The deregulation of the financial services in the late 1990s resulted in an explosion of entrepreneurial action important to the formation of banking institutions. This lesson presents a case study of Royal Bank Zimbabwe, tracing its origins, establishment, and the challenges that the founders faced on the journey. The Bank was established in 2002 but compulsorily amalgamated into someone else financial convention at the behest of the retain Bank of Zimbabwe in January 2005.
Entrepreneurial Origins
Any entrepreneurial investment originates in the mind of the entrepreneur. As Stephen Covey states in The 7 Habits of very sufficient People, all things are created twice. Royal Bank was created first in the mind of Jeffrey Mzwimbi, the founder, and was thus shaped by his experiences and philosophy.
Litho Printing
Jeff Mzwimbi grew up in the high density suburb of Highfield, Harare. On completion of his advanced Level he secured a place at the University of Botswana. Any way he decided against the schoraly route at that time since his house faced financial challenges in terms of his tuition. He therefore opted to join the work force. In 1977 he was offered a job in Barclays Bank as one of the first blacks to drill that industry. At that time the banking industry, which had been the retain of whites, was opening up to blacks. Barclays had a new general Manager, John Mudd, who had been complicated in the Africanisation of Barclays Bank Nigeria. On his secondment to Zimbabwe he embarked on the inclusion of blacks into the bank. Mzwimbi's first placement with Barclays was in the small farming town of Chegutu.
In 1981, a year after Independence, Jeff moved to Syfrets Merchant Bank. Mzwimbi, together with Simba Durajadi and Rindai Jaravaza, were the first black bankers to break into merchant banking department. He rose straight through the ranks until he was transferred to the head office of Zimbank - the essential shareholder of Syfrets - where he headed the international department until 1989.
The United Nations co-opted him as an counselor to the retain Bank in Burundi and thereafter, having been pleased by his performance, appointed him a counselor in 1990. In this capacity he advised on the commence of the Pta Bank travellers' cheques. After the consultancy project the bank appointed him to head the implementation of the programme. He once again excelled and rose to come to be the Director of Trade Finance with a mandate of advising the bank on ways to heighten trade among member states. The member states were considering issues of a common currency and common market in line with the European model. Because the Ifc and World Bank had unsuccessfully sunk heavy sums of funds into amelioration in the region, they were advocating a move from amelioration finance to trade finance. Consequently Pta Bank, though predominantly a amelioration bank, created a trade finance department. To craft a strategy for trade finance at a regional level, Mzwimbi and his team visited Panama where the Central Americans had created a trade finance institution. They studied its models and used it as a basis to craft the Pta's own strategy.
Mzwimbi returned to Zimbabwe at the conclusion of his contract. He weighed his options. He could rejoin Barclays Bank, but up-to-date developments presented someone else option. At that time Nick Vingirai had just returned home after successfully launching a discount house in Ghana. Vingirai, inspired by his Ghanaian experience, established Intermarket discount House as the first indigenous financial institution. A few years later Nmb was set up with William Nyemba, Francis Zimuto and James Mushore being on the ground while one of the major military behind the bank, Julias Makoni, was still covering the country. Makoni had just moved from Ifc to Bankers' Trust, to facilitate his possession of a financial institution. Inspired by fellow bankers, a dream took shape in Mzwimbi's mind. Why come to be an laborer when he could come to be a bank owner? After all by this time he had essential international experience.
The above feel shows how the entrepreneurial dream can generate from viewing the successes of others like you. The essential experiences acquired by Mzwimbi would be essential on the entrepreneurial journey. An entrepreneurial idea builds on the experiences of the entrepreneur.
First Attempts
In 1990 Jeff Mzwimbi was approached by Nick Vingirai, who was then Chairman of the newly resuscitated Cbz, for the Ceo position. Mzwimbi turned down the offer since he still had some contractual obligations. The post was later offered to Gideon Gono, the current Rbz governor.
Around 1994, Julias Makoni (then with Ifc), who was a close friend of Roger Boka, encouraged Boka to start a merchant bank. At this time Makoni was working at setting up his own Nmb. It is possible that, by encouraging Boka to start, he was trying to test the waters. Then Mzwimbi was looking out the last of his contract at Pta. Boka approached him at the hint of Julias Makoni and asked him to help set up United Merchant Bank (Umb). On right consideration, the banker in Mzwimbi thorough the offer. He reasoned that it would be an fascinating option and at the same time he did not want to turn down someone else opportunity. He worked on the project with a view to its licensing but quit three months down the line. Some of the methods used by the promoter of Umb were deemed less than ethical for the banking executive, which led to disagreement. He left and thorough an offer from Econet to help restructure its debt portfolio.
While still at Econet, he teamed up with the late priest Dr Swithun Mombeshora and others with the intent of setting up a commercial bank. The only commercial banks in the country at that point were thorough Chartered, Barclays Bank, Zimbank, Stanbic and an unwell Cbz. The project was audited by Kpmg and had gained the interest of institutional investors like Zimnat and Mining manufactures Pension Fund. However, the Registrar of Banks in the Ministry of Finance, made impossible demands. The timing of their application for a licence was unfortunate because it coincided with a saga at Prime Bank in which some politicians had been involved, important to accusations of work on peddling. Mombeshora, after unsuccessfully trying to work on the Registrar, asked that they slow down on the project as he felt that he might be construed as putting unnecessary political pressure on her. Mzwimbi argues that the impossible stance of the Registrar was the hypothesize for backing off that project.
However other sources indicate that when the project was about to be licensed, the late priest
demanded that his shareholding be increased to a point where he would be the majority shareholder. It is alleged that he contended this was due to his ability to leverage his political muscle for the issuance of the licence.
Entrepreneurs do not give up at the first sign of resistance but they view obstacles in starting up as studying experiences. Entrepreneurs produce a "don't quit" mind-set. These experiences growth their self -efficacy. Perseverance is critical, as failure can occur at any time.
Econet Wireless
The aspiring banker was approached, in 1994 by a budding telecommunication entrepreneur, Strive Masiyiwa of Econet Wireless, to advise on financial matters and help restructure the company's debt. At that time Mzwimbi belief that he would be with Econet probably for only four months and then return to his banking passion. While at Econet it became apparent that, once licensed, the major drawback for the telecommunication company's growth would be the cost of cell phone handsets. This presented an opening for the banker, as he saw a strategic option of setting up a leasing finance department within Econet that would lease out handsets to subscribers. The incredible four months to licensing of Econet dragged into four years, which encompassed a bruising legal struggle that finally enabled the licensing against the State's will. Mzwimbi's feel with merchant banking proved beneficial for his role in Econet's formation. With the explosive growth of Econet after an Ipo, Mzwimbi assisted in the commence of the Botswana operations in 1999. After that, Econet pursued the Morocco licence. At this stage, the dream of owning a bank proved stronger than the appeal of telecoms. The banker faced some tough decisions, as financially he was well covered in Econet with an assured administrative position that would strengthen with the expansion of the network. Any way the dream prevailed and he resigned from Econet and headed back home from Rsa, where he was then domiciled.
His Econet days bestowed on him a ample shareholding in the company, extensive his worldview and taught him vital lessons in creating an entrepreneurial venture. The persistence of Masiyiwa against severe government resistance taught Mzwimbi essential lessons in pursuing his dream in spite of obstacles. No doubt he learnt a lot from the enterprising founder of Econet.
Debut Royal Bank
On his return in March 2000, Mzwimbi regrouped with some of his friends, Chakanyuka Karase and Simba Durajadi, with whom he had worked on the last endeavor at launching a bank. In 1998 the Banking Act was updated and a new statutory instrument called the Banking Regulations had been enacted in the light of the Umb and Prime Bank failures.
These required that one should have the shareholders, the premises and tool all in place before licensing. Previously one needed only to set up an office and hire a secretary to accumulate a banking license. The licence would be the basis for approaching possible investors. In other words it was now required that one should incur the risk of setting up and purchasing the It infrastructure, hire personnel and lease premises without any insurance that one would accumulate the licence. Consequently it was virtually impossible to ask covering investors into the project at this stage.
Without recourse to covering shareholders injecting funds, and with minimal financial capacity on the part of his partners, Mzwimbi fortuitously benefited from his ample Econet shares. He used them as collateral to way funds from Intermarket discount House to finance the start up - acquired tool like Atms, hired staff, and leased premises. Mzwimbi recalls pleading with the Central Bank and the Registrar of Banks about the oddity of having to apply for a licence only when he had spent essential amounts on capital expenditure - but the Registrar was adamant.
Finally, Royal Bank was licensed in March 2002 and, after the prerequisite pre-opening inspections by the Central Bank, opened its doors to the group four months later.
Entrepreneurial Challenges
The challenges of financing the new investment and the earlier disappointments did not deter Mzwimbi. The risk of using his own resources, whereas in other places one would fund a essential investment using institutional shareholders' capital, has already been discussed. This section discusses other challenges that the entrepreneurial banker had to overcome.
Regulatory Challenges and Capital Structure
The new banking regulations placed shareholding restrictions on banks as follows:
*Individuals could hold a maximum of 25% of a financial institution's equity
*Non-financial institutions could hold a maximum of 10% only
*A financial convention Any way could hold up to a maximum of 100%.
This posed a problem for the Royal Bank sponsors because they had envisaged Royal Financial Holdings (a non-financial corporate) as the major shareholder for the bank. Under the new regulations this could hold only 10% maximum. The sponsors argued with the Registrar of Banks about these regulations to no avail. If they needed to hold the shares as corporate bodies it meant that they needed at least ten companies, each keeping 10% each. The discussion for having financial institutions keeping up to 100% was shocking as it meant that an asset owner with a required capitalisation of million would be allowed by the new law to hold 100% shareholding in a bank which had a 0 million capitalisation yet a non-banking institution, which may have had a higher capitalisation, could not control more than 10%. Mzwimbi and team were advised by the Registrar of Banks to spend in their personal capacities. At this point the retain Bank (Rbz) was plainly complicated in the registration process on an advisory basis with the main responsibility resting with the Registrar of Banks. Although the Rbz agreed with Mzwimbi's team on the need to have corporations as major shareholders due to the long term existence of a corporation as compared to individuals, the Registrar insisted on her terms. Finally, Royal Bank promoters chose the path of satisficing- and hence opted to spend as individuals, resulting in the following shareholding structure:
*Jeff Mzwimbi - 25%
*Victor Chando - 25%
*Simba Durajadi- 20%
*Hardwork Pemhiwa- 20%
*Intermarket Unit Trust - 2% (the only institutional investor)
*Other individuals - less than 2% each.
The challenge to accumulate institutional investors was due to the restrictions cited above and the requirement to pump money into the project before the licence was issued. They negotiated with Ta Holdings, which was ready to take equity keeping in Royal Bank.
So tentatively the sponsors had allocated 25% equity for Zimnat, a subsidiary to Ta Holdings. Close to the registration date, the Zimnat negotiators were changed. The incoming negotiators changed the terms and conditions for their investment as follows:
*They wanted at least a 35% stake
*The Board chairmanship and chairmanship of key committees - in perpetuity.
The promoters read this to mean their project was being usurped and so turned Ta Holdings down. However, in retrospect Mzwimbi feels that the decision to issue the Ta investment was emotional and believes that they should have compromised and found a way to adapt them as institutional investors. This could have strengthened the capital base of Royal Bank.
Credibility Challenges
The main sponsors and senior managers of the bank were well known players in the industry. This reduced the credibility gap. Any way some corporate customers were implicated about the shareholding of the bank being entirely in the hands of individuals. They adored the bank risk to be reduced by having institutional investors. The new licensing process adversely affected way to institutional investors. Consequently the bank had institutional shareholders in mind for the long term. They claim that even the then head of supervision and licensing at Rbz, agreed with the promoters' concern about the need for institutional investors but the Registrar of Banks overruled her.
Challenges of Explosive Growth
The strategic plan of Royal Bank was to open ten subject offices within five years. They planned to open three branches in Harare in the first year, followed by branches in Bulawayo, Masvingo, Mutare and Gweru within the next year. This would have been followed by an growth in the whole of Harare branches.
From their diagnosis they believed that there was room for at least four more commercial banks in Zimbabwe. A competitor diagnosis of the manufactures indicated that the government controlled Zimbank was the major competitor, Cbz was struggling and Stanbic was not likely to grow rapidly. The bigger banks, Barclays and thorough Chartered, were likely to scale down operations. The promoters of the bank project had observed in their extensive international experie nce that whenever the cheaper was indigenised in Africa, these multinational banks would arrange of their rural branches. They were therefore positioning themselves to exploit this scenario once it presented itself.
The incredible opening presented itself earlier than expected. On an international flight with the thorough Chartered Bank Ceo, Mzwimbi, confirmed his interest in a stake of the bank's disinvestments which was production rounds on the rumour mill. Although surprised, the multinational banker agreed to give the two month old entrepreneurial bank the right of first refusal on the fifteen branches that were being disposed of.
The deal was negotiated on a lock, stock and barrel basis. When the proclamation of the deal was made internally, some employees resisted and politicised the issue. The thorough Chartered Ceo then offered to proceed on a phased basis with the first seven banks going through, followed by the others later. Due to Mzwimbi's savvy negotiating skills and the determination by thorough Chartered to arrange of the branches, the deal was successfully concluded, resulting in Royal Bank growing from one subject to seven outlets within the first year of operation. It had exceeded their projected growth plan.
Due to what Mzwimbi calls divine favour, the deal included the real estate belonging to the bank. Interestingly, thorough Chartered had failed to get bank buildings on lease and so in all small towns they had built their own buildings. These were thus transferred within the deal to Royal Bank. possible in the deal was an inbuilt equity from the properties since the buy price of 0 million was heavily discounted.
Shortly after that, Alex Jongwe, the Ceo of Barclays Bank, approached Royal Bank to offer a similar deal to the thorough Chartered acquisition of rural branches. Barclays offered eight branches, of which Royal initially thorough six. Chegutu and Chipinge were excluded, since Royal already had a proximity there.
However after failing to arrange of those two branches, Barclays came back and asked Royal "to take them for a song". Mzwimbi thorough these for two strategic reasons, namely the acquisitions gave him physical assets (the buildings) that he could lease out to anyone who decided to strengthen into those areas and secondly, that created a monopoly in those towns. With time, the fortuitous inclusion of real estate into the deal increased the wealth of Royal Bank as the prices of properties skyrocketed with hyperinflation.
One of the major key drivers of the Zimbabwean cheaper is agriculture. After the failed Land Donors discussion in 1998 and the subsequent land reform programme, it was clear to the established banks that commercial farming would be significantly affected.
They sought to quit the small towns since their major clients were commercial farmers. Strategically to accumulate these branches when the major source of their income was under threat would have required that Royal Bank should have put in place an alternative source of income from farming. It is not clear either this had been determined during these acquisitions.
The acquisition increased Royal's subject network to 20 and the staff complement by 50. Incidentally, the growth created problems of managing the system as well as cultural issues. The very unionised thorough Chartered employees were antagonistic to supervision as compared to the trusting Royal culture. This acquisition resulted in possible culture challenges. supervision controlled this by introducing Norton and Kaplan's Balanced Scorecard system in an endeavor to conduct the cultural clashes of the three systems.
The Challenge of Financing Acquisition
A major challenge in acquisitions is the financing structure. during licensing the Registrar of Banks refused to accept the nearly 0 million that had been spent by the promoters of Royal Bank as capital. She insisted that this be recognised as pre-operating expenses and therefore wanted to see fresh capital amounting to 0 million. The change of rules posed a challenge for Mzwimbi's team. However, being an astute deal maker he strategically conceptualised an arrangement whereby the 0 million worth of tool purchased be accounted for as belonging to Royal Financial Holdings and made available to Royal Bank on a lease basis. This would then be sold to the bank as it grew. The Rbz was appraised of this decision and thorough it, and even noted in the inspection article the whole of expenditure spent pre-operatively by the promoters. The remainder of the pre-operative expenses were converted into nonvoting non-convertible preference shares of Royal Bank.
In January 2003 commercial bank capitalisation was increased to 0 million by the regulator and hence there was a need for recapitalisation. This coincided with the subject acquisition deals. At this stage the Royal Bank team decided to partially fund the acquisition straight through a conversion of the preference shares into commonplace shares and partially from fresh capital injected by the shareholders. Since the bank was now performing well, it purchased the capital equipment, owned by Royal Financial Holdings, which it had been leasing. This deal included the redistribution and balancing of shareholdings in Royal Bank to conform to the statutory requirements. Retrospectively it may be viewed as a strategic blunder to have moved the tool into the bank ownership. considering the "sale" of Royal Bank assets to Zabg, if these and the real estate had been warehoused into Rfh the take-over may have been difficult. This highlights the failure sometimes by entrepreneurs to appreciate the point of asset security mechanisms while still small.
However the Rbz accused the shareholders of using depositors' funds for the recapitalisation of the bank. Partly this is due to a misunderstanding that Rfh is the keeping company of Royal Bank and so sometimes accounts flowing from Royal Financial Holdings were accounted by Rbz investigators as Royal Bank funds. These allegations formed part of the allegations of fraud against Mzwimbi and Durajadi when they were arrested in September 2004. Subsequently the courts cleared them of any fraudulent activities in January 2007.
Managerial Challenges
Retrospectively, Mzwimbi views his managerial team as being exquisite apart from some "weaknesses in the finance department". He assembled a solid team from discrete banking backgrounds. The most essential ones became founding shareholders like Durajadi Simba at treasury, the late Sibanda in charge of the lending department. Faith Ngwabi-Bhebhe, then with Kingdom, helped lay a solid foundation of human reserved supply systems for the bank.
However, they had a challenge looking a financial director. The new statutory instrument required that Cvs of all corporate officers be made available for vetting when the licence was applied for. Without a licence one could not promise someone in current employment a job and submit his Cv as this would reflect badly on the promoters. eventually they hired a chartered accountant without banking experience. Initially they belief this was a stop-gap measure.
With the unanticipated growth, they forgot to revisit this department to strengthen it. Because of these weaknesses the bank continued to face challenges in the treasury department, despite the gallant efforts of the financial director. Strangely, when other administrative directors were arrested the Fd was left untouched and yet all the issues at stake arose from treasury activities. It would appear in retrospect that the Fd was intimidated into providing incriminating evidence for the others. She too was threatened with arrest.
Successful entrepreneurial ventures in a growth phase need both strong leaders and strong managers. It's not adequate to have strong leadership skills. As Ed Cole said, "It's easier to accumulate than to maintain." The role of strong managers is to generate the capacity to assert what strong entrepreneurial leaders acquire. Interestingly a new field of research, Strategic Entrepreneurship now recognises the need for both entrepreneurial and strategic supervision competences for prosperous ventures.
Strategic growth Plans
Royal Bank's strategic intent was to generate a full house of financial services. The plan included a commercial bank, a discount house, an insurance company, a construction society and an asset supervision service. Any way the foresight was later refined and the plans for a discount house were dropped, since a strong commercial bank with a powerful dealing room would serve the same purpose. A strong asset owner would also ease the need for a discount house.
With the essential subject network, the commercial bank was solid but needed a proximity in a few major centres e.g. Masvingo and Gweru. In Gweru they could not find convenient premises.
In Masvingo, after a struggle they were offered premises which had previously been earmarked for Trust Bank. With Trust Bank facing challenges, it abandoned Masvingo. However, Royal was placed under a curator when it was about to move in.
Royal Bank courted Finsreal Asset Managers for a possible acquisition since there were synergies and shared beliefs. It had a solid corporate buyer base and very good growth prospects since an astute entrepreneur led it. Unfortunately the deal was aborted at the last little when the owner opted out. After the Finsreal flop, Mzwimbi and his team pursued the asset owner straight through organic growth. They advanced their own company -Regal Asset Managers - during the last quarter of 2003. At this stage the capital requirements and licensing process of asset managers was fairly easy. Asset managers were quite profitable, with minimal regulatory controls. Regal Asset Managers completed two good deals, namely: a supervision buyout of Screen Litho, a printing concern, and a big deal for First Mutual at its demutualisation.
The Screen Litho deal had been offered to investment capitalists but their demands were excessive. That is when Regal Asset Managers was set up and done a funding deal straight through Royal Financial Holdings (Rfh), resulting in Rfh keeping 99% of Screen Litho which was to be off- loaded once supervision was in a solid financial position. Screen Litho is performing very well and hence this investment has proven successful. The entrepreneurial Mzwimbi thus diversified his financial briefcase straight through this deal.
For the construction society, Royal eyed First National construction society (Fnbs) and practically signed a memorandum of agreement. Royal Bank was practically ready to replacement its staff mortgage factory to Fnbs, when a close friend with a powerful position in the society discouraged it from committing to the deal without divulging the reasons. A short while later Fnbs was placed under a curator, with the Rbz citing cases of fraud by the top executives. The increasingly acquisitive Royal Bank entrepreneurs shifted and trained their guns at Beverly construction Society. Intermarket had already failed to supreme a deal with Beverley. Royal Bank was now competing with African Banking Corporation (Abc), which beat it to an deal but was denied shareholder authority to complete the deal. Royal Bank then went back to wooing Shingai Mutasa of Ta Holdings in an endeavor to growth its institutional shareholder base. He was keen on the deal.
Mutasa was acquainted with the two British owners of Beverley and one of his board members sat on the Beverley construction society board. His retain would have been crucial in the deal. Any way this process was overtaken by events, as the incoming Rbz governor superintended a monetary procedure which led the financial sector into a tailspin.
Some young entrepreneurs approached Royal Bank seeking for retain to produce an insurance company. Since this was in line with Royal's strategic plan it consented and helped start Regal insurance Company. Royal Bank originated the name Regal Insurance.
Once the licence was acquired there were some shareholder disputes and Royal Bank distanced itself from the deal. The young entrepreneurs who had been supported by Royal Bank lost the company to the other shareholders.
The final thrust in the strategic plan was establishing a stock broking firm. An idiosyncrasy with stock broking licences is that they are not issued to an convention but to a person. Intermarket had the top whole of stock broking licences. Mzwimbi approached the Intermarket stock broking Ceo, who was a friend, about the prospects of acquiring one of the stockbrokers and he did not seem to have a problem with that. At the same time Victor Chando, a major shareholder in Royal Bank, brought to the table his interest in acquiring Barnfords Securities. He was encouraged to pursue the deal with the help of Royal Bank with the plan of bringing it in-house as soon as possible. All Royal Bank deals would now be channelled straight through Barnfords.
It appears that Royal bank advanced a strong appetite for deals. One wonders what it would have been like if it had taken time to produce strong systems and capacity before attempting so many deals. What could have been avoided if the appetite for deals had been controlled? Entrepreneurs may need to exercise restrain in their expansion in order to generate capacities to dispell and join the growth.
Royal Entrepreneurship - The Case of Royal Bank Zimbabwe Ltd Formation Litho Printing