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The deregulation of the financial services in the late 1990s resulted in an explosion of entrepreneurial action leading to the formation of banking institutions. This episode 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 an additional one financial custom at the behest of the sustain Bank of Zimbabwe in January 2005.
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Entrepreneurial Origins
Any entrepreneurial venture originates in the mind of the entrepreneur. As Stephen Covey states in The 7 Habits of extremely efficient 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.
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. However he decided against the academic 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 sustain of whites, was chance up to blacks. Barclays had a new general Manager, John Mudd, who had been involved 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 requisite shareholder of Syfrets - where he headed the international branch until 1989.
The United Nations co-opted him as an consultant to the sustain Bank in Burundi and thereafter, having been pleased by his performance, appointed him a consultant in 1990. In this capacity he advised on the originate of the Pta Bank travellers' cheques. After the consultancy scheme the bank appointed him to head the implementation of the programme. He once again excelled and rose to become 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 store in line with the European model. Because the Ifc and World Bank had unsuccessfully sunk massive 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 recent developments presented an additional one option. At that time Nick Vingirai had just returned home after successfully launching a reduction house in Ghana. Vingirai, inspired by his Ghanaian experience, established Intermarket reduction 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 troops behind the bank, Julias Makoni, was still outside the country. Makoni had just moved from Ifc to Bankers' Trust, to facilitate his proprietary of a financial institution. Inspired by fellow bankers, a dream took shape in Mzwimbi's mind. Why become an laborer when he could become a bank owner? After all by this time he had requisite international experience.
The above palpate shows how the entrepreneurial dream can originate from viewing the successes of others like you. The requisite experiences acquired by Mzwimbi would be requisite 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 potential that, by encouraging Boka to start, he was trying to test the waters. Then Mzwimbi was finding out the last of his covenant at Pta. Boka approached him at the hint of Julias Makoni and asked him to help set up United Merchant Bank (Umb). On rigorous consideration, the banker in Mzwimbi approved the offer. He reasoned that it would be an keen selection and at the same time he did not want to turn down an additional one opportunity. He worked on the scheme 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 approved 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 market bank. The only market banks in the country at that point were approved Chartered, Barclays Bank, Zimbank, Stanbic and an ill Cbz. The scheme was audited by Kpmg and had gained the interest of institutional investors like Zimnat and Mining industry 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, leading to accusations of influence peddling. Mombeshora, after unsuccessfully trying to influence the Registrar, asked that they slow down on the scheme 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 scheme 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 capability 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 learning experiences. Entrepreneurs found a "don't quit" mind-set. These experiences increase 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 propose on financial matters and help restructure the company's debt. At that time Mzwimbi notion 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 increase would be the cost of cell phone handsets. This presented an chance for the banker, as he saw a strategic selection of setting up a leasing finance branch within Econet that would lease out handsets to subscribers. The thinkable, four months to licensing of Econet dragged into four years, which encompassed a bruising legal struggle that ultimately enabled the licensing against the State's will. Mzwimbi's palpate with merchant banking proved useful for his role in Econet's formation. With the explosive increase of Econet after an Ipo, Mzwimbi assisted in the originate 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. However 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 huge shareholding in the company, wide his worldview and taught him vital lessons in creating an entrepreneurial venture. The persistence of Masiyiwa against severe government resistance taught Mzwimbi requisite 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 attempt 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 equipment all in place before licensing. Previously one needed only to set up an office and hire a secretary to acquire a banking license. The licence would be the basis for approaching potential 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 acquire the licence. Consequently it was virtually impossible to invite outside investors into the scheme at this stage.
Without recourse to outside shareholders injecting funds, and with minimal financial capacity on the part of his partners, Mzwimbi fortuitously benefited from his huge Econet shares. He used them as collateral to entrance funds from Intermarket reduction House to finance the start up - acquired equipment 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 requisite 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 public four months later.
Entrepreneurial Challenges
The challenges of financing the new venture and the earlier disappointments did not deter Mzwimbi. The risk of using his own resources, whereas in other places one would fund a requisite venture 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 settled 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 custom However could hold up to a maximum of 100%.
This posed a question 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 retention 10% each. The conference for having financial institutions retention up to 100% was shocking as it meant that an asset manager 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 sustain Bank (Rbz) was simply involved in the registration process on an advisory basis with the main accountability 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 acquire institutional investors was due to the restrictions cited above and the requirement to pump money into the scheme before the licence was issued. They negotiated with Ta Holdings, which was ready to take equity retention 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 venture 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 scheme was being usurped and so turned Ta Holdings down. However, in retrospect Mzwimbi feels that the decision to issue the Ta venture 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. However some corporate customers were concerned about the shareholding of the bank being entirely in the hands of individuals. They beloved the bank risk to be reduced by having institutional investors. The new licensing process adversely affected entrance to institutional investors. Consequently the bank had institutional shareholders in mind for the long term. They claim that even the then head of administration 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 increase in the number of Harare branches.
From their analysis they believed that there was room for at least four more market banks in Zimbabwe. A competitor analysis of the industry 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 approved Chartered, were likely to scale down operations. The promoters of the bank scheme had observed in their ample international experie nce that whenever the economy was indigenised in Africa, these multinational banks would dispose of their rural branches. They were therefore positioning themselves to exploit this scenario once it presented itself.
The thinkable, chance presented itself earlier than expected. On an international flight with the approved Chartered Bank Ceo, Mzwimbi, confirmed his interest in a stake of the bank's disinvestments which was making 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 notification of the deal was made internally, some employees resisted and politicised the issue. The approved Chartered Ceo then offered to walk 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 approved Chartered to dispose 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 increase plan.
Due to what Mzwimbi calls divine favour, the deal included the real estate belonging to the bank. Interestingly, approved Chartered had failed to get bank structure on lease and so in all small towns they had built their own buildings. These were thus transferred within the deal to Royal Bank. potential 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 approved Chartered acquisition of rural branches. Barclays offered eight branches, of which Royal initially approved six. Chegutu and Chipinge were excluded, since Royal already had a proximity there.
However after failing to dispose of those two branches, Barclays came back and asked Royal "to take them for a song". Mzwimbi approved these for two strategic reasons, namely the acquisitions gave him corporal assets (the buildings) that he could lease out to anything 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 economy is agriculture. After the failed Land Donors conference in 1998 and the subsequent land reform programme, it was clear to the established banks that market farming would be significantly affected.
They sought to quit the small towns since their major clients were market farmers. Strategically to acquire these branches when the major source of their earnings was under threat would have required that Royal Bank should have put in place an alternative source of earnings from farming. It is not clear either this had been considered while these acquisitions.
The acquisition increased Royal's subject network to 20 and the staff complement by 50. Incidentally, the increase created problems of managing the law as well as cultural issues. The extremely unionised approved Chartered employees were antagonistic to administration as compared to the trusting Royal culture. This acquisition resulted in potential culture challenges. administration controlled this by introducing Norton and Kaplan's Balanced Scorecard law in an attempt to administrate the cultural clashes of the three systems.
The Challenge of Financing Acquisition
A major challenge in acquisitions is the financing structure. while 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 equipment purchased be accounted for as belonging to Royal Financial Holdings and made ready 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 approved it, and even noted in the inspection narrative the number 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 market 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 lowly 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 equipment 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 safety 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 retention 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 perfect apart from some "weaknesses in the finance department". He assembled a solid team from discrete banking backgrounds. The most requisite 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 finding a financial director. The new statutory instrument required that Cvs of all corporate officers be made ready for vetting when the licence was applied for. Without a licence one could not promise man 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 notion this was a stop-gap measure.
With the unanticipated growth, they forgot to revisit this branch 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 increase phase need both strong leaders and strong managers. It's not sufficient to have strong leadership skills. As Ed Cole said, "It's easier to acquire than to maintain." The role of strong managers is to originate the capacity to verbalize what strong entrepreneurial leaders acquire. Interestingly a new field of research, Strategic Entrepreneurship now recognises the need for both entrepreneurial and strategic administration competences for thriving ventures.
Strategic increase Plans
Royal Bank's strategic intent was to originate a full house of financial services. The plan included a market bank, a reduction house, an insurance company, a building society and an asset administration service. However the foresight was later refined and the plans for a reduction house were dropped, since a strong market bank with a marvelous dealing room would serve the same purpose. A strong asset manager would also relax the need for a reduction house.
With the requisite subject network, the market bank was solid but needed a proximity in a few major centres e.g. Masvingo and Gweru. In Gweru they could not uncover favorable 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 settled under a curator when it was about to move in.
Royal Bank courted Finsreal Asset Managers for a potential acquisition since there were synergies and shared beliefs. It had a solid corporate buyer base and very good increase prospects since an astute entrepreneur led it. Unfortunately the deal was aborted at the last microscopic when the owner opted out. After the Finsreal flop, Mzwimbi and his team pursued the asset manager straight through organic growth. They advanced their own company -Regal Asset Managers - while 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 administration 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 venture capitalists but their demands were excessive. That is when Regal Asset Managers was set up and closed a funding deal straight through Royal Financial Holdings (Rfh), resulting in Rfh retention 99% of Screen Litho which was to be off- loaded once administration was in a solid financial position. Screen Litho is performing very well and hence this venture has proven successful. The entrepreneurial Mzwimbi thus diversified his financial folder straight through this deal.
For the building society, Royal eyed First National building society (Fnbs) and roughly signed a memorandum of agreement. Royal Bank was roughly ready to replacement its staff mortgage factory to Fnbs, when a close friend with a marvelous position in the society discouraged it from committing to the deal without divulging the reasons. A short while later Fnbs was settled 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 building Society. Intermarket had already failed to consummate a deal with Beverley. Royal Bank was now contentious with African Banking Corporation (Abc), which beat it to an agreement but was denied shareholder authority to complete the deal. Royal Bank then went back to wooing Shingai Mutasa of Ta Holdings in an attempt to increase 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 building society board. His sustain would have been crucial in the deal. However this process was overtaken by events, as the incoming Rbz governor superintended a monetary course which led the financial sector into a tailspin.
Some young entrepreneurs approached Royal Bank seeking for sustain to found 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 custom but to a person. Intermarket had the highest number 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 question 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 found 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 rehearsal restrain in their expansion in order to originate capacities to Ant. Eject and incorporate the growth.
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