ENTREPRENEURIAL CHALLENGES – The Case of Royal Bank Zimbabwe Ltd

Industry is shaking

In December 2003, Mzwimbi traveled on a well-deserved family vacation to the United States, pleased with progress and convinced that his scattered empire was on a solid jog. But a call from a business magnate in January 2004 warned him of what was called a looming shaker in the financial sector. It appears that the incoming governor had entrusted a few close colleagues and acquaintances with his plans. This confirmed Mzwimbi the fear that arose when RBZ refused to accommodate banks that had liquidity challenges.

In the last two months of 2003, interest rates rose close to 900% p.a., while RBZ followed helplessly. RBZ had the tools and capacity to control these rates, but nothing was done to ease the situation. This increase in interest rates wiped out almost all of the bank’s revenue made within the year. Bankers usually rely on government rates (TB) as they can be easily traded. Their yield had been good until interest rates rose rapidly. As a result, bankers now borrowed at higher interest rates than Treasury rules could cover. Bankers were put in the uncomfortable position by borrowing expensive money and lending them cheaply. An example at Royal Bank was an entrepreneur who borrowed $ 120 million in December 2003, which in March 2004 had ballooned to $ 500 million due to the high rates. Although the expenditure on funds was now at 900% pa, Royal Bank had just increased its interest rates to only 400% pa, which means it financed the customer’s deficit. However, this client was unable to pay it, returning just $ 120 million, demonstrating that he had no capacity to repay the $ 400 million interest. Most bankers accepted this discrepancy because they believed it was a temporary dysfunction that is perpetuated by the fact that an acting governor was unable to make bold decisions. Bankers believed that when a substantial governor was sworn in, he would control interest rates. Much to their dismay, after he assumed the presidency, Dr. left. The gono rates were untouched and consequently the situation worsened. This scenario continued until August 2004, causing considerable strain for entrepreneurs.

After reflection, some bankers feel that the central bank deliberately raised interest rates as this would allow it to restructure the financial services sector. They claim that bank managers during the cash crisis in the latter half of 2003 would often meet with RBZ in an effort to find solutions to the crisis. With retrospect, they claim that there is evidence to suggest that the current governor, although not yet appointed, was already in control of the RBZ operations during this period and was therefore responsible for the unsustainable interest rate system.

In January 2004, after his holiday, Mzwimbi was informed by RBZ that Royal had been accommodated for $ 2 billion on December 28, 2003. The central bank wanted to know whether this property should be formalized and placed in the newly created Troubled Bank Fund. However, this was expensive money both in terms of interest rates and also in terms of terms and loan terms. At Trust Bank, access to this facility had already given the Central Bank the right to retire the top executives, restructure the board and virtually take over the bank’s management.

Royal Bank rejected the offer and used deposits to pay down the money. However, interest rates did not fall.

During the first quarter of 2004, Trust Bank, Barbican bank and Intermarket Bank were identified as distressed and subject to serious central bank corrective orders.

Royal Assault

Royal Bank remained stable until March 2004. People who had their funds locked into Intermarket Bank withdrew huge sums of money from Royal Bank while others moved to foreign owned banks when the view created by Central Bank was read by market to mean that entrepreneur bankers were scammers.

Others with Andrew their money on the basis that if financial behavior like Intermarket can sink, then it could happen to any other initially controlled bank. The Royal Bank had the advantage that it was the only bank in the smaller cities, so people had no choice. But even in this scenario, there were no stable deposits as people kept their funds moving to avoid being caught unknowingly. For example, in a week, Royal Bank had withdrawals of more than $ 40 billion, but weathered the storm without using the central bank’s accommodation.

At this point, newspaper reports indicating some leakage of confidential information began to appear. When confronted, a public paper reporter admitted that the information was provided to them by the Central Bank. These reports were intended to cause panic and thus expose the banks to depositor flight.

Statutory reserves

In March 2004, at the time of significant vulnerability, Royal Bank received a letter from RBZ canceling the exemption from statutory reserve requirements. Statutory reserves are funds (which constitute a certain percentage of their total deposits), banks are obliged to deposit with the Central Bank without interest.

When Royal Bank started its business, Mzwimbi applied to the Central Bank – then under Dr. Tsumba, on foreign exchange to pay for supplies, software and technology infrastructure. No foreign currency could be used, but instead Royal Bank was exempt from paying statutory reserves for one year, thus releasing funds that Royal could use to acquire foreign currency and purchase the necessary resources. This was a normal procedure and practice for the Central Bank, which had also been made available to other banking institutions. This will also strengthen the bank’s liquidity position.

Even investors are sometimes offered tax exemptions to encourage and promote investment in any industry. This exception was delayed due to bungling in the RBZ Bank Supervision Department and was thus only implemented one year later, and it would therefore run from May 2003 to May 2004. The premature cancellation of this exception got the Royal Bank surprisingly as its Projections of cash flows were based on these, which started in May 2004.

When RBZ insisted, Royal Bank calculated the statutory reserves and noted that due to a decrease in its deposits, it was not eligible for payment of statutory reserves at that time. When the bank submitted its returns with zero statutory reserves, the central bank claimed that the bank was now due for the entire statutory reserve since its inception. In practice, this was not treated as a statutory reserve exemption, but more as a penalty for avoiding statutory reserves. The Royal Bank appealed. There were contradictory statements between the Banking Supervision and Capital Markets departments on the issue as banking supervision was given to the validity of Royal’s position. However, capital markets insisted it had instructions from the top to recall the full $ 23 billion. This was forced into the Royal Bank and transferred without consent to the Troubled Banks Fund to exorbitant levels of 450% per annum.

FML Saga

As FML demutualized, executives were concerned about the possibility of being swallowed by its huge strategic partner, Trust Holdings. FML turned to Royal Bank and other banks to act as buffers. The deal was that FML would finance the transaction by investing funds in Royal Bank so that Royal would not finance it from its balance sheet.

Accordingly, FML would entrust Royal Bank’s deposits to the tenor of the loan. The deal was completed through Regal Asset Managers and was set to mature in December 2004, where First Mutual’s share price was expected to have flourished, enabling Royal Bank to reap its investments and exit profitably. The deal resulted in Regal Asset Managers owning 57 million FML shares. Royal Bank gave FML some securities in the form of treasury rules as collateral for the deposit.

The Reserve Bank and the trustee wrote off this investment because at that time FML was suspended on the ZSE. However, the fact that it was suspended does not invalidate its value. Recent events have shown that this investment has generated tremendous capital value for Regal Asset Managers as the ZSE rose again. Still, the trustee considered this investment negatively. Around March 2004, there was an infection effect at FML due to the challenges of Trust Bank. This resulted in the forced departure of FML’s CEO and chairman. The FML was suspended from the local bourse when investigations into the funding structure of the Capital Alliance acquisition were completed. Because of the pressure put on FML, it wanted to withdraw deposits into Royal Bank in violation of the agreement. FML was unable to locate and return the treasury that Royal had provided as collateral. Royal Bank suspects that these had been placed with ENG, another asset management firm that collapsed in December 2003. A public row broke out. Royal Bank executives sought advice from Renaissance Merchant Bank, which had brokered the deal, and the chairman of ZSE, both of whom agreed with Royal that the deal was legitimate and FML had to respect the deal. At this point, FML sought court intervention in an attempt to force Royal Bank into liquidation. Even the curator responded to the FML’s position, resulting in him taking it to arbitration. Royal’s position remained that if FML fails to return the securities, it will not get the money.

Royal bank executives claimed political interference in the issue. Royal Bank executives believe that the governor, against his better judgment, decided to take action against Royal Bank on the pretext of political pressure. In retrospect, the political backing to crack the whip at Royal gave credence to the rumor that the governor had an underlying agenda in taking Royal and merging it into ZABG because of its strong affiliate network.

Royal Bank was warned by friendly RBZ insiders that if it ever had access to the Troubled Bank Fund, it would be in trouble so it tried to avoid this at all costs.

But on August 4, 2004, Royal was served papers effectively placing it under the curator. Interestingly, the trustee’s contract was signed two days earlier. Up to this time, no depositor had ever failed to withdraw his deposits from the Royal Bank.

The lack of credibility of the Reserve Bank in the handling of this case is exposed when considering that some banks were given more than eight months to stabilize under the trustees, e.g. Intermarket and CFX were banking and were able to recover. But Royal and Trust Bank were under the curator for less than two months before being assembled. The press raised concerns that the curators are taking over the role of businessman rather than nurse, thus burying these banks. This seemed to confirm the possibility of a hidden central bank agenda.

Victor Chando

Chando was an outstanding financial engineer who created Victory Financial Services after a piece with the MBCA. He had been the mastermind behind the creation of the Century Discount House predecessor, which he later sold to Century Holdings. Initially, Royal Bank had an interest in discount houses, which is why Victor had a significant shareholder at the outset. He later acquired Barnford’s Securities, which Royal intended to bring in-house.

Victory Financial Services was involved in foreign exchange trading with the help of offshore companies that bought free funds from Zimbabweans abroad and bought raw materials for Zimbabwean companies. Such a deal with National Foods went sour, and MD reported it to the Central Bank. Investigations revealed that the deal was clean, but RBZ disclosed that it was involved in illegal foreign currency transactions and linked this to Royal Bank. However, this was a transaction made by a shareholder as an account holder in which the bank had no interest. What confused matters was that Victory Financial Services became houses in the same building as Royal Bank.

After failing to nail Chando to any criminal charges, Central Bank issued an order to Royal Bank to force him out as a shareholder and board member. It’s ridiculous that the Central Bank would vet who is a shareholder or not in banks – especially when the people had no criminal records.

Negotiations were held with OPEC to take over Chando’s shareholding. The Reserve Bank was aware of this development. OPEC would then assist with the recapitalization as well as open bank lines.

The arrest

In September 2004, the executive directors of Royal Bank, Mzwimbi and Durajadi were arrested on five charges of fraudulent damage to the bank. One of the charges was that they fraudulently used depositors’ funds to recapitalize the bank.

Three of the charges following police investigation were dropped when they were not correct. The two remaining charges were:

(a) a conflict of interest on loans made available to directors. RBZ claims they did not disclose their interests when companies controlled by them gained access to loans at concessional rates from the bank. The enterprising bankers, however, dispute these charges as they claim that the board minutes prove that this interest was revealed. Even the bank’s financial statements acknowledge that they were granted access to loans as part of their employment contract with the bank.

b) there was money for Finsreal Asset Management. However, Mzwimbi claims that Finsreal actually owes them money and not the other way around. Royal Bank shareholders had to deposit money to recapitalize the bank and were asked to deposit their funds with Finsreal Asset Management. As some had not paid their share of the recapitalization on the due date, Royal Financial Holdings, which had an account with Finsreal, paid the money on shareholders’ behalf – which was then payable to Royal Financial Holdings. Somehow, RBZ confused this transaction as the bank’s funds and therefore charged

shareholders in using depositors’ funds to recapitalize.

In retrospective analysis of the lawsuit in which Royal Bank executives are accused of swindling the bank, it appears that RBZ created an untruth to frustrate the bankers. The curator, who initially refused to rule before RBZ appointed independent appeal, has clearly testified in court that no directors were stolen from the bank and that, contrary to the RBZ allegations, the curator did not recommend charges against the bankers. In January 2007, the former executive directors of the Royal Bank were acquitted by the High Court of the remaining criminal charges after the prosecution failed to put forward a convincing argument.

Royal Bank assets were sold by the trustee to ZABG almost two months after being placed under the trustee without any audited accounts. The speed at which a sales agreement was reached is astounding. Owners of the Royal Bank went to court, and after a lengthy legal battle, the court ruled that the assets were being sold illegally and that the sale was therefore “illegal and without force or effect and therefore invalid”. The court then ordered the owners to appeal to the central bank to determine whether the trustees had acted. The central bank set up an “independent panel” in advance to judge the case. Oddly enough, ZABG continued to trade the illegal assets.

The panel advised that Royal Bank’s appeal was rejected as it would be difficult to separate it from ZABG. They also cited the fact that ZABG had some contractual obligations with third parties who may not want to do business with Royal bank. This strange decision fails to explain why these considerations were not taken when the merger was carried out. The decision also redefined the agreements between the trustee of Royal bank and ZABG as not a “sale agreement”, although the parties to the agreement clearly intended to be considered as such. This was a way of circumventing the Supreme Court’s decision that the sale agreement was invalid.

But the panel did not explain how this sale of the assets should be considered if it was not a sale.

Accordingly, the major shareholders of Royal appealed to the Minister of Finance who upheld the RBZ decision. Mzwimbi and his colleagues have therefore appealed to the courts. Meanwhile, despite the unprecedented legal challenge, there was a failed attempt to sell the disputed assets of ZABG. Just ice cream delayed is denied justice.

Mzwimbi and his team have been denied access to all bank records, and yet they are expected to defend themselves. As I have characteristically put it, “We enter into this battle blind folded and our hands tied while fighting one who has armor and a sword.”

Around 2002-3, there were press releases indicating that the ruling party / state would have a stake in the profitable banking sector. A government minister at the time of the arrest confirmed this to Mzwimbi and his team. Another bank, NMB, had allegedly been assaulted, and major shareholders were told to dispose of their holdings to certain politically connected individuals. They refused and had to leave the country after some trumped-up charges were preferred against them. Unfortunately, the governor faced opposition and the politicians distanced themselves. An original banker reported how he was summoned to the governor’s office, stating that he would leave the country when his bank would be closed. This banker credits Royal Bank’s opposition to being manipulated as the reason his own bank survived. The bank was placed under curatorship on August 4, 2004. Mzwimbi had secured potential investors to recapitalize the bank just before the deadline of September 30, 2004. Three days before that deadline, Mzwimbi met with the curator and explained in detail the position of the recapitalization exercise. Investors who had shown interest and were in advanced negotiations were OPEC, Fidelity Insurance and some South African investors. He further asked the trustee to request the Central Bank for an extension of approximately one week. The next day, he was arrested on the pretext of leaving the country. Mzwimbi and his team believe his arrest at the critical stage was meant to scare future investors and result in a lack of recapitalization. This gives credence to the view that the decision to acquire the bank and merge it into ZABG had already been made. The recapitalization would have flooded those plans. In particular, other banks were given an extension to regulate their recapitalization plans.

Shakeman Mugari reported that the central bank has in principle agreed to enter into a system of agreements with Royal, Trust and Barbican banks, which could see the final solution to this issue. He claims that the central bank ignored the value of securities pledged by the banks to the central bank for the loans. If these are included, the bank shareholders have some significant value within ZABG. Had this scheme been completed, it would have protected RBZ officials from being sued in their personal capacity for shareholder value loss. From the article, it appears that a Memorandum of Understanding was signed to effect a reduction of Allied Financial Services’ stake in ZABG, while former bank shareholders will record their share in relation to the value of their assets. This seems to indicate that the central bank has noticed a weakness in its arguments.

If this turns out, Royal Bank could recover a fairly large share of ZABG because of its assets that included real estate and its undervalued paper assets.

The legal difficulties show that entrepreneurs in unstable environments face unnecessary political and legal challenges. The rule of law in these countries is sometimes non-existent. Instead of supporting investors, the regulatory and political environment presents serious challenges for entrepreneurs. Entrepreneurs in these environments must assess the associated risk in establishing their businesses. However, a new breed of entrepreneurs who do not fear the shifts in political interference is making a difference. Entrepreneurs recognize that the environment is a constraint, but can be manipulated until valuable opportunities are exploited for commercial value. These entrepreneurs do not choose to be victims of the environment.

Assault against the nature of entrepreneurs

The information asymmetry, in which the central bank played its case in the public press, while the accused bankers had no right to reaction, created a false impression in the people’s mind that entrepreneurs were greedy and unscrupulous.

The central bank accused Jeff Mzwimbi and Durajadi Simba of forfeiting funds from the bank. An example appeared in a press article claiming that the sale of Barclays Bank branches to Royal Bank was canceled and the repaid funds transferred to Mzwimbi and Durajadi with Finsreal Asset Managers and not Royal Bank’s account. This was a clear case of deliberate misinformation as the central bank was aware of the truth. Royal Bank had included the purchase of the branch building Bulawayo Barclays Bank, which Barclays Bank would lease from Royal Bank. When Royal Bank briefly entered the Interbank Clearing House, it renegotiated with Barclays. This was after Royal threatened that if it did not clear this amount, it would be placed in the Troubled Bank Fund – which brought severe penalties.

The result was that Barclays repaid the amount it paid directly to Royal’s Central Bank account. RBZ acknowledged that they received these funds. How can they now accuse the founding shareholders of transferring the same funds that went directly to the RBZ account? Mzwimbi insists Barclays can easily testify to this.

RBZ also alleged that Mzwimbi and Durajadi withheld information from their CVs when applying for a banking license, thus raising doubts about their integrity. They claimed that Mzwimbi withheld information about his involvement in a failed bank, UMB. But the Royal Bank business plan filed with RBZ clearly indicates this involvement. The central bank would have these items anyway. They also questioned Durajadi’s source of funds and cast aspirations on net worth. Still, Durajadi had been involved in the Zimbabwe Trust and a transport business with his brother, giving him sufficient net worth.

RBZ claims that the Board of Directors of Royal Bank did not comply with a directive on recapitalization before July 29, 2004. Royal Bank executives and board of directors categorically declare that they never received this directive. Mzwimbi and his team claim this is incorrect information as all banks were required to have recapitalized on September 30, 2004.

Regulators also claim that Royal Bank’s balance sheet had a $ 140 billion deficit, which bankers dispute. If you were to consider the disputed $ 23 billion for statutory reserves and the $ 20 billion as accommodation from the clearinghouse, this would amount to $ 77 billion with interests. However, with the undervaluation of the assets and the $ 160 billion written off as uncollectible, there would be no negative balance. The royal executives’ allegations are that, at the request of the Reserve Bank, the trustee deliberately tampered with the accounts to give a reason for the acquisition. This can be validated by the fact that the trustee’s balance continued to change each time he was challenged and he increased depreciation, even for funds that had since been collected. When Royal and Trust Banks were merged into ZABG, the bank is still profitable without recapitalization. The very fact that this new merged bank can operate long from insolvent bank capital without recapitalizing lends credibility to Royal Bank’s owners.

The entrepreneurs claim that they were dealing with a central bank, which was determined to see them sink and not to protect the integrity of the banking system. This environment was not conducive to survival, and it reinforced normal weaknesses that could be resolved in the course of normal business.

entrepreneur Determination

Mzwimbi and his colleagues refused to give up in challenging situations. Despite intimidation, they took the central bank to court and refused to bow until justice was done. They were given many opportunities to leave the country but would not.

It is reported that they have not abandoned their dream. They have set up Royal Financial Services in Kenya despite the challenges in Zimbabwe. In fact, a sign of perseverance. Press releases indicated that they are in talks with Trust Bank, so once they have won their case, they can merge and continue their operations in Zimbabwe. Confidence did not confirm or deny this. However, the more likely scenario is that both Trust and Royal could reach a compromise with the central bank, resulting in them raising equity in ZABG, subject to an independent revaluation exercise of the assets acquired.

Entrepreneurial Principles

The entrepreneurial journey is fraught with risk, but can be very rewarding. Some lessons to be learned from the case study are as follows:

• Entrepreneurs take calculated risk. Mzwimbi did not use all his resources in the bank, but left his shareholding in Econet intact. He also sought to diversify his wealth by holding some investments with FML and Screen Litho. This has been the mainstay of his wealth creation strategy. The disaster that found the bank did not completely wipe him out because of this prudent investment strategy.

• Entrepreneurs learn from their experiences. Mzwimbi’s vast experience taught him critical lessons. His international banking experience enabled him to see the new trends as Barclays and Standard Chartered withdrew from villages and created a route for his entry strategy. His work with Econet taught him perseverance as he and his colleagues fought legal battles with the government for granting the license. Little did he know that this was just the training ground for the battle of his life – the Battle of the Royal Bank.

• Entrepreneurs must continuously scan the environment for threats and opportunities. While Mzwimbi and his team were good at noticing the new positive trends in the environment at the start, they chose not to change the regulatory environment when the new governor came on board.

• Entrepreneurial strategy emerges and therefore entrepreneurs should be flexible. Although Royal Bank had a plan to grow at a steady pace when the opportunity arose to acquire other branches cheaply, the entrepreneurs took the opportunity.

• Entrepreneurs face credibility challenges as customers, regulators and suppliers test the credibility of newcomers. Royal Bank minimized this by recruiting experienced and well-known staff in the market. However, the lack of institutional shareholders led to a lack of credibility with some corporate clients.

• Entrepreneurs need to develop both leadership and management skills in their organizations to ensure both the ability to leverage opportunities (entrepreneurial activity) and sustainable business performance (strategic management). The more modern view of entrepreneurship just transcends venture creation and now includes strategic growth. Although Mzwimbi was an excellent leader, he needed a strong and strong manager to consolidate the gains and create solid systems to sustain the rapid growth. Leaders thrive on change, while leaders thrive on managing complexity and creating order.

• Business is built on relationships as these help to scan operating environment eg critical information about opportunities and threats were obtained from close relationships

Let’s close this article with a few questions that an entrepreneur should consider. For example, if Mzwimbi had expanded less aggressively, would Royal Bank have been safer from the regulators? How could Mzwimbi have protected Royal Bank from political and regulatory interference if he anticipated these risks? If Mzwimbi had chosen to pursue his business ideas in a country with a more reliable political and regulatory environment, how would he have done so? Would it have been wiser to keep the equipment, real estate and other assets of Royal Financial Holdings or other business and only rent them to the bank? In that scenario, would the predators have been able to hit the bank?

Sources: I dr. Tawafadza A. Makoni confirms to be the author of this work. The material for this case study is taken from my interviews with Mr J Mzwimbi, CEO of Royal Bank in February 2006 and two Royal Bank board members. Some material is taken from an unpublished Royal Bank Strategic Business Plan, (2000)