ENTREPRENEURIAL CHALLENGES – The Case of Royal Bank Zimbabwe Ltd

Industry Shake-up

In December 2003 Mzwimbi went on a well deserved family vacation to the United States, satisfied with the progress and confident that his sprawling empire was on a solid footing. However a call from a business 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 accommodate banks which had liquidity challenges.

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 control these rates but nothing was done to ease the situation. This hiking of interest rates wiped out nearly all the bank’s income made within the year. Bankers normally rely on treasury bills (TBs) since they are easily 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 expensive money and on-lending it cheaply. An example at Royal Bank was an entrepreneur who borrowed $120 million in December 2003, which by March 2004 had ballooned to $500 million due to the excessive 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 $120 million and demonstrated that he had no capacity to pay back the $400 million interest charge. Most bankers accepted this anomaly because they thought 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 control 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 considerable 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 during the cash crisis 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 control of the RBZ operations during 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 $2 billion on the 28th of December 2003. The Central Bank wanted to know whether this accommodation should be formalised and placed into the newly created Troubled Bank Fund. However, this was expensive 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 management 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 corrective orders by the Central Bank.

Royal Assault

Royal Bank remained stable until March 2004. People who had their funds locked up in Intermarket Bank withdrew huge sums of funds from Royal Bank while others were moving 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 advantage that in the smaller towns it was the only bank, so people had no choice. However even in this scenario there were no stable deposits as people kept their funds moving to avoid being caught unawares. For example in one week Royal Bank had withdrawals of over $40 billion but weathered the storm without recourse to Central Bank accommodation.

At this time, newspaper reports indicating some leakage of confidential information started appearing. When confronted, one public paper reporter confided that the information 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 significant vulnerability, Royal Bank received a letter from RBZ cancelling the exemption from statutory reserve requirements. Statutory reserves are funds, (making up a certain 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 acquire foreign currency and purchase the needed resources. This was a normal procedure and practice of the Central Bank, which had been made available to other banking institutions as well. This would also enhance 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 Supervision and Surveillance Department 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 effect 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 between the Bank Supervision and Capital Markets divisions on the issue as Bank Supervision conceded to the validity of Royal’s position. However Capital Markets insisted that it had instructions from the top to recall the full amount of $23 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 concerned 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 agreement 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 through Regal Asset Managers and was to mature in December 2004, at which time it was anticipated that the share price of First Mutual would have blossomed, allowing Royal Bank to harvest its investment 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 investment because at that time FML was suspended at the ZSE. However the fact that it was suspended did not invalidate its value. Recent events have shown that this investment has generated huge capital value for Regal Asset Managers as the ZSE rebounded. Yet the curator valued this investment negatively. Around March 2004 there had been a contagion effect 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 structure 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 locate and return the treasury bills that had been provided as collateral by Royal. Royal Bank suspected that these had been placed with ENG, another asset management company which collapsed in December 2003. A public 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 attempt 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 better judgment, decided to act against Royal Bank under the pretext of the political pressure. In retrospect, the political support for cracking the whip at Royal gave credence to the rumour that the governor had an underlying agenda in taking Royal and merging it into ZABG because of its strong branch 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 placed it under the curator. Interestingly, the curator’s contract 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 hidden agenda 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 Discount House which he later sold to Century Holdings. Royal Bank initially had an interest in discount houses and so at inception had included Victor as a significant shareholder. He later acquired Barnfords Securities which Royal intended to bring in-house.

Victory Financial Services was involved in foreign currency dealings, using offshore companies 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 involved in illegal foreign currency transactions and linked this to Royal Bank. However this was a transaction done by a shareholder as an account holder, in which the bank had no interest. What confused matters, was that Victory Financial Services was housed in the same building 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 people 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 credit for the bank.

The Arrest

In September 2004 the executive 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 conflict of interest on loans that were made available to the directors. The RBZ alleges that they did not disclose their interests when companies 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 annual financial statements of the bank acknowledge that they accessed loans as part of their employment contract with the bank.

b) money was owed to Finsreal Asset Management. However Mzwimbi argues that Finsreal actually 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 portion of the recapitalisation by the due date, Royal Financial Holdings, which had an account with Finsreal, paid the money on behalf 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 executive 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) recommend charges against the bankers. In January 2007 the former executive 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 placed under the curator, without any audited financial statements. The speed at which an agreement 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 effect and therefore null and void”. The court then directed that the owners should appeal to the Central Bank for a determination 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 appeal 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 business with Royal bank. This strange ruling fails to explain why these considerations were not made when the amalgamation was done. The ruling also redefined the agreements between the curator of Royal bank and ZABG as not being an “agreement of sale” even though the parties which entered into the agreement clearly intended it to be viewed as such. This was a way of circumventing the Supreme Court ruling that the agreement of sale was null and void.

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

Consequently the major shareholders of Royal appealed to the Minister of Finance who upheld the RBZ decision. Mzwimbi and his colleagues have therefore appealed to the courts. In the meanwhile there was a failed attempt to sell the disputed assets by ZABG despite the outstanding legal challenge. Just ice delayed is justice denied.

Mzwimbi and his team have been denied access to all bank records and yet are expected 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 minister of government at the time of the arrest confirmed this to Mzwimbi and his team. Another bank, NMB, had allegedly been assaulted and the major shareholders were told to dispose of their shareholdings to certain politically connected 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 credits Royal Bank’s resistance to being manipulated as the reason why his own bank survived. The bank was placed under curatorship on 4th August 2004. Mzwimbi had secured potential 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 detail the position for the recapitalisation exercise. Investors who had shown interest and were in advanced negotiations were OPEC, Fidelity Insurance and some South African investors. He further 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 critical stage was meant to intimidate the would-be investors and result in the failure to recapitalise. This lends credence to the view that the decision to acquire 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 scheme 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 significant value within ZABG. If this scheme 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 article it appears like a memorandum of agreement had been signed to effect a reduction 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 regain 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 volatile 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 assess the associated risk in setting up their enterprises. However a new breed of entrepreneurs who do not fear the vicissitudes of political interference is making a difference. Entrepreneurs recognise that the environment is a constraint but can be manipulated until worthwhile opportunities are exploited for commercial value. These entrepreneurs choose not to be victims of the environment.
Assault on Entrepreneurs’ Character

The information asymmetry whereby the Central Bank played its case in the public 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 article 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 branch building which Barclays Bank would lease a portion 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 amount it would be placed into the Troubled Bank Fund – which carried severe penalties.

The result was that Barclays refunded the amount 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 easily testify to this.

The RBZ also alleged that Mzwimbi and Durajadi withheld information from their CVs on application for the bank licence and hence questioned their integrity. They claimed that Mzwimbi withheld information on his involvement with a failed bank, UMB. But the business 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 involved in Zimbabwe Trust and a transport business with his brother, which gave him sufficient 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 categorically 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 allege that the balance sheet of Royal Bank had a deficit of $140 billion, which the bankers dispute. If one were to consider the disputed $23 billion for statutory reserves and the $20 billion as accommodation from the clearing house, this would amount to $77 billion with interests. However with the undervaluing of the assets and the $160 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 provide a reason 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 argument of the Royal Bank’s owners.

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

Entrepreneurial Determination

Mzwimbi and his colleagues refused to give up under challenging 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. Indeed 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 subject to an independent revaluation exercise 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 keeping 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 prudent investment strategy.

• Entrepreneurs learn from their experiences. Mzwimbi’s vast experiences taught him critical lessons. His international banking experience enabled him to see the emerging trends as Barclays and Standard 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. Little 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 positive 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 opportunity arose to acquire 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 ability to exploit opportunities (entrepreneurial activity) and sustainable company performance (strategic management). The more contemporary view of entrepreneurship transcends just the venture creation and now encompasses strategic growth. Although Mzwimbi was an excellent leader he needed a strong and powerful manager to consolidate the gains and create solid systems to sustain the rapid growth. Leaders thrive on change while managers thrive on handling complexity and creating order.

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

Lets close this article with a few questions that an entrepreneur should consider. For instance, if Mzwimbi had expanded 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 anticipated those risks? If Mzwimbi had selected to pursue his enterprise 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 Business Plan, (2000)

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Offshore Internet Banking Advantages and Disadvantages

The topic of offshore internet banking is a hot one and one that is increasingly growing in popularity not only within the consumer banking community, but also the business or corporate banking sector.

The beauty of offshore online banking is that in addition to enabling you to conduct banking activities allowed by traditional and local brick and mortar businesses, it allows you more variety and flexibility in terms of your banking needs. For example, if you travel often, offshore online banking gives you the flexibility to conduct business on to go from anywhere, while ensuring that you have access to the type of currency if you need at a time you need it.

Having said that, not all banks offer online or internet banking services as this service costs the banks a significant amount of money. Programming sophisticated and secure systems require the effort of several full time computer engineers, full security and compliance departments, as well as heavy overhead to support the service on an ongoing basis.

Because there are so many variables involved in offering this service, offshore internet banking services vary from one financial institution to another. Some have better systems while others have work to do. A lot of this is predicated on the resources the bank has dedicated to this initiative, both in terms of quantity and quality.

Opening an Offshore Bank Account

Before diving further into this topic, I want to clarify that engaging in offshore internet banking is not about evading taxes. It is about mitigating risk of capital loss due to no fault of your own. So when considering a foreign jurisdiction in which to establish an offshore bank account, consider one that is politically stable and financially strong. In addition, it helps to select a jurisdiction that pays an attractive interest rate and has low to no income tax. Some of the most preferred jurisdictions over the years have been Switzerland, Cayman Islands, Singapore, Hong Kong and the United Arab Emirates (UAE).

Opening a personal bank account is usually a very personal activity. With offshore internet banking however, there are ways you can get started remotely without having to show up to the bank’s local office, saving a ton of time, money and mainly frustration.

One such way is by visiting a local bank’s branch in your domicile state, or home country. Many big banks that offer internet banking have a multi-national presence. Chances are good that your selected bank has a local branch near where you live, despite being headquartered in another offshore jurisdiction.

In other cases, there are international banks that may not have local branches near where you live, but are willing and able to establish an offshore bank account for you through email, snail mail, fax and telephone. There are usually a set of documents required by banks in order to execute this process. Therefore you can still open a foreign bank account with an offshore bank without having to leave your country, but it may come with a little more effort, and sometimes the struggle involved in communicating with someone overseas.

The Advantages of Offshore Internet Banking

Here are some advantages of offshore internet banking that you should know about.

Protection from sovereign risk – as mention already above, parking funds in foreign bank accounts mitigates the risk of loss of capital resulting from freeze or confiscation of funds by Governments without any fault of your own. This risk is less of a concern in a developed economy with a solid banking infrastructure such as the United States, but it is nonetheless an inherent risk that exists.

Tax benefits – many offshore jurisdictions have low to no income tax implications on interest income, or income from business activities.

Higher Interest Rates – because many offshore banks operate with low costs, they can afford to offer higher interest rates compared to larger multi-national names. In fact, in developed economies like in Europe and North America, regulatory compliance requirements is seen by many as form of taxation on banks, thereby increasing overhead costs and lowering interest rates.

On Demand Access to Statements – offshore internet banking gives you instant access to your statements where you can view your activities on a real time basis. This includes past and pending deposits and withdrawals. You can therefore access your account balance at anytime.

Money Management – with offshore internet banking you can transfer funds between accounts across the globe instantly. Offshore banks have inventories of various currencies and can help you fulfill banking transactions in multiple countries. You can schedule automatic payments to vendors to release automatically.

There are several other advantages to offshore internet banking. You can open offshore trading accounts and establish offshore brokerage accounts to conduct trading and investment activity (there can be tax advantages to this). Conducting transactions online is not only mostly free, but also very efficient. Transaction time online is simply much less. You can also have streams of income potentially directly deposited straight into your offshore online bank account.

From a personal finance perspective, downloading banking activity from your offshore online bank account is easy and can be done instantly. Most online banking platforms are designed to feed information into financial or personal accounting software or to spreadsheets like Excel. Individuals can save a significant amount on accountant fees just by utilizing this feature. Not to mention more intimate knowledge and management of their own finances.

For those looking for anonymity, offshore online bank accounts also allow you to conduct banking anonymously as per bank secrecy guidelines.

The Disadvantages of Offshore Internet Banking

Merely establishing an offshore bank account can be a reason for the Government to put more focus on your activities. After all, many use offshore internet banking as a mechanism to conduct illegal activity and evade taxes. Some specific disadvantages of offshore internet banking as a result of conducting business through foreign bank accounts are the following:

Knowledge of Internet – There is a certain level of internet savvy required to be able to navigate your way through offshore internet banking platforms to ensure you are getting exactly what you want. This is a big reason why some elderly shy away from conducting banking online.

Deposit Timeline – Because many banks do not have the technology to be able to collect deposits remotely, you may have difficulty depositing all your proceeds. While many banks have developed electronic scanning technology, others have yet to catch up. There is no consistency to say the least.

Security / Fraud Implications – because banking is conducted online, offshore internet banking exposes you to the risk of network intrusion or breach. Because information is transferred electronically and stored in various databases, breaches can cause private and sensitive information to leak out into the wrong hands. But then again, this is no different than losing your check book if compared to traditional brick and mortar banking.

Spam Mail – offshore online banking also means that you will receive emails from the foreign bank you have your offshore bank accounts with. Internet predators recognize this as an opportunity for phishing, or fish for private and sensitive information. Many times you may see an email in your inbox from what seems like your foreign banking institution. However it is not. These are phishing emails hoping for you to login and enter your personal information such as login and password.

TIPS: Here are a few tips to avoid falling for phishing scams. First, when you receive an email from your bank, call them to verify that they sent the email. Second, instead of opening the email they sent you, visit the bank’s website directly and see if you can conduct what’s asked of you on their site by you logging in directly rather than clicking a login link in an email message.

Third, if you were to open the email and click on any link in it for whatever reason, once the link takes you to a website where you are required to enter personal information, look for security symbols such as an https URL address or a padlock on the lower right hand side corner of the web browser. There are other security measures as well that can be visible spotted. Read online for more on this topic.

Financial Security – some offshore bank locations are not very financially secure or stable. For example, during the global economic crisis of 2008, many savers lost money parked in offshore bank accounts in some destinations such as Iceland. I don’t mean to scare you by any means as this situation is rare, and in most cases those who suffer losses are compensated in some way over time. However, know that this inherent risk exists. Always look for deposit insurance. The bigger the allowance the better.

Credibility by Association – as I’ve already mentioned, offshore internet banking has negative connotations attached to it, often associated with money laundering, use of illegal monies, untaxed monies and support of illegal causes. Offshore bank accounts at times are tied to crime rings and terrorists. What does this mean for you? Although you may engage in offshore banking legally and legitimately, understand that there will be closer scrutiny over you by the Governments.

Access Restrictions – offshore banks are in destinations far away from you, therefore more difficult and expensive to access. In many countries, communication in person is preferred to communicating over phone, email and snail mail, therefore internet banking can get a bit difficult and frustrating. I see this trend slowly changing with banks understanding the need to communicate at all levels and mediums to satisfy a global audience.

Expensive – offshore internet banking is usually more expensive to set up and administer and thus more accessible and feasible for those more affluent or high income earners. It’s not so much that it is expensive to open a foreign bank account. It is not. However, many times you will need to go through a firm that specializes in helping expatriates establish and manage foreign bank accounts. All these activities cost money.

Internet banking today is very convenient and is accessible to almost everyone. For the average individual it can be a great offshore tax planning tool to add to the mix. For those that travel, foreign internet banking can provide all sorts of convenience, allowing one to transact anywhere and with anyone. So if you liked what you read about offshore online banking, I highly recommend you look into it further to see how it can help you meet your objectives.

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Universal Banking – Answer For The Best Banking Design?

1.1 INTRODUCTION

In recent years, universal banking has been growing its popularity in Indonesia. Mandiri Bank, for example, has taken strategy to become Indonesia’s universal bank; this bank has also initiated to develop an integrated financial risk system in terms of sounding financial performance and increasing shareholder value. In Germany, and most developed countries in Europe, universal banks have initiated its operations since nineteen century. There is mounting evidence that in those countries, universal banks have taken an important part in the development of real sectors and the financial system. In those countries, the growing numbers of universal banking practices are really supported by the regulation of central of bank.

Despite, in The United States, they are strict to regulate universal banks by blocking commercial banks from engaging in securities and stock markets practices. They argued that the practice of universal banking might be harmful for the financial system. ((Boyd et.al, 1998) cited in Cheang, 2004) The “risk” might be the key reason why the central bank of The U.S is worried about the universal banking system. Since, if the central of bank allowed banks to adjust their operation to be universal banks, the relationship among, banks, financial and stock markets would be closer. Consequently, this would give an uncertainty to the banks condition and performance. For example, if there were a disaster in stock market, banks would get problems in their financial positions. Thus, they would tend to be insolvent.

In addition universal banks would also threaten the market share of other specialized institutions, because more customers would choose universal banks that offer more option to their investment. Hence, more specialized institutions are likely to be ruined in the U.S financial industry.

One majoring factor, which is triggering a bank to be universal bank, is to increase the profit by enlarging their market share. According to João A. C. Santos (1998) universal bank itself can be defined as the financial institution, which enlarges its service range in terms of offering a variety of financial products and services in one site. Thus, by operating universal banking, banks could get a greater opportunity to expand to another financial area, such as : financial securities, insurance, hedge funds and etc.

Although the trend of banks has recently tended to universal banks, it is undoubtedly true that universal banks would also face further risks because a wide range of financial services is strongly associated with increasing risks and escalating monitoring costs. These are the major concerns why banks have to implement more advance technology in terms of financial risk management. Moreover, the practices of universal banks would cause significant risks to economy’s payment system. Since, the operation of universal banks connects closely to the financial and stock markets that are very fluctuate in a short term.

To win in the tight competition among financial institutions, banks have to alter their maneuver to lead in the market. Universal bank could be the wise choice for the bank manager, because they can attract more customers with a wide range of services. Furthermore, by altering their operation to the universal banking system, banks would get benefits from the efficiency and economies of scale.

In order to understand about the universal banking practices, this paper would examine the exclusive matters, which related to the risks and benefits in a universal bank. Moreover, this paper would also focus the whole impact of this institution to the financial system and the economy as a whole.

1.2 PROFITS AND COSTS IN UNIVERSAL BANKING: IMPLICATIONS FOR INDIVIDUAL BANKS

General problem related to financial intermediation, include universal banks and another type of banks, is about asymmetric information . It is the main problem that causes costs to increase and influence the performance of financial institutions. In Universal banks, the problems that would increase are slightly different with specialized banks; they are similar in that they should cope the risks problem associated with their financial position. Although, in universal banks, the risks are more bigger due to the wide range of financial instruments that they organized. Therefore, banks have to increase their spending on monitoring costs that are more complicated than specialized institutions or conventional banks.

Possible answer why more banks sacrifice to the escalating risks and transform it operation into the universal banking is that they want to compete and expand their market share, in order to seek a greater opportunity profits by serving more choices to their customers. Many banks has experienced a great performance after they alter their operation, the main concerns are that they could reach better economies of scale which can reduce the amount of spending in operational costs and also a greater opportunity to get more profits. The research finding which was conducted by Vender, R. (2002, cited in Cheang, 2004) about the efficiency of revenue in financial conglomerates and the level of both profit and cost in universal banking, has proved that both financial conglomerates and universal banking contain good performance in several indicators of bank profitability. His finding also suggests that the sustained expansion of financial conglomerates and universal banking practices may increase efficiency in the financial system.

This opinion is strengthen by another experts, like : George Rich and Christian Walter (1993). They state that universal banks which posse benefits over specialized institutions, are able to take advantage of reduction in the average cost of production and scope in banking. It is essential for banks that operate on a international level and in order to fulfill customer needs with a variety of financial services. They also mention a classic example how universal banks in some countries, such as : Switzerland, Germany and more European countries has experienced benefits by operating universal banking. In addition, they also state that the fear if universal bank would threaten specialized institutions has not proven. In Switzerland and Germany, for example, specialized institutions could achieve a better improvement in terms of cooperating with big banks. Universal banks are one of potential market channel which can sell their products directly to the customers, so specialized institutions also get additional return due to the increases in the number of universal banks. Therefore, this proves that universal banks do not threat other institutions; in fact, they support specialized institutions to market their products.

According to Fohlin, universal banking would lead to a bank’s concentration due to the increases the number of branch. Based on Germany’s experience, such branching-based expansion has led to the efficiency in banking because it could increase economies of scale in advertising and marketing, and open an enormous opportunity to enhance diversification and steadiness for banks.

A universal bank has unique position to tackle asymmetric information. As stated by Joao A. C. Santos (1998), that a universal bank has potential benefits on the reduction of agency cost and acquires profits due to information advantages. Although in other sides, universal banking also face problems related to the cost, conflict of interest and safety and soundness. But the default risk, which is generally happened in financial intermediation, would decrease substantially because universal banks are easier to control over their customers. Most of lenders in universal banks are their customers, so they can understand about the capacity of the customers from the information that they gather.

Nicholas Cheang (2004) also points out how universal banks could reduce a crucial problem in financial institution, asymmetric information. He argued that they could preserve a close relationship with their borrowers, by gathering more relevant information to make an important decision for investment. Their advantageous positions also vital to optimize the distribution of fund allocation, because banks have already known which investment that would give more margins to them. So, they don’t need to worry too much about the risk.

1.3 UNIVERSAL BANKS AND THE STABILITY IN THE FINANCIAL SYSTEM

Financial institution plays a vital role in terms of mobilizing funds in the economy. Consequently, stability in financial system is really important to manage by government in order to prevent wider implications to the real sectors. Financial disasters which happened in most countries in Asia in 1997 are the classic examples how importance to save banks to recover the economy.

As the financial supermarkets, which are handling a variety of financial instruments, they must face a greater risk than specialized institutions. As a consequence, this institution needs to be monitored closely in order to prevent more implications to the economy. According to Benston (1994), the escalating risks in universal banking would lead to a great problem because it can cause generous distress in the financial system. Hence, it will greatly increase the risk to the economy’s payment system. In another term, Rime and Strioh (2001) who examine the financial system in Switzerland in which universal banking are becoming more important in this country, state that difficulty in monitoring large universal banks is a major concern. This is the reason why universal bank has to spend more money in monitoring cost and develop an advanced system in information technology. In other words, it could say that the consequence of inefficient monitoring could lead to financial instability. (Cheang, 2004)

A wider range of universal banks in financial system makes the fund channels of banks to the customer are larger than specialized institutions. So, the economy will improve because universal banks will support more funding. This can be seen by the fact that a universal bank practice in Germany has triggered the progress of some enterprises performance in this country. (Stiglitz, 1985). It is understandable that when the allocation of fund can distribute widely and effectively to the potential enterprises, the economy will improve. In this context, universal banks have played as the key institution which mobilize fund to the potential lender.

Edwards (1996), has also proved that a universal bank is not just significantly contributed to economy from the external funds that they provide, but also from the improvement of the information flows. (cited in Cheang, 2004) Therefore, this proves that universal banks have played a significant role in terms of reducing the default risk by providing important information about the lender or customers. Furthermore, the safety of the financial system would be improved by the existence of universal banks.

1.4 CONCLUSION

The development of universal banks has to in line with the policy direction of central bank, because it is important to keep the stability of financial system and the economy as whole. There are three important areas that must be concerned related to universal bank operations, such as : the strengthened of capital and advanced risk management system. Consequently, in order to manage universal bank, people need to be aware about the unique of the risk type in universal banking. Furthermore, policy maker must also consider about the implication of universal banks in financial system.

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