Financial regulation is a form of regulation or supervision, which subjects financial institutions to certain requirements, restrictions and guidelines, aiming to maintain the integrity of the financial system. This may be handled by either a government or non-government organization. Financial regulation has also influenced the structure of banking sectors by increasing the variety of financial products available. Financial regulation forms one of three legal categories which constitutes the content of financial law, the other two being market practices, case law.
In Zimbabwe there are five principal agencies charged with the responsibility of financial regulation and supervision. These are the Reserve Bank of Zimbabwe (RBZ), The Ministry of Finance and Economic Development, The Deposit Protection Corporation, The Securities and Exchange Commission (SEC) and The Insurance and Pensions Commission.
Regulation is necessary to ensure consumer’s confidence in the financial industry. There are three main reasons for financial system regulation:
- to ensure system stability i.e. the safety and soundness of the financial system;
- to provide smaller (individuals), retail clients with protection. Caveat emptor does not apply to financial contracts due to their complex and opaque nature, and;
- to protect consumers against monopolistic exploitation.
The deregulation of the financial sector and emergence of new financial instruments and services offered by financial institutions has blurred boundaries between different types of financial institutions such as banking, insurance and securities.
A brief history of the Zimbabwe financial system
Zimbabwe’s current financial regulation and supervisory architecture was inherited from the Rhodesian Government at independence in 1980. Specifically, the Reserve Bank of Zimbabwe, the Commissioner of Insurance and Pension Funds and the Zimbabwe Stock Exchange as regulator of the capital markets. Since then, the financial system has undergone several changes in recent years. The Commissioner of Insurance was superseded by The Insurance and Pension Fund Commissioner through Act 7 of 2000 and The Zimbabwe Stock Exchange has been superceded by the Securities and Exchange Commission through the Securities Act 17 of 2004. This regulatory and supervisory regime served Zimbabwe well until 1990 as the financial sector was stable and witnessed no financial crisis or bank collapses.
Zimbabwe's Financial Regulatory and Supervisory System
In Zimbabwe there are five principal agencies charged with the responsibility of financial regulation and supervision. These are the Reserve Bank of Zimbabwe (RBZ), The Ministry of Finance and Economic Development, The Deposit Protection Board, The Securities Commission (SEC) and The Insurance and Pensions Commission (Figure 1 illustrates the current financial regulatory structure in Zimbabwe).
Ministry of Finance and Economic Development
The Ministry of Finance is the ultimate supervisor of the financial system. In other words, all the regulators and supervisors of the financial system fall under the purview of the Ministry of Finance and Economic Development.
Reserve Bank of Zimbabwe (RBZ)
The Reserve Bank of Zimbabwe (RBZ) is the primary institution responsible for the regulation and supervision of banks. It was not always that way. Prior to 2000 registration of banks was the responsibility of the Ministry of Finance whilst supervision was the purview of the Central Bank. However, the Banking Act of 2000 and Statutory Instrument 205 of 2000 (Statutory Instruments of Zimbabwe) transferred all responsibility to the Reserve Bank of Zimbabwe but by 2004, the Reserve Bank was required to consult with Ministry of Finance before withdrawing a bank licence. By 2006 the Central Bank adopted the risk-based supervision of banks. Moreover, the Reserve Bank of Zimbabwe was also responsible for ensuring that Zimbabwe’s financial system remains up-to-date with International Standards that are set by the Bank for International Settlements. However, Zimbabwe faced challenges in fully implementing the Basel II Accord. Implementation was hampered by the 2000-2008 economic crisis and by the liquidity problems bedeviling the financial sector during that period.
Under the RBZ Act, the RBZ is empowered to supervise the operations of all banks in the country. Its Bank Supervision and Surveillance department scrutinizes periodic returns under its risk-based-supervision (off-site examination) and undertakes regular examinations of the books and records of the bank through on-site examinations in order to ensure conformity with statutory regulations as well as with RBZ Prudential Guidelines. However, it is not an independent Central Bank and its objectives are, inter alias, not narrowly focused on price and financial stability.
The Deposit Protection Corporation
The Deposit Protection Corporation came into being through Act 7 of 2010, is tasked with the responsibility of protecting depositors thereby ensuring safety and soundness of the banking system by preventing bank runs. Moreover, the Corporation will have power to obtain information from financial institutions that will allow it to detect early signs of difficulties within the financial system; the Corporation will also be given power to administer failed or failing institutions and, where possible, restore them to financial health. The Deposit Protection Fund was established in 2003 in terms of Section 66 of the Banking Act Chapter 24:20 as read in conjunction with Section 4 of the Deposit Corporation Act Chapter 24:29 of 2011.
Membership is mandatory and premiums are levied at a rate of 0.03 per cent per annum or 0.075 per cent per quarter with a minimum and maximum contribution of USD500 and USD 30 000 respectively. The maximum insurable limit was USD150.00 per depositor per bank.
Deposit accounts which are covered by the scheme include; demand, time and savings deposits; class B and class C shares of building societies. However, interbank deposits, negotiable certificates of deposit and banker’s acceptances are excluded. The cover provided secures individuals, corporate and trust accounts.
The Securities and Exchange Commission
The Securities Act (SA) 24: 25 took effect on 01 June 2008. It governs the regulation of securities services in Zimbabwe to include securities exchanges, Central Securities Depositories (CSDs) and the respective members, misuse of inside information, and improper trading practices. The securities Act does not apply to Collective Investment Schemes investments regulated by the Collective Investment Schemes Act [Chapter 24:19] (Act No. 25 of 1997).
The Securities and Exchange Commission (SEC) was formed with the following objectives inter alias; investor protection, reduce systemic risk, and promote market integrity.
The Insurance and Pensions Commission
It is clear from the foregoing multiple regulators that the regulation and supervisory architecture in Zimbabwe is based on the silo approach i.e. determined by the type of institution or functional lines-such as banking, insurance and the securities industry determining under which regulator they fall under. As a point of fact securities trades now transcend the securities industry to encompass the entire financial system. Furthermore, there is no harmonization of accounting practices. For instance IPEC wants returns at cost whilst banking insists on mark-to-market.