Fundanga explains why BoZ took over Finance Bank

The Bank of Zambia (BoZ) has said insider borrowing at Finance Bank resulting in the insider loans not performing was one of the reasons that prompted the Central bank to possess the bank.
The Bank of Zambia would consequently find a private sector solution to ensure that its status as a going concern is preserved due to its systematic importance.
In a statement released in Lusaka yesterday, Bank of Zambia Governor Caleb Fundanga reassured that Finance Bank would continue operating normally as the bank was being protected from further damage.
Under Section 77 of the Banking and Financial services Act (BFSA), a number of possible options were available to the BoZ to deal with any unsafe and unsound banking practices including issuing directives for corrective action such as directing the shareholders to re-capitalise the bank and for management to establish a programme of action to counteract the unsafe or unsound practice and or to establish or maintain safe and sound practices in its conduct of banking business.
“In this regard, the BoZ has pursued all the above options over the years to no avail. In addition, the bank management was availed an opportunity on more than one occasion to resolve the problems at Finance Bank but have consistently failed to do so.
“Due to difficulties in dealing with the problems in Finance Bank using the other options available as outlined, the BoZ made a decision that the optimal option under the current circumstances was taking possession of the bank in accordance with the provisions provided under Section 81 (1) (c) (i) and (ii),” he said.
Dr Fundanga said Finance Bank had seriously breached the provisions of the Act and had engaged in unsafe and unsound banking practices, and due to the high level of non-performing loans, mostly insider loans that are not paid back, the viability of the bank was seriously compromised.
During the possession period, the Bank of Zambia would prepare a statement of affairs of assets and liabilities and will take appropriate action in line with section 84B.
The BoZ conducted an inspection of Finance Bank between October 28 and November 27, 2009 for the financial position of the bank as at September 30, 2009.
The inspection findings determined that the bank’s credit risk management was weak and that there was no evidence of active participation from the Board in the credit granting process.
“There were unsound practices surrounding insider loans with most of them being uncolleratised. As a result, almost all the insider loans have remained non-performing. Clearly, the bank’s credit risk management had significant deficiencies and therefore posed a major risk to the bank’s financial condition through increased loan losses and their consequent negative impact on the bank’s earnings and regulatory capital position,” he said.
Finance bank was inspected in 2007, 2008, 2009 and all these inspections identified serious deficiencies which the bank failed to rectify despite repeated recommendations.
Past BoZ inspections repeatedly recommended that bank management complies with the Classification and Provisioning of Loan Regulations, that the bank improves its credit risk management, and that the bank ensures compliance with the disclosure of interest in insider loan facilities.
Dr Fundanga said the BoZ considered repeated failures by Finance bank to comply with the provisions of the law, and with the previous directives to constitute unsafe and unsound practices.
Under Section 18, and where a bank is found to be erring, the supervisory action the BoZ can take includes taking possession of a bank, suspending the bank’s licence, restricting the bank’s licence or revoking a bank’s licence.
The BoZ under the law, has the mandate to take supervisory action of any bank under Section 81 of the BFSA where the inspection conducted showed that the concerned bank conducts its business in breach of the Act or conducts itself in unsafe and unsound practices, the bank is unable, or was likely to become unable, to continue its operations in the ordinary course of its business, the banks capital is less than the prescribed minimum and when a bank becomes insolvent.
One of the key supervisory tools that the BoZ uses in its conduct of bank supervision is the periodic inspection of all banks to determine whether a bank was operating in a sound financial condition and also operating safely and that the requirements of the BFSA and other laws of Zambia have been complied with in the conduct of business.

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