Finance minister Felix Mutati recently announced that InterMarket Bank Corporation Zambia (IBCZ), will be back in business about three months after the Bank of Zambia (BOZ) had placed the institution under its care – virtually closing it.
Its continued closure is haunting customers. The last thing you want to discover is that your hard-earned income, which you have safely secured in a reputable bank, is inaccessible.
Since November 28, 2016 when the Bank of Zambia took possession of IBCZ, following a breach of the Zambian banking laws, the market has been uncertain. Rumours swelled that one or two more banks were heading the same direction. BOZ issued a statement stating that InterMarket Bank was insolvent and had failed to meet its obligations with the Central Bank.
How then does a financial institution, which is trusted to secure funds for its customers, become insolvent? One would think the bank would stay on top of business when it comes to meeting statutory regulations. However, to date, the bank remains closed with the hope of re-opening soon as announced by Mutati.
In general, insolvency occurs when the bank fails to pay its debts. It usually occurs for one of two reasons. Firstly, the bank may end up owing more than it has in its reserves or simply put, more than it owns. Secondly, insolvency may occur if the bank cannot pay its debts as they fall due, while its assets are worth more than its liabilities – known as lack of liquidity.
Those specialised in the area of finance and accounting understand that the position IBCZ reached meant its assets were worth less than its liabilities, and therefore, the institution was suffocating. Further, IBCZ could have been failing to honour its debts, creating a serious imbalance in the market. So, BOZ intervened and carpeted the financial institution, which has over the years struggled to grow beyond a few branches.
The closure of a commercial bank by the Central Bank is usually the last resort.This is because any closure comes with consequences, which may have long term effects on the overall performance of the economy. The banking industry plays a very critical role in economic growth, especially in Zambia, where over 10 commercial banks control the market chief among them include Barclays, Zanaco, Stanbic, Standard Chartered, Indo-Zambia and First National Bank. Others are Access Bank, Ecobank, CitiBank and Cavmont Bank to name a few.
Beyond anyone, customers are the first victims of a bank closure. They fear losing all the money they have deposited overtime, resulting in the loss of confidence in all financial institutions. Furthermore, a bank closure sends wrong signals to investors because investment potential is threatened and institution stand to lose capital. Similarly, investors lose their confidence in the economy.
In addition, emerging businesses that depend upon loans fail to raise the capital required to begin their operations, resulting in a decline in economic growth.A decline in economic growth drives unemployment levels up, which in turn drops tax revenues, making the government fail to meet its social obligations. Overall, a bank closure impacts bank customers, investors and the economy as a whole.
Ultimately, that is the fear that is created by the closure of InterMarket Bank. After facing a liquidity crisis, it meant that the bank had no access to enough cash in the short term. While assets were available and worth more than liabilities, they were mostly tied up in long term loans. In this case, the bank could not merely ask its borrowers to suddenly pay back their long-term loans. The situation caused panic, as it appeared that the bank was unable to meet its commitments. Bank of Zambia then intervened and offered short term liquidity.
By offering cash and short term injections of money, the Central Bank ensures people have faith in the banking system. The bank has since been restructured and declared solvent by BOZ. It will resume its normal operations on a date to be announced.
Questions still linger. Will the institution retain a healthy clientale base? What happens to customer confidence? Will the bank survive the harsh realities it struggled to overcome? It can only be hoped Intermarket is back to stay.