MPs amnesia affects Malawi Savings Bank resolve

When Parliament starts fighting against the application of the very laws they passed on financial and banking services less than five years ago, then you know that Malawi is in worse trouble than previously thought.

Reading the Financial Services Act and the Banking Act that members of Parliament (MPs) passed in 2010, the corrective action steps that the Reserve Bank of Malawi (RBM) has taken on Malawi Savings Bank (MSB)—and which government as shareholder has embraced—are what MPs empowered the RBM Governor to do when a bank is in capitalisation and liquidity troubles as is now the case with the wholly owned State bank.

Section 34 of the Financial Services Act empowers the registrar of financial institutions (the Governor) to issue directives to deal with various scenarios in accordance with the laws.

In this context, there are two relevant situations.

The first is with respect to the conduct of the affairs of financial institutions, or of the affairs of financial groups, to ensure that the institutions and groups maintain a sound financial position and do not cause or promote instability in the financial system.

The second pertinent situation is in respect of funding and solvency of financial institutions and financial groups.

Thus, in exercise of the powers conferred by Parliament under the Financial Services Act of 2010, Governor Charles Chuka, as registrar of financial institutions, issued the Financial Services (Prompt Corrective Action for Banks) Directive in May 2014.

The directive had two objectives as follows:

• Establish corrective actions that the registrar may take or impose on banks (while the bank is still under the control of the owners) and the circumstances under which such actions may be taken.
• Prescribe the circumstances under which the registrar or his agent may exercise powers under the existing legal framework to resolve banks (while suspending the rights of the owners and management) before a bank reaches actual insolvency.

The directive has two major categories—capital adequacy ratio (CAR) and liquidity.

In each category, the RBM defines bank conditions or their health status and the mandatory supervision actions that maybe undertaken to correct the situation.

Under CAR, the conditions include ‘undercapitalised banks’, ‘significantly undercapitalised banks’, ‘critically underutilised banks’ and a failed bank.

In the liquidity category, the defined conditions are banks in ‘weak liquidity position (liquidity ratio of between 22.5 and 30 percent), ‘significantly illiquid banks’ (recording a liquidity ratio of between 15 and 22.5 percent) and ‘critically illiquid banks’ (a bank that records liquidity ratio of below 15 percent).

MSB figures point to a bank that is both ‘significantly undercapitalised’—with Core Capital Ratio (CCR) of equal to or greater than five percent, but less than eight percent—and ‘significantly illiquid’.

For a ‘significantly undercapitalised’ bank, RBM may take, among several, a combination of the following measures: Require the bank to replace management, direct immediate new recapitalisation or capital restoration plan; registrar reviewing capital plan within two weeks and communicate to the bank its acceptability or otherwise; registrar make the final capital call on the bank within three months from time of acceptance of the capital plan.

Other measures for a ‘critically underutilised bank’ such as MSB are the following: Restrict undertaking of any material transaction without registrar’s approval; within a maximum of three months after the final capital call, the registrar may take over management and control of the bank or handover the bank to a deposit insurance agency if one is established.

In terms of significantly illiquid bank—MSB’s liquidity position stands at 15.7 percent against the required minimum of 30 percent—one of the measures is for the stressed bank to divest its equity, a process that government has started and which Parliament wants to stop.

A review of the communication and MSB figures that The Nation has seen shows that central bank appears to have done almost everything in terms of corrective measures that should be done for a bank in capital and liquidity distress as MSB is.

Therefore, according to the Banking Act and Financial Services Act, in particular the Directive on Prompt Corrective Action for Banks 2014, RBM should have taken drastic action on MSB by now given its current poor financial state, especially its urgent capital needs.

Instead, apart from taking a number of corrective measures, RBM provided waivers to MSB on minimum capital and liquidity requirements for several months, if not years. And now MSB needs at least K23.7 billion to smooth out its minimum capital and liquidity requirement—money that Finance, Economic Planning and Development Minister Goodall Gondwe says the shareholder, government; itself facing a financial squeeze as seen by the hundreds of billions in national budget deficit—does not have.

In fact, the very same MPs—whose job it is to allocate resources to public institutions—did not allocate any to bail out MSB during the just-ended Mid-Year Budget Review Meeting.

How then do the MPs expect government to release K23.7 billion to MSB without Parliament giving them?

The legislators know the money is not there, so why push the burden on the taxpayer and the Executive branch of government?

The bottom line is simple: MSB, in the state it is in now, is a threat to the rest of the country’s financial system and, as the MPs mandated the RBM to act, it has—pushing the shareholder to recapitalise by any method possible: either a cash injection it does not have or inviting a strategic equity partner to buy into bank, which is the most viable option right now given the myriad of challenges that need money from Account Number One.

Or did the legislators pass banking and financial services laws whose implications they did not fully grasp, just as they have no inkling of what would happen if MSB failed and there was a run on the bank? Because make no mistake, without capital MSB will fail and the central bank will have no choice, but take it out of business.

One financial analyst breaks it down nicely for the MPs who think they can politicise every decision, including one as sensitive, as technical and as critical as banking.

“The continued delay in making a decision on MSB’s future poses a serious systemic risk to the whole financial system in the country. What is clear is that in its current state, the bank should never have been allowed to continue operating at all for the extended period of time that it has so far.

“Banking by its nature is a sensitive sector and everyone needs to tread carefully and allow the experts to handle this sensitive industry with caution. The rhetoric that we have seen over the past few days in Parliament or any quarters relating to MSB is not helping and will not help MSB’s situation,” said one financial analyst who asked not to be named in order to speak freely about an issue that has put the local financial industry on edge.

Indeed, what Parliament is doing—trying to force government to hold on to an liquidity-stressed and undercapitalised bank is not detrimental to MSB alone—it is bad for the whole banking industry, the economy and the taxpayer.

It is also bad for the rule of law, especially when MPs go about trying to thwart the application of laws that they themselves passed not long ago.

It is a folly that is hard to swallow.

FAST FACTS

• MSB Successor bank to the POSB incorporated in 1910
• Incorporated into limited liability June 1994
• Established into Malawi Savings Bank (MSB) from POSB in 1995 by an Act of Parliament
• Since 1995 MSB using the Malawi Post Office Savings Bank Act
• January 2015 Bidders engaged on the ongoing tender involving Indebank and MSB
• February 2015 National Assembly reject proposed sale of MSB, matter referred to Budget and Finance Committee of Parliament
• Government majority shareholder with 100 percent stake
• MSB has 74 outlets across the country
• Employs over 600 employees
• Asset base at K46 billion