Risk Management

INTRODUCTION

1.1 Background Information

The subject of bank failures worldwide has gathered much attention over the last years with the failures of European banks, American banks and the Asian banking crisis being the most recognized cases. In all these cases the most prevalent issues contributing to the bank failures have been poor financial risk management practices in the banking institutions concerned. Similarly Zimbabwe also experienced a banking crisis in 2003/4. Banks are usually a measure of the economic growth of a country. The stability of the banking sector has a positive correlation with the economic growth of that particular country.

The year 2004 saw a new chapter in the Zimbabwe banking sector. The country faced its first ever bank failure. The Reserve Bank of Zimbabwe placed seven banking institutions under curatorship after having been declared unfit to provide banking services to the banking public. The banks that were placed under curatorship include Trust Banking Corporation, Intermarket Banking Corporation, Intermarket Building Society, Time Bank of Zimbabwe Ltd, CFX Bank, Royal Bank of Zimbabwe Ltd, and Barbican Bank.

Three of the commercial banks that collapsed namely Trust Banking Corporation, Barbican Bank and Royal Bank have since been amalgamated to form the Zimbabwe Allied Bank Group (Z.A.B.G). This bank failure was attributed to poor risk management policies amongst a host of other factors according to Reserve Bank of Zimbabwe Governor, Dr Gideon Gono (2005). Considering the role of banks in the economy of the country, corporate governance and risk management became matters of paramount importance.

“The increasing globalisations of financial markets, emergence of conglomerate structures, technological advances and innovations in financial products, have added to the complexity of risk management in the banking sector” (Reserve Bank of Zimbabwe, 2004).Financial institutions face a number of risks that should be...