Thursday, March 28, 2024

Finance Bank: A real test case for Zambia

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Bank of Zambia of Zambia governor Caleb fundanga (right )

By Enock Ngoma

THERE are many issues that the courts will determine in the matter of possession of Finance Bank Zambia, by the Bank of Zambia recently.
But aside from the court battles around this matter, the dust is finally clearing and the public is slowly piecing together the picture of what the central bank has presented as the reasons that compelled it to take possession.

It is clear from the outset that the news that Bank of Zambia (BoZ) had taken possession of Finance Bank Zambia Limited on December 10, 2010 obviously caused shockwaves among many, especially the shareholders in the bank, depositors and of course the general public.

It is not yet clear that the shareholders have responded to the emerging details of alleged violations found by the central bank following the various inspections at Finance Bank. The reasons advanced by the Bank of Zambia are now common knowledge, after the release last week of a Government gazette on the possession.

The shareholders have chosen to exercise their rights and taken the matter to different courts of law in different towns, and the merits of the actions they have taken, and may choose to take in future, will be determined by the courts of law. What have beena matter of enduring public interest since the announcement of the take-over are two questions: Was the BOZ starting a process of “nationalising” Finance Bank Zambia? Secondly, was Finance Bank Zambia hurtling towards closure?

Starting with the second question, the following observations have been made: The prophets of doom were hysterical about a phantom run on Finance Bank, even in the face of evidence that the bank was operating normally. They were incessant about what they predicted would be a run on the bank that would eventually lead to closure and that this would result in eroding the people’s confidence in the country’s banking system.

Nothing of this sort has happened because from the day of take-over, Finance Bank is operating normally at all of its over 30 branches and agencies that are widely spread around the country.

Finance and National Planning Minister Situmbeko Musokotwane and Secretary to the Treasury, Likolo Ndalamei alerted the nation to the structural reason why the much prayed-for run on Finance Bank could not materialise – close to 80 per cent of the more than K3 trillion deposits in the bank were from Government departments, ministries and agencies, with the balance being private companies and individual depositors.

The K250 billion being reported as signal for the run on the bank was, therefore, a small portion of those deposits. The hysteria displayed by these doomsayers, therefore, must have been caused by something other than their concern about the purported run. Further facts may emerge in this saga.

Anyone who has read the ruling MMD manifesto and followed Government policies since 1991 must have chuckled at the embarrassment caused by this assertion. A Government that has conducted such an extensive privatisation campaign cannot justify nationalising a private bank, especially after privatising Zambia National Commercial Bank, which had previously been in its hands. Some group must have been playing with what they regard as the gullible masses!

[pullquote]Finance and National Planning Minister Situmbeko Musokotwane and Secretary to the Treasury, Likolo Ndalamei alerted the nation to the structural reason why the much prayed-for run on Finance Bank could not materialise – close to 80 per cent of the more than K3 trillion deposits in the bank were from Government departments, ministries and agencies, with the balance being private companies and individual depositors. [/pullquote]

When announcing the take over of the bank, BoZ Governor Caleb Fundanga said the move was with the full approval of the BoZ directors based on the inspection findings at the bank and in a bid to protect the interests of depositors and other creditors of the bank and to ensure stability of the banking sector in Zambia.The seizure was also decided upon to protect Finance Bank from further damage which had been created by shareholders, directors and senior management staff who had failed in their duties to comply with the law, good governance and management practices.

To ensure that the take-over was smooth and that Finance Bank should not close, the central bank, after extensive consultations with, among others, central banks in the region and the Zambian Government, was assured by the Zambian Government that it would be a guarantor. This simply meant that whatever amount of money would have been withdrawn by big depositors, it would not have an effect on the bank’s liquidity as the Government, as guarantor, would have ensured that adequate funds were available in the bank at all times.

Fortunately, the matter did not even go that far because the BoZ, after taking over and putting in its own appointed management team, has ensured that operations to date are normal and all the anxiety has now simmered.

Like Dr Musokotwane aptly put it, “Finance Bank should now be considered to be in the safest hands and would be handled professionally to allow it to grow and maintain the many branches that it has throughout Zambia.”

Earlier, former Finance Minister Ng’andu Magande had asserted that following the possession by BoZ, Finance Bank was headed for closure.
But Dr Musokotwane brushed these sentiments aside, saying that Mr Magande was playing politics on a matter that required expert views and facts to avoid misleading the Zambian people.

Assuring the nation that closure was not among the options on Finance Bank, Dr Musokotwane urged Mr Magande and other critics to remember that Finance Bank was collecting huge sums of money on behalf of the Government in terms of taxes at most border points.
“The Government would, therefore, be the last to accept the closure of Finance Bank which has been paying its dues to the Government. It can be true that some banks taken over by the central bank have collapsed but this cannot be true for a viable entity like Finance Bank. This bank will not close,” the minister said.

Dr Musokotwane said it should be made clear that the owners of Finance Bank did not own the money held by the bank but it was owned by depositors who needed maximum protection. “Bank take-over is not politics. It happens everywhere in the world. It has happened in the United States, in the United Kingdom and even here in Zambia. There is nothing strange because the idea is just to protect the depositors,” he said.

Simaata Simaata, a well-known banker in Zambia and former director at Finance Bank, said according to the laws on banking, Finance Bank was found wanting and, therefore, the move taken by BoZ was in the best interest of the nation and the customers.

Even the Christian Coalition supported the move taken by BoZ with its spokesperson John Mwendapole advising depositors to have confidence in the decision taken by BoZ as it would curtail unethical activities that would have led to serious consequences for depositors and the national economy.

Director of bank supervision at BoZ Lameck Zimba said insider borrowing involving some shareholders, directors and senior management was one of the main reasons that necessitated the take-over because depositors’ monies were not safe.

[pullquote]Dr Musokotwane said it should be made clear that the owners of Finance Bank did not own the money held by the bank but it was owned by depositors who needed maximum protection.[/pullquote]

“If people are giving themselves huge loans in excess of billions of Kwacha, without the approval of the board which are not being paid back, then there is a big problem in that bank. There were several other unsafe and unsound banking practices that left us with no choice but to take possession of the bank.

“What we did not want was to have a repeat of what has happened in the past where by the time we move in, the bank was beyond redemption. That is why we promptly moved in. “And in fact, this was after Finance Bank failed to furnish us with information on various breaches of the law,” he said.

But last week, the public was given the most detailed and extensive rendering of the case that compelled the BoZ to take possession of Finance Bank Zambia. An Enforcement Decision and Order published via a Government Gazette Notice number 97 explicitly spelt out the breaches discovered at Finance Bank that led to the take-over and eventual termination of shareholder interests.

Giving the rationale for the termination of shareholder interests at Finance Bank, the Government Gazette Notice dated December 31, 2010 and signed by secretary at BoZ Mathew Chisunka said the purported holding of shares in Finance Bank by Finsbury, Clarkwell Limited and Mr J A T Samuel was characterised by complex trust and transfer arrangements whose final consequence was that the beneficial shareholding in the bank was not that of the declared entities but converged on the CEO and executive chairman of Finsbury Rajan Mahtani.

The BoZ had reason to believe that the acquisition by Credit Suisse of 40 per cent shareholding stake in Finance Bank appeared to be a lending transaction because of the underlying agreements that were not disclosed to BoZ. Among other things, these agreements guaranteed a return to Credit Suisse on their investment.

As a result of these matters, Finance Bank and certain of its shareholders had violated several pertinent provisions of the BFSA and other regulations in a manner that constituted unsafe and unsound banking practices.

The BoZ considers that the approvals given to certain shareholders to hold shares in Finance Bank were obtained by fraudulent misrepresentation and this necessitated the BoZ to withdraw its approvals on June 4, 2010 in respect of certain shareholders.

Giving the rationale for possession, the BoZ said other than failing and continued failure, and weak corporate governance coupled with risk management systems, Finance Bank through its shareholders, directors or senior management, either collectively or individually, violated various provisions of the BFSA and its Statutory instruments (SI). These included:

  • Section 23 (2) (Limitation on voting control) -Dr Mahtani, through Finsbury Investments Limited, with shares held by nominees or otherwise, effectively controlled 56.5 per cent shareholding in contravention of the 25 per cent limit.
  • Section 35 of the BSFA (disclosure of Interest) – failure to disclose interests relating to contracts, facilities, proposed contracts or facilities with Finance Bank.
  • Section 33 (conduct of directors, chief executive officers and managers) where these failed to act in the best interest of Finance Bank and failure to exercise due care, diligence and skill by allowing indiscriminate approvals and granting of loans to insiders contrary to sound lending practices.
  • Section 73 of the BFSA and SI 96 on limitations of granting of loans exposed Finance Bank to a single risk exposure of 62 per cent being an exposure in excess of the statutory limit of 25 per cent of regulatory capital as evidenced by the aggregate exposure of three borrowers, who were Zambezi Portland Limited, Cladava Mining and Ital Terrazzo as a common enterprise.
  • Section 77 on unsafe and unsound banking practices where the bank’s lending relationship with insider companies departed from sound lending principles and breaches of banking regulations. In addition, management repeatedly failed to comply with the provisions of the law and recommendations from previous inspection reports.
  • Section 52 , breach on credit administration as it failed to keep required credit information on credit files.
  • Section 36 (a) and CB circular 01/2009 on submission of prudential return where the bank was issuing false or misleading statements through returns, especially on insider loans classification and provisioning.
  • Finance Bank was in breach of regulation nine of SI 97 of 1996 (insider lending) in which it failed to maintain, adduce or procure board resolutions and supporting credit appraisal documentation to evidence participation by other board members in the approval of the loans to all insiders as prescribed.
  • It was in breach of regulations 17 (I) and 18 (I) of SI 142 (classification and provisional loans) as it failed to classify non-performing loans and advances as required by regulation 17 (I) and as a result the bank’s provisions fell short of the minimum provisioning requirements as provided for in regulation 18 (I).
  • The bank failed to maintain, adduce or procure an effective loan review system, thereby violating regulation 5 (I) of SI 142 (classification and provisioning of loans).

The Gazette Notice concluded that the shareholders, directors and senior management, whether acting individually or collectively, perpetuated breaches of various provisions of the BFSA, other applicable legislation and statutory instruments and that the shareholders, directors and senior management, whether acting individually or collectively were, therefore, not fit and proper persons to discharge their responsibilities in the best interest of Finance Bank.

With the foregoing, the BoZ decided to take prompt remedial measures through possession. The characterisation of this action as nationalisation, therefore, appears to have been an attempt to politicise this action, while the hysterical prediction of a run, and possible closure of the bank, must have been meant to mask facts which may be known sooner than later.

[Times of Zambia]

26 COMMENTS

  1. What ever reasons your giving in this long boring story, its impossible to rule out politics in the FB issue. The law and technicalities have been used to criple a perceive political enemy

  2. Great piece of work Enock. I bet all PF cadres from Matero University and Kulima Tower school of economics will miss everything you have said as seen already the the PF cadre from #2 Chimba. One thing they are forgetting is that crimes were being committed in this bank and even the money of their SATAn and his Chief Financier GBM were at risk and BOZ moved in to protect them.

    These directors were criminals and lacked any banking ethics and I believe Mr SATAn has a litigation against this bank pending in the courts. And today all PF cadres want to claim this bank’s operations were sound.

    The reasons why they grabbed the bank are there in point form for all to see. Let those claiming conspiracy rebut the advanced reasons.

  3. “Section 33 (conduct of directors, chief executive officers and managers) where these failed to act in the best interest of Finance Bank and failure to exercise due care, diligence and skill by allowing indiscriminate approvals and granting of loans to insiders contrary to sound lending practices.”

    The senior staff were availing themselves loans to buy planes, range rovers,houses etc. Ironically, BOZ has allowed the same people to go away with the same assets that they obtained through the above transgressions!!

  4. Whether or not there is a political angle to this, it seems clear that the Bank of Zambia had a compelling case to take over the operations of Finance Bank and remove its executive management. The charge sheet is pretty clear and is quite damning.

  5. Ladies & gentlemen, lets endeavour to separate politics from economics in some of these issues – FBZL matter being case in point. Where life is concerned there’s no pf or mmd. Thumb up to BOZ action!

  6. Following on from my comment at no.5, it would be interesting to know whether BoZ has carried out a comprehensive examination of ALL banks in Zambia. If so, this should be confirmed by the BoZ Governor and any other erring banks should also be sanctioned. That may be a good way of addressing the allegation that the action against FBZ is purely political. That’s just my 50 cents!

  7. Very soon we shall hear that the Bank has been sold, they are just preparing us simple Zambians to belive that something was wrong with this Bank. Years Later we shall know the real truth, Zambia the real Africa.

  8. #8 above – I agree with you NigerAreaboy. Additionally we still need to consolidate these minute banks so that the resultant six will be well capitalised and strong enough to finance projects and grow the economy. Inflation has gone down but interest rates are still high. When are we gonna move to the Prime rate system? The rate should averaging 14% now – seriously given the single digit inflation. This system supports all progressive economic models in the world. Guys at BoZ, please consider this issue some consideration for the sake of the economy. Remember also that the money in the banks is people’s money pooled to finance business and growth.

  9. This online newspaper is beginning to bear the characteristics of the Ministry of National guidance and is only missing Lewis Muliyunda . We are not kids. BOZ has exercised its power 20 years too late.

  10. #11 You are very right. This abuse has been going on since MMD came into power. The question is how come 80% of the deposits in FBZL were from government and not the private sector. How did this happen? Only 20% from private depositors!! SImple reason is that Chiluba and the late Mwanawasa were corrupt and where bought by Mathani. Mathani just stopped funding MMD under RB and that is why BOZ had now the courage to move in a sort out the mess they should have sorted out 20 years ago, but were protected by Chiluba and Mwanawasa.

    The whole system is just not transparent. If BOZ wants to gain our respect and restore their credibility, let them produce quarterly compliance reports of all the banks and make them public on their website.

  11. It shall be made mandatory for BOZ to prepare an annual report for Minister of Finance that shall be tabled before parliament. It shall have a Summary and detailed report attached one each bank for parliamentarians and public alike to go through and freely comment in any media.

    BOZ is trying to look wiser while it is in the first place who caused this mess and never took any action to remedy the malaise ( and never stood to the politicians who were not letting it do its job).

    Also, all banks and companies shall disclose political donations in their annual report. Mandatory for politicians to list down their contributors and file with election commission.

  12. FYI author, regardless of the reasons for government takeover of a bank, any such action is a ‘nationalisation’. Open your mind and stop attaching the negative connotations that the word nationalisation has become associated with. If ownership is from private to state, then it is effectively nationalisation (regardless of what you choose to call it). Do not patronize people when they speculate and perhaps get it wrong. In the absence of clear, reliable information, people are bound to speculate. At the time the Post raised this issue (before GRZ announcment) Musokotwane should have clarified with a clearly thought out press release.

  13. I think it is very clear now that The Post does not have the technical know how to report on this issue. Whilst Mmembe can handle political party reporting and propaganda, matters at this level should be left to the competent professionals with both knowledge and experience. The Post, stick to PF matters please.

  14. All Banks are required to make monthly capital adequacy returns to BOZ. Am sure BOZ has enuff experts to deal with the erring banks and there’s therefore no need to have public disclosures of such information.

    Now what we would like to see is what Finance bank has to say about these issues as published in the gazette then we would be abe to judge from there response whether this action was arbitrary or not. As it is these are breaches of the law and insofar as the law is concerned this action was necessary on the part of BOZ.
    Imwe ba PF , if you dont understand and cant analyse issues just shut up. And you chaps from MMD if ever discover that it was politics from the arising court proceedings your fingers will be burnt.
    Pa Post…yaba..i think you really missed this one.

  15. Good reporters will give you both sides of the arguement and not simply shove their ideas down your throat. The author has given us the governments arguement but has failed to mention the basis of the shareholders challenge. BOZ is justified in their action ( even if we call it nationalisation) if the reasons given by the author are valid. What if they are not? Let us learn to have an intellectual curiosity which demands answers and not merely regurgitations of politiciains statements.

  16. “The shareholders have chosen to exercise their rights and taken the matter to different courts of law in different towns”, LT, what is the latest on this court action, matter should have been heard in Ndola High Court by now.

  17. Clear report that should remove the veil of blindness of those that helplessly incline towards the incessant negative blisters and propaganda of M’membe’s Post trash. Except for those determined in ignorance, the self exiled political goons clinging in to a mythical and supposedly messianic boat, the sun shines so brightly and clearly, even for the blind to feel its heat.

  18. It cannot be clearer than this. To salvage himself out of this mess, M’membe must bend and touch his toes more than he has done before. Now pull those pants down, boy.

  19. POST and their accounts clerk from the Insurance industry trying to ape lawyers and journalists has come short no amount of jumping on the otherside of the fence will allow the zoo keeper to open the gate..you will pay what you took out…you will be bankrupted together with that fat desk lawyer..who never won a single high profile case…but run law in the paper

  20. Funny how the PF cadres become mute when presented with factual information! The truth is Rajan has been breaching the law since FJTs time and only survived due to State Hse protection. Kafupi nearly nailed him after they fell out but Levy later helped him resurrect. It goes to show Levy’s blatant hypocrisy! My only criticism of BOZ in this case is that they lack independence and will only act upon instructions from plot 1. Why didn’t BOZ nail Rakan long ago since it’s clear he’s been breaking the rules for a while now.

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