On the 24th of February 2015, the Reserve Bank of Zimbabwe resolved to cancel the banking licence of Kingdom Afrasia Bank. This brought to a close a long saga and put the final nail in the coffin of what was once one of the highlights of the Zimbabwean financial services sector in Kingdom Bank. The licence was pulled after the directors of the bank had exhausted all options and failed to meet the capital adequacy requirements set by the RBZ for banks. There are a few lessons we can learn from the story. To do so we must look at the details first.
Over the years the RBZ has raised bank capital requirements. In 2021 we saw this with Getbucks scrambling for finance options while ZB resolved to merge the Bank and Building Society to meet capital requirements. The axe fell for Kingdom Afrasia when they failed to meet the 31st December 2014 capital requirement of US$25 million. The bank had a capitalisation of only US$6 million at the time. At this point resolved to voluntarily surrender the licence. The swing of the axe by the RBZ on the 24th of February was a formality.
About Capital Adequacy requirements
The biggest lesson from the fall of Kingdom Afrasia is the importance of capital adequacy requirements in banking. We need to take a deep dive into capital adequacy requirements before we look at how this was important in the fall of Kingdom Afrasia. The concept comes from a convention that created a framework for modern prudential risk management in the world of finance. Known as the Basel framework you will find them numbered as Basel I, II and III. Each time introducing new concepts and regulations. These measures were meant to make financial institutions more stable, particularly those handling public funds. The concept at this point is simple, the bigger the equity a bank has the bigger the shocks it can take.
Now if we combine this concept with the reserve ratio, which requires banks to keep a certain percentage of the money placed in their care on hand. Say 10%, of all deposits, must stay within the bank. This is meant to cater for the needs of depositors in the short term to prevent a bank run, the term for depositors withdrawing their money en masse. The goal of both these concepts from the Basel Framework is to ensure bank liquidity against the loans they make.
No stranger to danger
Kingdom Bank was established in 1994 by Nigel Chanakira and was a big part of the Zimbabwean financial landscape. With such visibility also comes magnification of your moves, particularly where they do not go as planned. Those who have seen many Christmases will remember the infamous merger and subsequent demerger of Kingdom Bank and Miekles Limited to form Kingdom Miekles Africa Limited (KMAL). The merger happened in 2007 as they aimed for a New York Stock Exchange listing. KMAL fell apart due to shareholder disagreement on the vision and eventually, the two demerged in 2010. Kingdom returned to its core business after this.
Things fall apart…
Afrasia Bank Limited, a Mauritian financial services provider stepped in and acquired a 35% stake in Kingdom Financial Holdings Limited in 2012. After a few more changes in shareholding, the bank fully rebranded to Afrasia Bank. Afrasia seemed to take Kingdom’s flirtation with danger to another level as it was accused of diverting funds from the Africa Export-Import Bank. Spiritage communications also brought a case against Afrasia in which they alleged financial mismanagement including a scheme in which they invested money with Tetrad Investment Bank (Remember the name) only to borrow it back from Tetrad.
Earlier we mentioned a bank run and that is essentially what preceded the fall of Afrasia Bank. They staggered and suffered from liquidity problems all the while looking for investors to prop up the bank and help meet Reserve Bank Capital Requirements. The tainted image of Afrasia and its legal wrangles played a part in failing to find investors to meet capital requirements. 2014 was a bad year for banks as 5 other banks, Allied Bank, Capital Bank, Interfin, the aforementioned Tetrad Investment Bank and Metbank (which was suspended from foreign currency transacting earlier this year) all felt different measures of the wrath of the RBZ with all but Metbank closing.