BANKING DEPARTMENT

MSC BANKING AND FINANCIAL ECONOMICS (HARARE COHORT)

COURSE:
5110)

RISK MANAGEMENT AND CORPORATE GOVERNANCE (CBA

LECTURER: MR T MUTAMBANADZO
ASSIGNMENT:
DUE :

NUMBER TWO

11/03/16

NAME OF STUDENT

AARON KUUDZEREMA

STUDENT NUMBER

N01522588D

ADDRESS

NSSA HOUSE, KARIBA

TELEPHONE

0261 2145210

CELLPHONE

0773 501 255/0712 289 276

a) Examine whether Interfins employees petition is justifiable. (10 marks)

Corporate governance is affected by the relationships among participants in the governance
system. This goes to the extent that if any key player does not, or is not expected to, fulfil its
function in the risk management chain, other key players have to compensate for the gape
created by enhancing their own role.
Interfin being a public institution, it is the interest of the public, employees and customers
included to know what is contained in the forensic report. Board of directors at Interfin were
supposed to balance the interests of shareholders; employees, customers, suppliers, investors,
communities in order to achieve long term sustained value (World Bank). With regard to
identifying relations with stakeholders there is a difference between taking into account and
being accountable to stakeholders. Stakeholders to be accountable to are; banks and
creditors, institutional investors and employees. Employees as stakeholders have interests in
transparency and disclosures, ethical codes for directors and senior management.
Therefore, employees being insiders believe it is unimaginable for depositors funds
amounting to $100m to disappear without trace. The major concern was that a trained banker
or director could not afford to lend and transact recklessly as was the case at Interfin given
that such officials have a fiduciary duty to customers. Clearly, it does appear that certain
actions which led to the demise of the bank were fraudulent and employees were justified to
petition. Also, another conundrum was that a forensic report on such a public organisation
can be done and no action after two years.
The employees anxieties were also broadened by that it is clear that depositors and creditors
(including labour in situations where salaries were outstanding) have been the biggest losers.
This miserable reality has been coming on the back of indigenous bank owners who have
been the ultimate winners, most of them living large despite having clearly abused huge
depositors funds. Traditionally, the regulator that is the RBZ in this instance have been
placing distressed banks under curatorship first before being handed over for provisional
liquidation and final liquidation. A number of case studies have miserably shown that
curatorship do not work as no bank has ever recovered after such futile exercises. Interfin
being the last and recent example whilst other banks such as Renaissance, Royal Bank and
Trust were once placed under this option to avail. Reality seems to be knocking the minds of
depositors, employees and public at large that only the appointed curators benefit from such
schemes at the expense of depositors. For instance, had Interfin been placed under

provisional liquidation in 2012, disposal of assets would have yielded to better proceeds
compared to the current situation where the economic fundamentals and liquidity position in
the economy has worsened in 2015.
Petition by the employees was justifiable because in situations where regulators fail to
identify problems at an early stage in struggling financial institutions, employees as
stakeholders are key to ensure they play a role to fill the gap.

b) Discuss the reasons why the RBZ might not have made the report public. (10marks)
Action by the Reserve Bank of Zimbabwe of not making the forensic report about Interfin
Zimbabwe public can be traced back to evolution of financial regulation as a game of cat and
mouse. Regulations are imposed, then firms innovate sometimes with the blessings of
regulators, and if the innovations result in failures or scandals the cycle begins by reinventing
the regulations. However, the regulator as the safety net ensuring sound policies are enshrined
would not want its name tarnished on failing to preserve its role to supervise chiefly where it
is implicated regarding its deficiencies, resulting in scandalous activities like this case where
$100 million depositors funds vanished.
Financial crisis represents a political as well as substantive challenge to policy makers that
can be compared with the challenges that followed the collapse of Enron/ WorldCom and the
Asian financial crisis of 1997.
There are allegations that the senior officials from the RBZ were getting loans from
destabilised banks especially Interfin bank. Bank workers know these transaction as they
happen. However, though they have evidence they cannot bring it because of contractual
agreements. http://allafrica.com/stories/201011180051.html. Therefore, if the allegations are
true, it means the supervisor is complicit and no longer doing his job.
Interfin bank had a disputed ownership due to the presence of CFX bank assets in its DNA
composition. The transaction was being described as fraud perpetrated by Interfin directors
since they tried to liquidate an already merged bank. There were also reports of money
laundering strengthened by Money Gram international which was part of Interfin where
US$30 million diamond sales vanished and several other government assets. To everyones

belief if the forensic report would have been made public there was going to be panic in the
way transactions were being done at Interfin unearthing some of the alleged illegal or
irregular transaction cited above.

c) Evaluate the importance of making such a report public (10 Marks)

Effective corporate governance practises are one of the key prerequisites to achieve and
maintain public trust and in broader sense, confidence in the banking system. Bank failures
may contribute to significant public cost, affect deposit insurance schemes and increase
contagion risk. Sound corporate governance can create an enabling environment that rewards
banking efficiency, mitigates financial risks and increases systemic stability. Lenders and
other providers of funds are more likely to extend financing when they feel comfortable with
the corporate governance arrangements of the funds recipient and with the clarity and
enforceability of creditors rights.
RBZ by ordering forensic audit was a good initiative to scrutinize the rot at Interfin and hence
was supposed to make it public so that all interested players have a share of it to see on their
own what had gone wrong at the bank since everyone wanted an answer as to what happened
to the institution.
The regulatory approach to the subject would regard governance as something on its own, to
do with ensuring a balance between the various interested parties in a companys affairs, or
more particularly a way of making sure that in the failure of chairman or chief executive,
producing transparency in reporting or overseeing the risk management of the bank the
regulator should play its role. This indeed is what the Cadbury recommendations and the
subsequent reports and code are all about. It takes the view that there is an over-riding moral
dimension to running a business and that the standard of governance will depend on the
moral complexion of the operation. The business morality or ethic must permeate the entire
operation from top to bottom and embrace all stakeholders best corporate governance practice
is an integral part of good management practice also permeating the entire operation. The
interests of different stakeholders carry different weight, but it does not, by any means,
suggest that those with a major interest matter and the rest dont. On the contrary, best
corporate governance practice dictates that all stakeholders should be treated with equal
concern and respect. Therefore, importance of making such a report public will ensure

transparency and restore confidence to the investing public within the financial sector.
Making all the bad or illegal transaction public will show how the regulator is serious in
stamping out unethical practises in the banking sector where depositors, creditors and
employees are net losers when a banking institution closes shop.

d) Explain the effects of Deposit Protection Scheme on the objectives of the Market
Discipline (Pillar 111), under Basel 11. Examine how these effects can be addressed.
Market discipline is comprised of depositors punitive actions against banks for excessive
risk taking (Berger, 1991). Depositors require high interests rate from banks that pursue risky
investment policies, or they simply withdraw their deposits. Introducing a deposit insurance
system reduces risks but at the same time renders banks more inclined to raise their level of
risk taking. The market discipline hypothesis states that high interest rates are related to high
risk behaviour by banks. Market discipline in the economys banking sector is fundamental of
the Basel 2. Market discipline put pressure on the less efficient banks and hence could
improve the efficiency of banking system. Nier and Baumann (2006) present three conditions
for effective market discipline; depositors need to consider themselves at risk of loss if the
bank defaults, market responses to changes in the banks risk profile need to have cost
implications for the bank and its managers and the market must have adequate information to
gauge the banks riskiness.
Deposit insurance schemes increases the probability of a banking crises but at the same time
reduces loss from crises (RBZ Licensing 2006).
The above effects can be solved by admitting to Deposit Protection Scheme, bank must
satisfy certain solvency requirements. Only banks admitted to deposit to Deposit Insurance
Scheme will have the right to take household deposits.

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