An assessment of the effectiveness of the regulatory tools in managing bank failures in Zimbabwe: Case of Interfin and Royal Bank

Abstract

The continued failure of banks in Zimbabwe has left thousands of depositors stranded and reduced economic activity of the country. The stability and public confidence in the banking sector has also been eroded by the failure to effectively manage bank failures. The failure of banks has reduced the attractiveness of the country to foreign investment. The study looks at the effectiveness of the regulatory toolkit that the authorities have been using in the face of repeating bank failures. The Zimbabwean banking sector has experienced over twenty six bank failures since independence. The study looked at a case study of Interfin Banking Corporation and Royal Bank that failed and the regulatory tools used to resolve them. Data was gathered from interviews with regulatory authorities and the curators of the failed banks. The study established that effectiveness of the resolution tools was mainly affected by the provisions in the existing legal frameworks. As a result, the speed and finality of resolution efforts have been thwarted by legal battles and regulatory forbearance. There are no frameworks for other tools such as open bank assistance, purchase and assumption, and bridge banks to manage or resolve failing banks. Bank failures in Zimbabwe is predominantly a result liquidity challenges, poor risk management practices and weak corporate governance structure. The main players in the regulations and management of failed banks are the Reserve Bank of Zimbabwe and the Deposit Protection Corporation.