Zambia: BoZ takes over Finance Bank

By Nawa Mutumweno – The Bank of Zambia (BoZ) has taken over Finance Bank Zambia Limited (FBZL) with effect from Friday, December 10, 2010.

According to the central bank governor Caleb Fundanga, a new management has since been appointed to run the affairs of the bank with customers and staff being assured that the bank would continue to operate normally.

Speaking at a press briefing, Dr Fundanga said the takeover was with the full approval of the BoZ board of directors based on the inspection findings at Finance Bank and aimed at protecting the interests of depositors and other creditors of the bank, and to ensure the stability of the banking sector in Zambia.

“This supervisory action has been taken following the findings from the inspections by the BoZ conducted between October 2009 and October 2010, while a number of serious breaches of the Banking and Financial Services Act (BFSA) were observed. This measure was necessary in order to protect the interests of depositors and other creditors of the bank, and to ensure the stability of the banking sector in Zambia as a whole,” he elaborated.

According to Dr Fundanga, the seizure was also essential to protect Finance Bank from further damage created by shareholders, directors and senior management, who had failed in their duties to comply with the law, good governance and management practices.

It is the central bank’s view that had this action not been taken, the viability of Finance Bank would have been compromised, putting the interests of various stakeholders such as employees of the bank, depositors and creditors.

Meanwhile, the government has guaranteed all genuine deposits in and other genuine liabilities of Finance Bank and this guarantee would ensure there was  stability and no disruptions to Finance Bank’s commercial and personal banking services.

In order to facilitate a smooth possession period, the BoZ has appointed as its agents, seconded staff from First Rand Limited of South Africa to manage the operations of the bank with Mr Leonard Haynes as interim chief executive officer. These agents would be deployed across all branches of Finance Bank throughout the country and would act for and  on behalf of the BoZ.

The takeover is not without casualties with the managing director and CEO, the executive director (ED) special projects,  ED finance and credit, ED corporate banking and marketing, ED treasury and international banking, ED retail banking and operations and the financial consultant losing their jobs.

“It is imperative to take cognizance of the fact that Finance Bank is a significant player in our banking sector, with a widespread branch network and market share. It is the only bank that currently has a presence in Chinsali, Chongwe, Isoka, Kabompo, Mwinilunga, Samfya, Serenje and Sesheke. This invariably means that any perceived failure of Finance Bank would have led to instability in the banking sector, as well as an adverse effect on the economy in general. As such, the central bank will ensure it continues to operate and provide secure and reliable financial services to the people of Zambia,” Dr. Fundanga elaborated.

According to the central bank, as at October 31,2010, FBZL  total deposits amounted to about K1,104 billion and was the sixth largest bank in the sector in terms of deposits. About 50 percent of the bank’s deposit base was largely public sector (central government 23.0 percent, statutory bodies – 18.1 percent, parastatals – 4.9 percent and local government – 4.4 percent)). The remaining half of the total deposits were private sector deposits such as from private companies and individuals and households.

“This could pose a challenge when taking possession of the bank. There is a high probability that this group of depositors will trigger a run on the bank,” BoZ notes.

A run on FBZL would most likely extend to cash withdrawals across other banks’ ATMs due to the VISA application by FBZL clients. Currently, there is panic among individual depositors who are withdrawing their money from the embattled bank.

“This may create widespread cash shortages and panic. Possible cash shortages at ATMs, the notice of taking possessions of Finance Bank and low levels of financial literacy may result in public concerns regarding the financial health of the other banks increasing the probability of a run on deposits held at other banks and a ‘flight to quality’. This reputational risk is exceptionally high for the newly licensed banks (Access, UBA, Ecobank and International Commercial Bank), weak banks (BancABC and Intermarket) and the local banks (Investrust),” the statement adds.

FBZL is one of the largest commercial banks in the banking sector with a widespread branch network and market share. It has the third largest branch network with 34 branches, which is 15 percent of the industry total and 15 agencies.

Economic experts have intimated that the action by the central bank is a ploy to nationalize the bank in a bid to fix Rajan Mahthani, the former chairman of the bank. He is the man credited with establishing this first Zambian-owned bank.

Many people are amazed at the swift action by the central bank to “save the bank” when various banks collapsed in the 1990 including the Bank of Credit and Commerce International (BCCI), Credit Africa Bank, Prudence Bank and Meridian Bank Zambia Limited. What has changed now, one may ask?