Basel ll implementation : challenges and implications for the Zimbabwean banking system (2012 - 2013)

Abstract

The overall objective of this study is to establish the challenges and implications of implementing Basel II in developing countries, with particular focus on the Zimbabwean banking system. The main objective is to identify the problems being confronted by banks and the supervisory authority in Zimbabwe, being the Reserve Bank of Zimbabwe, in their journey to Basel II implementation. This purpose arose from the publication on 26 June 2004 of the “International Convergence of Capital Measurement and Capital Standards, a Revised Framework”, commonly known as Basel II, which has been adopted for implementation by the Reserve Bank of Zimbabwe. The Reserve Bank of Zimbabwe set 1 January 2013 as the implementation date for Basel II after which Basel I will no longer be used in Zimbabwe.

Banking institutions in Zimbabwe have been focusing their attention on becoming Basel II compliant since 2012, wherein they started conducting parallel run of the present framework i.e. Basel I with the Basel II rules. The Reserve Bank of Zimbabwe announced in January 2013 that banks will continue with the parallel through 2013, as banks were at various stages of implementing Basel II and there were weaknesses identified which were being addressed. As such Basel II capital rules were not implemented in full as at 1 January 2013 as initially envisaged by the central bank. Very little attention has been paid on the challenges and implications of Basel II confronting the Zimbabwean banking system.

A literature study was undertaken which included a review of the Basel II framework, impact studies, and a review of the relevant literature on the topic. The framework was studied in order to determine the major challenging themes and implications on developing country banks. Once these challenging themes were identified, the literature on those areas of impact was researched. The study of the Basel II framework identified a number of challenges that banks in developing countries will face. The first implication is that developing countries that choose to adopt Basel II standards will do so at a considerable cost to both their regulators and the banking sectors. Basel II presents a huge compliance burden. Large banks who are able to bear high compliance costs will survive, whilst the smaller banks will be discouraged. Secondly the perceived benefits of investing in Basel II are likely to be minimal because the new capital rules were not designed for, nor are they appropriate for developing economies. In addition, local banks in developing countries will face capital constraints, making them susceptible to mergers and acquisitions by sophisticated international banks that are able to inject fresh capital and bring in the necessary expertise sought by the regulators. Another difficult aspect of implementation is the cross border challenges. Banks that have cross border operations are more likely concerned with home-host supervisory issues largely emanating from differences in implementation timetables; approaches to implementation and interpretation of Basel II.

Another serious challenge is that the success of Basel II depends on strong and well developed financial systems, which include among others, existing regulatory and supervisory frameworks; sustainability of banking sector reforms; existing level of economic development; political stability; depth and efficiency of financial intermediation; a number of which lack developing countries

Notwithstanding the foregoing, many developing countries feel they are left with no choice but to adopt Basel II, as without it developed country regulators may deny their banks market access. Thus developing countries are in a “Catch-22” situation; compliance implies that developing country local banks may make themselves vulnerable to take-over by advanced international banks; non-compliance would evade this, however, they would be excluded from international financial markets. This will have serious implications on globalization efforts, in particular distribution of income as financial services play an essential role in post industrial economy.

This paper investigates the challenges and implications of Basel II implementation in developing countries, specifically in Zimbabwe. It begins by giving a brief background of the Zimbabwean banking system and an overview of Basel I and Basel II. This is followed by a discussion of the implications and challenges of Basel II and the reasons for its widespread adoption in developing countries.