Entrepreneurial Challenges - The Case of Royal Bank Zimbabwe Ltd

Industry Shake-up

In December 2003 Mzwimbi went on a well deserved house vacation to the United States, satisfied with the progress and inevitable that his sprawling empire was on a solid footing. However a call from a firm magnate in January 2004 alerted him to what was termed a looming shake- up in the financial services sector. It appears that the incoming governor had confided in a few close colleagues and acquaintances about his plans. This confirmed to Mzwimbi the fears that were arising as Rbz refused to adapt banks which had liquidity challenges.

Litho Printing

The last two months of 2003 saw interest rates soar close to 900% p.a., with the Rbz watching helplessly. The Rbz had the tools and capacity to operate these rates but nothing was done to ease the situation. This hiking of interest rates wiped out nearly all the bank's earnings made within the year. Bankers normally rely on treasury bills (Tbs) since they are undoubtedly tradable. Their yield had been good until the interest rates skyrocketed. Consequently bankers were now borrowing at higher interest rates than the treasury bills could cover. Bankers were put in the uncomfortable position of borrowing costly money and on-lending it cheaply. An example at Royal Bank was an entrepreneur who borrowed 0 million in December 2003, which by March 2004 had ballooned to 0 million due to the immoderate rates. Although the cost of funds was now at 900% p.a., Royal Bank had just increased its interest rates to only 400% p.a, meaning that it was funding the client's shortfall. However this client could not pay it and just returned the 0 million and demonstrated that he had no capacity to pay back the 0 million interest charge. Most bankers acceptable this anomaly because they concept it was a temporary dysfunction perpetuated by the inability of an acting governor to make bold decisions. Bankers believed that once a substantive governor was sworn in he would operate the interest rates. Much to their dismay, on assuming the governorship Dr. Gono left the rates untamed and hence the situation worsened. This scenario continued up to August 2004, causing principal strain on entrepreneurial bankers.

On reflection, some bankers feel that the central bank deliberately hiked the interest rates, as this would allow it to restructure the financial services sector. They argue that while the cash urgency of the last half of 2003, bank Ceos would meet often with the Rbz in an effort to find solutions to the crisis. Retrospectively they claim that there is evidence indicating that the current governor though not appointed yet was already in operate of the Rbz operations while that time period and was thus responsible for the untenable interest rate regime.

In January 2004, after his vacation, Mzwimbi was informed by the Rbz that Royal had been accommodated for billion on the 28th of December 2003. The Central Bank wanted to know either this chamber should be formalised and located into the newly created Troubled Bank Fund. However, this was costly money both in terms of the interest rates and also in terms of the conditions and terms of the loan. At Trust Bank, access to this facility had already given the Central Bank the right to force out the top executives, restructure the Board and virtually take over the administration of the bank.

Royal Bank turned down the offer and used deposits to pay off the money. However the interest rates did not come down.

During the first quarter of 2004 Trust Bank, Barbican bank and Intermarket Bank were identified as distressed and put under severe medicinal orders by the Central Bank.

Royal Assault

Royal Bank remained stable until March 2004. Citizen who had their funds locked up in Intermarket Bank withdrew huge sums of funds from Royal Bank while others were inspiring to foreign owned banks as the perception created by Central Bank was read by the market to mean that entrepreneurial bankers were fraudsters.

Others withdrew their money on the basis that if financial behemoths like Intermarket can sink, then it could happen to any other indigenously controlled bank. Royal Bank had an benefit that in the smaller towns it was the only bank, so Citizen had no choice. However even in this scenario there were no stable deposits as Citizen kept their funds inspiring to avoid being caught unawares. For example in one week Royal Bank had withdrawals of over billion but weathered the storm without recourse to Central Bank accommodation.

At this time, newspaper reports indicating some leakage of confidential data started appearing. When confronted, one communal paper reporter confided that the data was being supplied to them by the Central Bank. These reports were aimed at causing panic withdrawals and hence exposing banks to depositor flight.

Statutory Reserves

In March 2004, at the point of principal vulnerability, Royal Bank received a letter from Rbz cancelling the exemption from statutory reserve requirements. Statutory reserves are funds, (making up a inevitable percentage of their total deposits), banks are required to deposit with the Central Bank, at no interest.

When Royal Bank began operations, Mzwimbi applied to the Central Bank - then under Dr Tsumba, for foreign currency to pay for supplies, software and technology infrastructure. No foreign currency could be availed but instead Royal Bank was exempted from paying statutory reserves for one year, thus releasing funds which Royal could use to procure foreign currency and purchase the needed resources. This was a general course and custom of the Central Bank, which had been made ready to other banking institutions as well. This would also improve the bank's liquidity position.

Even investors are sometimes offered tax exemptions to encourage and promote investments in any industry. This exemption was delayed due to bungling in the Banking administration and lookout group of the Rbz and was thus only implemented a year later, consequently it would run from May 2003 until May 2004. The premature cancellation of this exemption caught Royal Bank by surprise as its cash flow projections had been based on these commencing in May 2004.

When the Rbz insisted, Royal Bank calculated the statutory reserves and noted that, due to a decline in its deposits, it was not eligible for the payment of statutory reserves at that time. When the bank submitted its returns with zero statutory reserves, the Central Bank claimed that the bank was now due for the whole statutory reserve since inception. In follow this was not being treated as a statutory reserve exemption but more as a penalty for evading statutory reserves. Royal Bank appealed. There were conflicting opinions in the middle of the Bank administration and Capital Markets divisions on the issue as Bank administration conceded to the validity of Royal's position. However Capital Markets insisted that it had instructions from the top to recall the full estimate of billion. This was forced onto Royal Bank and transferred without consent to the Troubled Banks Fund at exorbitant rates of 450% p. A.

Fml Saga

When Fml was demutualising, the executives were implicated about the possibility of being swallowed by its huge strategic partner, Trust Holdings. Fml approached Royal Bank and other banks to act as buffers. The deal was that Fml would fund the deal by placing funds with Royal Bank so that Royal would not fund it from its balance sheet.

Consequently Fml would leave the deposits with Royal Bank for the tenor of the loan. The deal was consummated straight through Regal Asset Managers and was to mature in December 2004, at which time it was incredible that the share price of First Mutual would have blossomed, allowing Royal Bank to harvest its speculation and exit profitably. The deal resulted in Regal Asset Managers owning 57 million Fml shares. Royal Bank gave Fml some securities in the form of treasury bills as collateral for the deposit.

The reserve Bank and the curator wrote off this speculation because at that time Fml was suspended at the Zse. However the fact that it was suspended did not invalidate its value. Up-to-date events have shown that this speculation has generated huge capital value for Regal Asset Managers as the Zse rebounded. Yet the curator valued this speculation negatively. Nearby March 2004 there had been a contagion follow at Fml due to the challenges at Trust Bank. This resulted in the forced departure of the Fml Ceo and chairman. Fml was suspended from the local bourse as investigations into the financing buildings of Capital Alliance's acquisition were carried out. Because of the pressure brought to bear on Fml, it wanted to withdraw the deposits held by Royal Bank, contrary to the agreement. Fml could not search and return the treasury bills that had been provided as collateral by Royal. Royal Bank suspected that these had been located with Eng, other asset administration firm which collapsed in December 2003. A communal row broke out. Royal Bank executives sought counsel from Renaissance Merchant Bank, which had brokered the deal, and the Chairman of the Zse, who both agreed with Royal that the deal was legitimate and Fml had to honour the agreement. At this stage Fml sought court intervention in an effort to force Royal Bank into liquidation. Even the curator contested the Fml position resulting in his taking it for arbitration. Royal's position remained that if Fml fails to return the securities then it will not get the funds.

Royal bank directors claimed political interference on the issue. The Royal Bank executives believe that the governor, against his best judgment, decided to act against Royal Bank under the pretext of the political pressure. In retrospect, the political reserve for cracking the whip at Royal gave credence to the rumour that the governor had an underlying schedule in taking Royal and merging it into Zabg because of its strong field network.

Royal Bank had been warned by friendly Rbz insiders that if it ever accessed the Troubled Bank Fund it would be in trouble, so it sought to avoid this at all costs.

However on 4th August 2004, Royal was served with papers that effectively located it under the curator. Interestingly, the curator's ageement was signed two days earlier. Until this time no depositor had ever failed to withdraw his deposits from Royal Bank.

The lack of credibility of the reserve Bank in handling this case is exposed when one considers that some banks were given more than eight months to stabilise under curators, e.g. Intermarket and Cfx Banks, and were able to recover. But Royal and Trust Bank were under the curator for less than two months before being amalgamated. The press raised concerns about the curators assuming the role of undertaker rather than nurse, and hence burying these banks.This seemed to confirm the possibility of a inexpressive schedule on the part of the Central Bank.

Victor Chando

Chando was an excellent financial engineer who set up Victory Financial Services after a stint with Mbca. He had been the brains behind the setting up of the predecessor of Century allowance House which he later sold to Century Holdings. Royal Bank initially had an interest in allowance houses and so at inception had included Victor as a principal shareholder. He later acquired Barnfords Securities which Royal intended to bring in-house.

Victory Financial Services was complicated in foreign currency dealings, using offshore fellowships that bought free funds from Zimbabweans abroad and purchased raw materials for Zimbabwean corporations. One such deal with National Foods went sour and the Md reported it to the Central Bank. On investigations the deal was found to be clean but the Rbz went ahead to publish that he was complicated in illegal foreign currency transactions and related this to Royal Bank. However this was a transaction done by a shareholder as an inventory holder, in which the bank had no interest. What confused matters, was that Victory Financial Services was housed in the same construction as Royal Bank.

After failing to nail Chando to any criminal charges, the Central Bank issued an order for Royal Bank to force him out as a shareholder and board member. It is ridiculous that the Central Bank would vet who is a shareholder or not in banks - particularly when the Citizen had no criminal records.

Negotiations with Opec were underway for it to take over Chando's shareholding. The reserve Bank was aware of these developments. Opec would then help in the recapitalisation as well as open up lines of prestige for the bank.

The Arrest

In September 2004 the menagerial directors of Royal Bank, Mzwimbi and Durajadi, were arrested on five allegations of fraudulently prejudicing the bank. One of the charges was that they fraudulently used depositors' funds to recapitalise the bank.

Three of the charges after police investigations were dropped, as they were not true. The two remaining charges were:

a) a friction of interest on loans that were made ready to the directors. The Rbz alleges that they did not disclose their interests when fellowships controlled by them accessed loans at concessionary rates from the bank. However the enterprising bankers dispute these charges, as they claim the Board minutes prove that this interest was disclosed. Even the each year financial statements of the bank talk that they accessed loans as part of their employment ageement with the bank.

b) money was owed to Finsreal Asset Management. However Mzwimbi argues that Finsreal undoubtedly owes them money and not the other way round. Royal Bank shareholders needed to inject money for recapitalisation of the bank and were requested to deposit their funds with Finsreal Asset Management. Since some had not paid their measure of the recapitalisation by the due date, Royal Financial Holdings, which had an inventory with Finsreal, paid the money on profit of the shareholders - who were then indebted to Royal Financial Holdings. Somehow the Rbz confused this transaction as the bank's funds and therefore accused the

shareholders of using depositors' funds to recapitalise.

By retrospectively analysing the court case wherein the Royal Bank menagerial directors are accused of defrauding the bank it appears that the Rbz created a falsehood in order to frustrate the bankers. The curator who initially refused to take a stand before the Rbz appointed Independent Appeal, has in court clearly testified that no monies were stolen from the bank by the directors and that the curator did not (contrary to Rbz assertions) advise charges against the bankers. In January 2007 the former menagerial directors of Royal Bank were acquitted by the High Court on the remaining criminal charges after the prosecution failed to present a convincing argument.

Royal Bank assets were sold by the curator to Zabg barely two months after being located under the curator, without any audited financial statements. The speed at which an deal of sale was reached is astonishing. The owners of Royal Bank went to court and, after a protracted legal struggle, the court ruled that the assets were sold illegally and hence the sale was "illegal and of no force or follow and therefore null and void". The court then directed that the owners should request for retrial to the Central Bank for a measurement of the actions of the curators. The Central Bank begrudgingly set up an "independent panel" to adjudicate the case. Strangely Zabg continued to trade on the illegal assets.

The panel advised that the request for retrial by Royal bank be rejected as it would be difficult to disentangle it from Zabg. They also cited the fact that Zabg had some contractual obligations with third parties who may not want to do firm with Royal bank. This strange ruling fails to explicate why these considerations were not made when the amalgamation was done. The ruling also redefined the agreements in the middle of the curator of Royal bank and Zabg as not being an "agreement of sale" even though the parties which entered into the deal clearly intended it to be viewed as such. This was a way of circumventing the consummate Court ruling that the deal of sale was null and void.

But the panel did not explicate how this disposal of the assets should be considered if it was not a sale.

Consequently the major shareholders of Royal appealed to the clergyman of Finance who upheld the Rbz decision. Mzwimbi and his colleagues have therefore appealed to the courts. In the meanwhile there was a failed effort to sell the disputed assets by Zabg despite the superior legal challenge. Just ice delayed is justice denied.

Mzwimbi and his team have been denied access to all bank records and yet are incredible to defend themselves. As he characteristically puts it, "We are going into this fight blind folded and our hands bound, while fighting someone who has armour and a sword."

Around 2002-3 there were press reports indicating that the ruling party/state wanted to have a stake in the profitable banking sector. A clergyman of government at the time of the arrest confirmed this to Mzwimbi and his team. other bank, Nmb, had assertedly been assaulted and the major shareholders were told to dispose of their shareholdings to inevitable politically related persons. They refused and had to leave the country after some trumped up charges were preferred against them. Unfortunately, the governor faced resistance and the politicians distanced themselves. One indigenous banker reported how he was summoned to the Central Bank governor's office and informed that he should leave the country, as his bank would be closed. This banker toll Royal Bank's resistance to being manipulated as the infer why his own bank survived. The bank was located under curatorship on 4th August 2004. Mzwimbi had secured inherent investors for the recapitalisation of the bank just before the deadline of 30th September 2004. Three days before that deadline, Mzwimbi met the curator and explained in information the position for the recapitalisation exercise. Investors who had shown interest and were in advanced negotiations were Opec, Fidelity guarnatee and some South African investors. He additional asked the curator to request the Central Bank for an extension of about a week. The very next day he was arrested on the pretext that he was about to leave the country. Mzwimbi and his team believe that his arrest at that principal stage was meant to intimidate the would-be investors and follow in the failure to recapitalise. This lends credence to the view that the decision to procure the bank and amalgamate it in Zabg had already been made. The recapitalisation would have scuppered these plans. Notably, other banks were given an extension to regularise their recapitalisation plans.

Shakeman Mugari reported that the central bank has in principle agreed to enter into a task of arrangement with Royal, Trust and Barbican banks which could see the final resolution of this issue. He argues that the central bank disregarded the value of securities that the banks had pledged to the central bank for the loans. If these are factored in, then the bank shareholders have some principal value within Zabg. If this task had been consummated it would have protected Rbz officials from being sued in their personal capacity for the loss of value to shareholders. From the record it appears like a memorandum of deal had been signed to follow a allowance of Allied Financial Services' share in Zabg while the former banks' shareholders will take up their share in proportion to the value of their assets. This seems to indicate that the central bank has noted a weakness in its arguments.

If this proves true Royal Bank could procure a fairly big stake of Zabg due to its assets which included the real estate and its paper assets which had been undervalued.

The legal hassles show that entrepreneurs in vaporing environments face unnecessary political and legal challenges. The rule of law in these countries is sometimes nonexistent. The legislative and political environments, instead of supporting investors, pose serious challenges to entrepreneurs. Entrepreneurs in these environments have to compare the related risk in setting up their enterprises. However a new breed of entrepreneurs who do not fear the vicissitudes of political interference is manufacture a difference. Entrepreneurs recognise that the environment is a constraint but can be manipulated until worthwhile opportunities are exploited for commercial value. These entrepreneurs select not to be victims of the environment.
Assault on Entrepreneurs' Character

The data asymmetry whereby the Central Bank played its case in the communal press while the accused bankers had no right of response created a false impression, in the minds of the populace, of entrepreneurs being greedy and unscrupulous.

The Central Bank accused Jeff Mzwimbi and Durajadi Simba of siphoning funds from the bank. An example appeared in a press record in which it was alleged that the sale of Barclays Bank branches to Royal Bank was annulled and the refunded funds were remitted to Mzwimbi and Durajadi at Finsreal Asset Managers and not Royal Bank's account. This was a clear case of deliberate misinformation as the Central Bank was aware of the truth. Royal Bank had included the purchase of the Bulawayo Barclays Bank field construction which Barclays Bank would lease a measure of from Royal Bank. When Royal Bank fell short at the Interbank Clearing House, it renegotiated with Barclays. This was after Royal was threatened that if it did not clear this estimate it would be located into the Troubled Bank Fund - which carried severe penalties.

The follow was that Barclays refunded the estimate paying it directly to Royal's Central Bank account. The Rbz acknowledged receiving these funds. How can they now accuse the founding shareholders of siphoning the same funds which went directly to the Rbz account? Mzwimbi insists that Barclays can undoubtedly testify to this.

The Rbz also alleged that Mzwimbi and Durajadi withheld data from their Cvs on application for the bank licence and hence questioned their integrity. They claimed that Mzwimbi withheld data on his involvement with a failed bank, Umb. But the firm plan for Royal Bank which was filed with Rbz clearly states this involvement. The Central Bank would have these records anyway. They also queried Durajadi's source of funds and cast aspersions on the net worth statement. Yet Durajadi had been complicated in Zimbabwe Trust and a transport firm with his brother, which gave him enough net worth value.

The Rbz contends that the Board of Royal Bank failed to comply with a directive to recapitalise by 29th July 2004. Royal Bank executives and Board state undoubtedly that they never received this directive. Mzwimbi and his team argue that this is misinformation, as all banks were required to have recapitalised by 30th September 2004.

The regulators also contend that the balance sheet of Royal Bank had a deficit of 0 billion, which the bankers dispute. If one were to think the disputed billion for statutory reserves and the billion as chamber from the clearing house, this would estimate to billion with interests. However with the undervaluing of the assets and the 0 billion which was written off as uncollectible, there would be no negative balance sheet. The contention of the Royal Executives is that the curator, at the behest of the reserve Bank, deliberately tampered with the accounts to furnish a infer for the take-over. This may be validated by the fact that the curator's balance sheet kept changing whenever he was challenged and he increased the write-offs, even of funds that had since been collected. Since Royal and Trust Banks were amalgamated into Zabg, the bank is still profitable, without any recapitalisation having been carried out. The very fact that this new amalgamated bank can operate for this long from insolvent banks' capital without recapitalising lends credence to the seminar of the Royal Bank's owners.

The entrepreneurs contend that they were dealing with a Central Bank which was considered to see them sink and not to protect the integrity of the banking system. This environment was not conducive to survival and it amplified general weaknesses which could have been resolved in the course of general business.

Entrepreneurial Determination

Mzwimbi and his colleagues refused to give up under inspiring situations. Despite intimidation they took the Central Bank to court and refused to budge until justice was done. They were presented with numerous opportunities to quit the country but would not.

It is reported that they have not given up on their dream. They have set up Royal Financial Services in Kenya, despite the challenges in Zimbabwe. undoubtedly a sign of perseverance. Press reports indicated that they are in negotiations with Trust Bank so that once they win their case they can merge and continue their operations in Zimbabwe. Trust did not confirm or deny this. The more likely scenario However is that both Trust and Royal could reach a compromise with the central bank resulting in them taking up equity in Zabg field to an independent revaluation practice of the assets which were taken over.

Entrepreneurial Principles

The entrepreneurial journey is fraught with risk but can be very rewarding. Some lessons that can be learned from the case study are as follows:

• Entrepreneurs take calculated risk. Mzwimbi did not use all his resources in the bank but left his shareholding in Econet intact. He also sought to diversify his wealth by holding some investments with Fml and Screen Litho. This has been the mainstay of his wealth creation strategy. The disaster that befell the bank did not completely wipe him out because of this frugal speculation strategy.

• Entrepreneurs learn from their experiences. Mzwimbi's vast experiences taught him principal lessons. His international banking caress enabled him to see the emerging trends as Barclays and acceptable Chartered withdrew from country towns, creating a route for his entry strategy. His work with Econet taught him perseverance as he and his colleagues fought legal battles with government for the award of the licence. Miniature did he know that this was just training ground for the battle of his life - the battle for Royal Bank.

• Entrepreneurs need to continuously scan the environment for threats and opportunities. Whereas Mzwimbi and his team were good at noticing the emerging inevitable trends in the environment at inception, they failed to pick the changes in the regulatory environment when the new governor came on board.

• Entrepreneurial strategy emerges and therefore entrepreneurs should be flexible. Although Royal Bank had a plan to grow at a steady pace, when the opening arose to procure other branches cheaply the entrepreneurs seized the opportunity.

• Entrepreneurs are faced with credibility challenges as customers, regulators and suppliers test the credibility of newcomers. Royal Bank minimised this by recruiting experienced and well known personnel in the market. However the lack of institutional shareholders led to credibility gaps with some corporate clients.

• Entrepreneurs need to craft into their organisations both managerial and leadership competences to ensure both the quality to exploit opportunities (entrepreneurial activity) and sustainable firm performance (strategic management). The more contemporary view of entrepreneurship transcends just the speculation creation and now encompasses strategic growth. Although Mzwimbi was an excellent leader he needed a strong and distinguished employer to join the gains and originate solid systems to reserve the rapid growth. Leaders thrive on turn while managers thrive on handling complexity and creating order.

• firm is built on relationships as these help in the scanning of the operating environment e.g. principal data about opportunities and threats was obtained from close relationships

Lets close this record with a few questions that an entrepreneur should consider. For instance, if Mzwimbi had vast less aggressively, would Royal Bank have been safer from the regulators? How could Mzwimbi have protected Royal Bank from political and regulatory interference if he incredible those risks? If Mzwimbi had premium to pursue his firm ideas in a country with a more dependable political and regulatory environment, how would he have performed? Would it have been wiser to keep the equipment, real estate and other assets in Royal Financial Holdings or other corporate entity and only lease them to the bank? In that scenario would the predators have been able to pounce on the bank?

Sources: I Dr Tawafadza A. Makoni confirm being the author of this work. The material for this case study was drawn from my interviews with Mr J Mzwimbi Ceo of Royal Bank in February 2006 and two Royal Bank Board Members. Some material was drawn from an unpublished Royal Bank Strategic firm Plan, (2000)

Entrepreneurial Challenges - The Case of Royal Bank Zimbabwe Ltd

Litho Printing