of maintaining financial stability, the Reserve Bank has enhanced the Troubled and Insolvent Banks Policy to provide guidance on the resolution of problem banking institutions. 5. In view of the challenging operating environment being faced by banking institutions, the Reserve Bank instituted a number of measures to enhance regulation of the sector and promote financial stability. 6. The measures include among others, the review of corporate governance guidelines and disclosure requirements for banking institutions, as well as proposed amendments to the current legislation to ensure that they move in tandem with local and international developments in the financial services sector. 7. With regards to financial inclusion, the Reserve Bank welcomed the increased focus on mobile banking products by banking institutions in collaboration with mobile network operators. Further, the Reserve Bank is working closely with the Ministry of Finance in drafting a Microfinance Bill, which seeks to address challenges being faced by the microfinance sector such as tenure of licences, consumer protection issues and transparent pricing in line with international developments in the microfinance sector. 8. The Reserve Bank spearheaded the setting up of a Multi-disciplinary