Southern California Bank Levies to Enforce a Judgment: You Need to KNOW

Here are some need to KNOW tips to ensure the success of your levy.

KNOW the Bank

Since AB 2364 was passed and enacted into law in California Code of Civil Procedure Section 684.115, as of January 15, 2013, banks with more than nine branches in the state had to either elect a specific branch for services, including bank levies, or, their failure to elect is deemed an election that any branch is proper for service. Under the new law, the California Department of Financial Institutions (now, the California Department of Business Oversight) had to publish the bank’s designations on their website.

So, go to the CDBOs website, and under the “Service of Legal Process”, you will find the list. Pay close attention to the information. First, determine whether the bank is on the list. If they aren’t, you can serve a bank levy at any branch. A glaring example of absence on the list is Wells Fargo. On the other hand, if they are on the list, for instance, Bank of America, you should note three things, 1) the proper name of the bank, not just the trade name, “Bank of America, N.A.”; 2) the address for service, which in Bank of America’s case, is only one address, and it’s in downtown Los Angeles. That means every bank levy in the State of California for Bank of America has to go through the downtown Los Angeles location listed and is done through the downtown Los Angeles Sheriff’s Office; 3) the days and hours for service, Bank of America only allows service from 9-2, Mon-Fri.

KNOW the County Sheriff

Now that you KNOW the bank, you KNOW which Sheriff’s office (the “Levying Officer”) you are going to have to go through for the levy, and that means you can order your Writ of Execution from the court that issued your judgment for the county where the bank’s designated branch for service is. Now, you need to familiarize yourself with the Sheriff. Go to their website, and read all their information regarding Civil Processes. You’ll note for the Los Angeles Sheriff that they have a nice tracking system on-line that shows when service was made, information on the writ, and pending and past payments. Also, if the Sheriff has form Sheriff’s Instructions specifically for a bank levy on their system, it’s not mandatory, but it’s a good idea to use them simply because the Sheriff will be familiar with the form.

Next, you need to decide whether you are going to open the bank levy file and have the Sheriff serve the bank levy or you are going to utilize a Registered Process Server (RPS). This depends on several factors: 1) Do you need the service to occur on a specific date? 2) Are you in a rush to complete the bank levy? 3) Do you want to complete the bank levy as inexpensively as possible? You might want to call the Sheriff and ask how long it takes for them to serve a bank levy. At the time of the writing of this article, the Los Angeles County Sheriff’s backlog for levies was well over three months, so unless you are okay with waiting and not knowing when the bank levy will “hit”, you might want to use an RPS.


Only use an RPS that is experienced with bank levies. Don’t just hire the cheapest RPS and assume they know what they are doing. In fact, some RPSs won’t do full bank levies, which includes: opening the file with the Sheriff, serving the levy on the bank, and closing the file with the Sheriff. And, as far as I know, none of them will prepare the paperwork. There’s a reason for that. It’s a lot of paperwork, and it must be prepared perfectly, and the steps must be timed correctly. You usually only get one bite at the apple when it comes to bank levies, so, if the Sheriff rejects your paperwork after your RPS makes service on the bank, you will be S.O.L. (which is not an acronym for Statute of Limitations), because your Judgment Debtor will find out about the levy from the bank, and he or she will likely close the bank account or withdraw all or most of the money.

Suffice it to say that doing a bank levy using the Sheriff as the server is much easier than using an RPS because of the complications involved with the paperwork and the number of steps. In fact, caveat-you should carefully consider using a judgment enforcer or attorney if you are going to do a bank levy and need to use an RPS. It’s quite the ordeal. There are five distinct steps and no less than 13 documents that have to be prepared for an RPS bank levy.

KNOW your Judgment Debtor

This ties in to KNOW your Sheriff and RPS and your decision on whether to proceed with the Sheriff or with an RPS. If it’s a small dollar judgment and you have no idea how much money, if any, the judgment debtor has in the bank, or if you are certain the judgment debtor has a good Claim of Exemption and you just want to get their attention, you might want to use the Sheriff and save yourself some money.

However, if you KNOW the judgment debtor gets paid via auto-deposit on every other Thursday, you might want to have an RPS serve the bank levy on the following Friday. Or, if you know, the judgment debtor just sold his house and you know the close of escrow date, again, you might want to have an RPS serve the bank levy. Or, maybe you know the judgment debtor always gets a company bonus on a certain date… the scenarios are endless, and hopefully, so is your success.

So… KNOW your bank levy.

Digital Banking – What Is It Really?

If you are a banker, techie, agent or most importantly a customer in BFSI Segment, I would take it for granted you must have heard the new buzz word “Digital Banking”. In my circle, I did chat with several people and interestingly, no two persons seem to perceive this in same manner – well, this is kind of exaggeration, but you get the picture! This made me take a pause and think what this could mean to someone like me who is an insider in the industry, to answer if a colleague, friend, or someone at my box asks me about this. As a true CrossFit athlete I follow at least the first rule – tell everyone you come across about CrossFit.

The reason I bring up CrossFit is not just because of my fascination or, even obsession. CrossFit is a bit of complex and daunting to those uninitiated, but to put it simply it is strength and conditioning program, which optimizes fitness. CrossFit defines fitness itself in terms of 10 components – Cardiovascular Endurance, Stamina, Flexibility, Strength, Power, Speed, Agility, Coordination, Accuracy, Balance. But, typically if you ask any of your friends what is fitness, you might get multiple responses. E.g. a runner will say ability to run half-marathon, or a weight lifter might say deadlift of at least 1.5 x body weight, or a guy into yoga might say doing 108 Suryanamaskaras. Well, each of them may be right in their own way. Your definition of fitness may be doing all of those, or you could just say I am fit enough if I am able to do my 9-to-5 job without taking any sick leave in an appraisal cycle.

On the same lines, banks could interpret Digital Banking in their own terms and similarly, people like you and me will have formed some opinion based on our own exposure.

Over the years, banks of all sizes and shapes optimized a lot by adapting to IT / ITES (IT Enabled Services) and they have achieved varied degrees of success. However, due to lack of focused and longterm approach, creation of disjoined systems, rapidly changing business and operating scenarios, etc., the intended goals might not have been fully realized. Some of those “failed” initiatives could have been driven by the institution’s urge to be an early adaptor of a technology or trend (betting on a wrong horse). On the contrary, we might lose a huge opportunity, if we don’t recognize and bet on a winning horse. So, the trick is betting on the right horse, at a right time – i.e., when the odds are low. Typically, industries use what is called a Hype Cycle to evaluate a new technology or trend. If you are interested to understand what is a “hype cycle”, please see Gartner’s methodology. I will try to string together some of the key aspects of Digital Banking, as unlike most of the buzzwords, it is neither a single service nor a technology.

Just around the time (2008-10) I spent about a year plus in Brussels, three big banks (Fortis, Dexia and KBC) which always came across as extremely risk averse bankers from the BeNeLux region, started facing major pressure and their value eroded significantly and triggered heated debates in the community – who thought their money is always safe with the banks (either as a depositor or share holder). What really happened there, is very complex. Key factors being, huge sovereign debt hovering between 84 to 99% of GDP, lack of Government for 533 days, etc. These triggered liquidity issues. If you add to this other upheavals in the banking industry globally, it is easy to realize that the “trust” within the system was under threat. How would we build trust? By being transparent. Customers need (not want!) transparency in the whole system. Younger the customer base, that need felt is more acute. This, when you look from the changing customer experience and expectations from retail industry (Amazon, Flipkart), transportation (Uber, Ola), food industry (Zomato, FoodPanda, ZaptheQ), you know where the banking industry is. Customers have reset the expectations in terms of value, experience, and options. The Key takeaway for the banker – User Experience – rich, uniform, mobile (anywhere), secure, enhanced value.

Many people I have interacted with recently on this topic, opined Internet Banking or Mobile Banking as Digital. Yes, this is only the beginning of what could be Digital Banking. Probably, they cover earlier set of customer expectations. Moving on, could we see a day soon, where there is no paper in any of the banking transactions? When I say paper, I am not just referring to currency! Few things which are already in practice in few banks and gaining momentum across are – digitizing processes within the bank (like customer on-boarding, loan application), cheque truncation systems which allows you to take a photo of the cheque on your mobile and send to your bank, etc. – there by bringing efficiency in decisionmaking, ability to customize processes to specific customer requirements, save some unnecessary trips to the branch, etc. This could mean in other words, implementing document/ image management systems, business process management and monitoring systems, integrating these components within the existing IT solutions. The Key – digitizing internal processes.

Social Media in the last few years have brought biggest impact across borders – be it, Tahrir Square revolution, Ice Bucket Challenge, which mobile to buy, how we order and pay for lunch or identifying a fine dining place and going Dutch while sharing the bill. Social Media is already bring disruptions in terms of which bank to trust, what they can expect from a bank in terms of services, lend a voice to their dissatisfaction. Which in turn means, banks have to be on the same Social Media listening to their customers, selling their services and also ultimately, attracting new customers, retaining the customers and more importantly, becoming “The Goto Bank” if the customer has multiple accounts. As an example, what could not have been expected few years back, in Kenya, one of our prestigious client’s Twitter handle (@ChaseBankKenya) uses Twitter to connect, launch and share CSR activities, and address customers’ queries and concerns very effectively. That is, The Reach factor.

Another silent thing happening behind the walls in a bank is called Data Analytics or Big Data. These churn out unprecedented insights into customer behavior and preferences, driving extremely focused strategies. These also help customers to understand their spend analysis, plan their budgets, financial goal management etc.

Apart from these key components, there are several others which could make the bank more “digital” – chat and video discussion facilities to bring bank closer to the customer when he/she needs it, or educating customers through online tutorials like financial literacy, tax planning, etc., integrating various solutions and systems in the bank to reduce data replication and redundancy and helping the bank make more Straight Through Processing systems there by reducing errors, cost of operations, and increasing efficiency in the entire system. Banks could significantly increase seamless data exchange with others partners like regulatory bodies, clients, government bodies thus making entire process much more transparent and efficient.

Finally, the big question is what should be achieved from the big task list to call a bank “Digital Bank”? Just like in fitness, there is no single solution or the right solution. Each bank has to define its own strategy, execution plan to reach the goal of customer delight, operation efficiency, and overall share holders’ enhanced value.

What to Really Expect When Buying A Bank Owned Property

In recent years, most new buyers wanted to buy a new home from a homebuilder. Today, nearly every buyer I pre-qualify today says the same thing. “I want to buy a bank-owned property.”

In some counties around the country, foreclosures are at all-time highs. As a result, in today’s market, the best deal for homebuyers is quite often the bank-owned property.

While many real estate professionals claim their business is off by as much as 60%, agents who concentrate on bank-owned properties are experiencing the second coming of the gold rush.

In the Las Vegas, the bank-owned real estate market is somewhat of an unknown. For many years, someone who was on the verge of foreclosure simply listed their home for sale and found a willing buyer to step in and save the day. As a result, many experienced real estate professionals and homebuyers are not as familiar with the process of buying a bank-owned property. Hopefully, this newsletter will help.

A bank-owned property or REO for “Real Estate Owned” is any property where the lender or bank has taken back ownership through a foreclosure, short sale, or other related act.

In the Las Vegas market today our inventory has swelled with this product. Many pundits believe this is the very tip of the iceberg and many, many more are coming.

It’s important to understand there is a difference between a foreclosure and an REO. The REO is what happens after the act of foreclosure and after an unsuccessful foreclosure auction.

This newsletter will help you understand the process of buying a property that is owned by the bank. This is not about buying a home in foreclosure or in pre-foreclosure.

There are far more benefits, far less stress, and it’s much easier to buy an REO property than a pre-foreclosure. Let’s walk through it.

So Joe Smith bought a house in 2005 for $350,000. He did 100% financing, interest only, and he recently lost his job. Joe couldn’t make his mortgage payments so he called a real estate agent to sell the house. The agent regretfully advises him his house is worth $340,000 today and by the time he pays commissions, closing costs and late payments to the mortgage company, he will have to write a check to close his house for $30,000.

Joe can’t afford to do that so when he fails to make his mortgage payments, he is eventually foreclosed on by his bank, and evicted from his home.

Now, the bank has a foreclosure sale or auction. They require a minimum bid of $378,000 for the property. This minimum bid includes the balance of the loan, accrued interest, the attorney’s fees for the legal action to get to this point, and all of the other money associated with this foreclosure.

At the foreclosure auction, the bank requires that any bidder have their $378,000 money ready that day in the form of a cashier’s check for the full amount of their bid. They also let the bidders know that they will get the house “as is,” with no repair allowance, and with all other liens that are on it.

Since Mr. Smith didn’t have much equity, neither does the bank, and when they add all of these fees to the auction price, the minimum bid becomes a price at or well above market value, like in this case $378,000. That means it rarely ends up getting bid on.

This means the property ends up back in the hands of the bank and now you have an REO.

The bank now owns the property, and it gets recorded on their books as a sellable asset. Banks are in the business of loaning money and maximizing their value through strong business practices like checking, savings, lending, and making money for their shareholders.

They are not usually in the business of owning real estate.

They want to turn this asset into cash, so they put the home on the market with the goal of selling it as quickly as possible.

To accomplish this they will usually reduce the price of all of the costs they had at the foreclosure auction like the legal fees and such. They will list it and market the property with an experience REO real estate agent who can advertise it and put it on lock box for easy access. They will get rid of all of the liens.

They will put the property in the very best position possible to move. So in this case, you would expect the house to go back on the market for somewhere around the market value of $340,000.

But don’t read too much into this. Just because they want to sell it fast doesn’t necessarily mean that they will dramatically reduce the price further below market value. In some cases they will, but in others they won’t. It’s a sell-able asset and they want to make as much as possible.

This is where you come in.

First, you will want to contact a lender to make sure you are qualified to buy a home, the home is qualified for the lender, and how much you are qualified to buy.

Next, and equally as important, you want to contact a real estate agent and let them know you are interested in purchasing an REO.

Not all REO properties are a bargain. Its important that you hire a real estate professional who can let you know if you are getting a deal or not. Ask your agent to do a “CMA” or “comparative market analysis” on the property and find out what its worth in today’s market.

Do your research before making an offer. Buying a bank-owned property is often a great opportunity but is also has its challenges.

I spoke with Dan Humeston, with Century 21 Moneyworld, who is considered one of Las Vegas’ top REO agents. No one in this market today is busier than Dan.

A recent report listed Dan as the number one producing real estate agent in Las Vegas so far in 2007 and by a far margin. I understand he is currently #3 nationwide for all Century 21 agents.

I asked Dan, who is a long-time expert in REO, what you can do to make sure your offers are accepted and also what you can expect when making an offer on a bank-owned property.

Dan says agents and their clients have to understand what they are getting into before moving forward. Here is what you need to know.


Banks are exempt from providing you with a real property disclosure. Therefore, before you even think about making an offer you have to do an initial inspection of the house. You want to understand what damage has been done to the home and what your lender says about it. Some of this damage may not make it through the lending process and you need to be aware of that before making your offer.

Items like a damaged roof, broken windows, AC and heating problems, exposed wiring, or missing flooring can make it so your lender cannot loan on that home. Before making an offer, make a list of the repairs that you see that need to be done. Go over this list with the lender and the appraiser then decide whether or not to move forward.

Dan says this is the number one problem he faces today on offers. The client makes an offer but has no idea how the repairs necessary will affect his loan. The bank knows what damage will not make it through the lending process and may reject the offer simply because you haven’t done your research.

Knowing if the home is able to get a loan on it is something that needs to be done before you make an offer. The house has to qualify just like the borrower’s do.


A quick tour of REO properties and you soon discover that people going into foreclosure rarely take care of the home at the end. It can take four to eight months for a person to be foreclosed on. They sometimes get angry and knowing they are losing the home anyway, they fail to maintain it in a satisfactory condition. It is not uncommon during your tour to find dead landscaping, broken windows, holes in walls, stained carpet, broken fixtures, missing appliances, and much worse.

Banks will often ask that you buy the property “as is.” You probably assume this means none of those items will be fixed should you decide to buy the home. However, Dan says that isn’t always the case. On occasion, you may be able to negotiate to get some minor repairs done.

Dan recommends that once again, before you make your offer, you analyze the repairs that are necessary. Get with the lender and his appraiser and find out which repairs will be absolutely necessary for the loan to happen. Put together a price for these, let’s say $3500.

When you make your offer, ask for $3500 in “appraisal-condition repairs” or “lender-required repairs.” Use those exact terms. Dan says he may be able to sell these to the bank. If you just say “$3500 for miscellaneous repairs,” you dramatically reduce your chance of acceptance.

However, let’s say you did your initial inspection of the house, you didn’t see a lot of problems and you make your offer. During the formal inspection with the home inspector, you learn the home has $10,000 in roof damage. Your lender tells you the roof needs to be repaired before you close escrow. The bank refuses to pay for it as it wasn’t in the original offer. Don’t plan on the bank giving you access to the home during escrow to fix this, Dan says. The liability and the risk are too high for the bank.


You will make your initial offer in writing. Unless it’s a full list offer with no additional concessions, the offer may require the listing agent to go back to the seller, the bank, for approval. The bank may be in a different time zone. Banks are closed on weekends.

Also, always remember, that banks are in the money business, not the real estate business. Your transaction is secondary to their day-to-day business and may be treated as such.

If they have a dedicated department that handles REO properties for them, and many do, they may have 3-4 people who have to review it first.

I have heard stories of banks taking 30-45 days to answer counter offers. In this time, they may get an offer better than yours and you are out. If you really love the house and think it’s a great deal, you will want to be very careful about your counter offers.

I recently heard a story about a bank that took nearly 50 days to answer a counter offer that was only 3% off of list. The buyer got angry on the 45th day and walked. Five days later when the bank called to say they accepted the offer, the buyer had moved on. There is little sense of urgency from banks today if the offer is not clean and near full price.

Dan says if you want this to happen quickly, make a clean offer, with a higher net to the bank, and get your due diligence done in 10 days or less. If you are an agent and you want 2 additional points, make a higher offer. The bank doesn’t care what you make, they have a net figure in mind. And don’t ask for the appraisal to be paid by the bank. They rarely will accept that.

When you make your offer feel free to ask for what you want, like closing costs, repairs, and more. However, the more you ask for, the longer you will want to plan on waiting for the answer.

Its also very important that you or your real estate agent find out how much the bank has on the books for the loan on the property. If they have $350,000 on the books and they are listing it for $310,000, they will not be too excited about an offer for $290,000 where you are asking for closing costs.

If they have $280,000 on the books and they are listing it for $310,000, your offer for $290,000 plus closing costs may be a winner.

In a declining market it’s very important to know the actual market value of the property. I am doing a loan for a client who saw an REO that was listed for $465,000. His agent advised him the property was only worth $420,000. However, the bank had taken it back with a loan on it for $510,000. He offered $400,000 and got it.

Dan says banks decide how much to list their properties by studying the recent comps, not by what they have in the deal. They want to net as much as possible and that may mean they are selling it a big profit, not a loss.


In today’s market with 23,000 houses, many sellers will let you make an offer with a deposit of $1000 or less. With bank-owned properties this number will usually be much higher. Plan on $5000-$20,000 or 3%-5% of the asking price. I recently saw $15,000 of earnest required on a $300,000 home.


The bank that owns the property may ask you to get pre-qualified with their bank before making your offer. You don’t have to use them. You can choose whatever bank you want for your loan but they want to make sure you are a real candidate. They also want to try and make some more money on the home by being your lender.

I recently pre-qualified a low credit score buyer who was putting down 30% on an REO property that was held by a major bank who recently reduced their subprime guidelines. He couldn’t qualify with them but I demonstrated that I had him approved. They still turned him down.

On the flip side, if you end up in that spot, I highly recommend that you have your lender contact the listing agent to walk him through the strengths of your loan.

I have another loan currently where the property was the REO of another large bank, the borrower went through their pre-qualification process, and his offer was declined. I spoke with the listing agent, went over the entire loan with him and its strengths, presented him a detailed approval letter from my in-house underwriter, as well as a two-week close of escrow, and we got the deal.

Dan says these loan requests usually come from a different department at the bank that sees this as an opportunity to generate revenue. The REO departments simply want these homes off their books and don’t care who does the loan. However they have a right to make sure your lender is not a flake and the pre-qualification letter is real. Asking you to pre-qualify through them just to test your worthiness is not an outrageous request.


Make sure you hire a very reputable home inspector and that he inspects the home very carefully. A lot of damage could have been done by the previous owners and a lot of it unseen by just walking through. As we discussed earlier, before making your offer you want to be sure to factor in the costs of the repairs you will have to do. However, you may want to make sure your offer is contingent on termination if the damages are far greater than originally disclosed and expected.

If your home inspector turns up additional damage like this, this could be an opportunity. If you are still willing to go forward, contact the bank and renegotiate the deal with the new information. They may be willing to lower the price and you may get a well-earned and valuable price break. However, you don’t want to plan on this.

A client of mine, who specializes in fixer-uppers, has had some success renegotiating on bank-owned properties by presenting a detailed list of the damage he sees to the bank before he makes an offer. After the formal inspection, he does a new list.

He gets a professional contractor to prepare a cost analysis to fix the damage after he gets the report from the inspector and then presents this to the bank. Once again, this won’t always work on “as is” but can be very effective as it gives the bank the opportunity to see a real list of the damage with details of the costs that it will take to repair.

The bottom line to buying a bank-owned property is get pre-qualified as a borrower, get the house’s damage pre-qualified with your lender to review the possible challenges in the loan before making your offer, don’t plan on the bank’s willingness to “give the house” away, and be patient for answers.

If you are preparing to make an offer on a bank-owned property, you want some advice, or you simply want more information on bank-owned properties, and you want to reach Dan Humeston, you can do so at [email protected].

Sustainable Government – Banking For a “New” New Deal

“This isn’t about big government or small government. It’s about building a smarter government that focuses on what works.” Barack Obama, November 26, 2008

As our 44th President prepares to enter the Oval Office, bank lending has seized up, some of the nation’s largest banks are on life support, and the big three automakers are bankrupt. Housing continues to crash, and so does the economy.

Little wonder that Obama is being compared to Franklin D. Roosevelt, who entered the White House in similar financial straits in 1932. Even before taking office, Obama has started his version of the “fireside chats” (updated from radio to online video) given by Roosevelt nearly weekly to reassure the public. He said on November 22 that he plans to create 2.5 million new jobs by 2011 and kick-start the economy by building roads and bridges, modernizing schools, and creating technology and infrastructure for renewable energy. These are excellent ideas, but what will they be funded with-more government debt?

Obama has pledged to honor the commitments of the outgoing administration to rescue financial markets, on the theory that if we don’t, our credit system could freeze up completely. But as noted by Barry Ritholtz in a December 2 article, the bailout has already cost more than the New Deal, the Marshall Plan, the Louisiana Purchase, the moonshot, the savings and loan bailout, the Korean War, the Iraq war, the Vietnam war, and NASA’s lifetime budget combined. [1] Increasing the debt burden could break the back of the taxpayers and plunge the nation itself into bankruptcy.

How can the new President resolve these enormous funding challenges? Thomas Jefferson realized two centuries ago that there is a way to finance government without taxes or debt. Unfortunately, he came to that realization only after he had left the White House, and he was unable to put it into action. With any luck, Obama will discover this funding solution early in his upcoming term, before the country is declared bankrupt and abandoned by its creditors.


Jefferson realized too late that the Founding Fathers had been misled. He wrote to Treasury Secretary Gallatin in 1815:

“The treasury, lacking confidence in the country, delivered itself bound hand and foot to bold and bankrupt adventurers and bankers pretending to have money, whom it could have crushed at any moment.”

He wrote to John Eppes in 1813:

“Although we have so foolishly allowed the field of circulating medium to be filched from us by private individuals, I think we may recover it … The states should be asked to transfer the right of issuing paper money to Congress, in perpetuity.”

It had long been held to be the sovereign right of governments to create the national money supply, something the colonies had done successfully for a hundred years before the Revolution. So why did the new government hand over the money-creating power to private bankers merely “pretending to have money”? Why are we still, 200 years later, groveling before private banks that are admittedly bankrupt themselves? The answer may simply be that, then as now, legislators along with most other people have not understood how money creation works. Only about 3% of the U.S. money supply now consists of “hard” currency-coins (issued by the government) and dollar bills (issued by the private Federal Reserve and lent to the government). All of the rest exists merely on computer screens or in paper accounts, and this money is all created by banks when they make loans. Contrary to popular belief, banks do not lend their own money or their depositors’ money. They merely “monetize” the borrower’s promise to repay. Many creditable authorities have attested to this fact. Here are a few:

“[W]hen a bank makes a loan, it simply adds to the borrower’s deposit account in the bank by the amount of the loan. The money is not taken from anyone else’s deposit; it was not previously paid in to the bank by anyone. It’s new money, created by the bank for the use of the borrower.”

– Robert B. Anderson, Secretary of the Treasury under President Eisenhower

“Banks create money. That is what they are for… The manufacturing process to make money consists of making an entry in a book. That is all… Each and every time a Bank makes a loan… new Bank credit is created-brand new money.”

– Graham Towers, Governor of the Bank of Canada from 1935 to 1955

“Of course, [banks] do not really pay out loans from the money they receive as deposits. If they did this, no additional money would be created. What they do when they make loans is to accept promissory notes in exchange for credits to the borrowers’ transaction accounts. Loans (assets) and deposits (liabilities) both rise [by the same amount].”

– The Chicago Federal Reserve, Modern Money Mechanics (last updated 1992)

Not only are banks merely pretending to have the money they lend to us, but today they are shamelessly demanding that we bail them out of their own imprudent gambling debts so they can continue to lend us money they don’t have. According to the Comptroller of the Currency, the books of U.S. banks now carry over $180 trillion in a form of speculative wager known as derivatives. Particularly at issue today are betting arrangements called credit default swaps (CDS), which have been sold by banks as insurance against loan defaults. The problem is that CDS are just private bets, and there is no insurance commissioner insuring that the “protection sellers” have the money to pay the “protection buyers” if they lose. As loans have gone into default, the elaborate gambling scheme built on them has teetered near collapse, threatening to take the banking system down with it. Now the players are demanding that the government underwrite their bets with taxpayer funds, on the theory that if the banking system collapses the public will have no credit and no money. That is the theory, but it misconstrues the nature of money and credit. If a private bank can create money simply by writing credit into a deposit account, so can the federal government. The Constitution says “Congress shall have the power to coin money,” and that is all it says about who has the power to create money. It does not say Congress can delegate to private banks the right to create 97% of the national money supply in the form of loans. Nothing backs our money except “the full faith and credit of the United States.” The government could and should have its own system of public banks with the authority to issue the credit of the nation directly.


Accumulating a network of publicly-owned banks would be a simple matter today. As banks became insolvent, instead of trying to bail them out, the government could just put them into bankruptcy and take them over. Insolvent banks are dealt with by the FDIC, which is authorized to proceed in one of three ways. It can order a payout, in which the bank is liquidated and ceases to exist. It can arrange for a purchase and assumption, in which another bank buys the failed bank and assumes its liabilities. Or it can take the bridge bank option, in which the FDIC replaces the board of directors and provides the capital to get it running again in exchange for an equity stake in the bank. An “equity stake” means an ownership interest: the bank’s stock becomes the property of the government.[2] Nationalization is an option routinely pursued in Europe for bankrupt banks. As William Engdahl observed in a September 30 article, citing economist Nouriel Roubini for authority:

“[I]n almost every case of recent banking crises in which emergency action was needed to save the financial system, the most economical (to taxpayers) method was to have the Government, as in Sweden or Finland in the early 1990’s, nationalize the troubled banks [and] take over their management and assets … In the Swedish case, the Government held the assets, mostly real estate, for several years until the economy again improved at which point they could sell them onto the market … In the Swedish case the end cost to taxpayers was estimated to have been almost nil. The state never did as Paulson proposed, to buy the toxic waste of the banks, leaving them to get off free from their follies of securitization and speculation abuses.” [3]

As in any corporate acquisition, business in the banks nationalized by the government could carry on as before. Not much would need to change beyond the names on the stock certificates. The banks would just be under new management. They could advance loans as accounting entries, just as they do now. The difference would be that interest on advances of credit, rather than going into private vaults for private profit, would go into the coffers of the government. The “full faith and credit of the United States” would become an asset of the United States. Instead of paying half a trillion dollars annually in interest, the U.S. could be receiving interest on its credit, replacing or eliminating the need to tax its citizens.


There are three ways government could fund itself without either going into debt to private lenders or taxing the people: (1) the federal government could set up its own federally-owned lending facility; (2) the states could set up state-owned lending facilities; or (3) the federal government could issue currency directly, to be spent into the economy on public projects. Viable precedent exists for each of these alternatives:

1. The Federal Bank Option

The federal government could issue credit through its own lending facility, leveraging “reserves” into many times their face value in loans just as banks do now. Franklin Roosevelt funded his New Deal through the Reconstruction Finance Corporation (RFC), a government-owned lending institution. However, the RFC borrowed the money before lending it. A debt-free alternative would be for a government-owned bank to issue the money simply as “credit,” without having to borrow it first. This was done by the state-owned central banks of Australia and New Zealand in the 1930s, allowing them to avoid the worldwide depression of that era. In the informative booklet “Modern Money Mechanics,” the Chicago Federal Reserve confirms that under the fractional reserve system in use today, one dollar in reserves is routinely fanned by private banks into ten dollars in new loans. Following that accepted protocol, the government could fan the $700 billion already earmarked to unfreeze credit markets into $7 trillion in low-interest loans.

Apparently, that is how Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke are planning to generate the $7 trillion they say they are now prepared to advance to rescue the financial system: they will just leverage the $700 billion bailout money through the banking system into $7 trillion in new loans. [4] But the Federal Reserve is a privately-owned banking corporation, and the recipients of its largesse have not been revealed. [5] The $700 billion in seed money belongs to the taxpayers. The taxpayers should be getting the benefit of it, not a propped-up private banking system that uses taxpayer money for the “reserves” to create ten times that sum in “credit” that is then lent back to the taxpayers at interest.

Seven trillion dollars in government-issued credit could furnish all the money needed to fund Obama’s New Deal with a few trillion to spare. Among other worthy recipients of this low-interest credit would be state and local governments. Many state and municipal governments are going bankrupt through no fault of their own, just because interest rates shot up when the monoline insurers lost their triple-A ratings gambling in the derivatives market.

2. The State Bank Option

While states are waiting for the federal government to step in, they could charter their own state-owned banks that issue low-interest credit on the fractional reserve model. Article I, Section 10, of the Constitution says that states shall not “emit bills of credit,” which has been interpreted to mean they cannot issue their own paper currency. But there is no rule against a state owning or chartering a bank that issues ten times its deposit base in loans, using standard fractional reserve principles.

Precedent for this approach is found in the Bank of North Dakota (BND), the nation’s only state-owned bank. BND was formed in 1919 to encourage and promote agriculture, commerce and industry in North Dakota. Its primary deposit base is the State of North Dakota, and state law requires that all state funds and funds of state institutions be deposited with the bank. The bank’s earnings belong to the state, and their use is at the discretion of the state legislature. As an agent of the state, BND can make subsidized loans to spur economic and agricultural development, and it is more lenient than other banks in pressing foreclosures. Under a program called Ag PACE (Agriculture Partnership in Assisting Community Expansion), the interest on loans made by BND and local lenders may be reduced to as low as 1 percent. [6] North Dakota remains fiscally sound at a time when other state governments swim in red ink, and its educational system is particularly strong. While disruptions in capital markets have hampered student loan operations elsewhere, BND continues to operate a robust student loan business and is one of the nation’s leading banks in the number of student loans issued. [7] North Dakota’s fiscal track record is particularly impressive considering that its economy consists largely of isolated farms in an inhospitable climate. Ready low-interest credit from its own state-owned bank may help explain this unusual success.

3. Government-issued Currency

A third option for creating a self-sustaining government would be for Congress to simply create the money it needs on a printing press or with accounting entries, then spend this money directly into the economy. The usual objection to that alternative is that it would be highly inflationary, but if the money were spent on productive endeavors that increased the supply of goods and services-public transportation, low-cost housing, alternative energy development and the like-supply and demand would rise together and price inflation would not result. The American colonial governments issued their own money all through the eighteenth century. According to Benjamin Franklin, it was this original funding scheme that was responsible for the remarkable abundance in the colonies at a time when England was suffering the depression conditions of the Industrial Revolution. After the American Revolution, private bankers got control of the money supply, but Abraham Lincoln followed the colonial model and authorized government-issued Greenbacks during the Civil War. Not only did this allow the North to win the war without plunging it into debt to the bankers, but it funded a period of unprecedented expansion and productivity for the country.

Obama would do well to consider these funding solutions for his “smarter” government. He has been quick to assemble his advisers and form policy, but a fast start down the wrong road could do more harm than good. The bailout scheme of the current administration is serving merely to keep a failed banking system alive by draining assets away from the productive economy. The conventional wisdom is that we must continue down the path we are on, because the alternative means frightening, radical change. Financing a new New Deal without putting the country further into insolvency, however, would not be a radical departure from tradition but would represent a return to our roots, to the uniquely American monetary policy advocated by our venerable forebears Benjamin Franklin, Thomas Jefferson and Abraham Lincoln.

1. Barry Ritholtz, “Bailout Costs More than Marshall Plan, Louisiana Purchase, Moonshot, S & L Bailout, Korean War, New Deal, Iraq War, Vietnam War,” Global Research (December 2, 2008).

2. G. Edward Griffin, The Creature from Jekyll Island (Westlake Village, California: American Media, 1998), pages 63, 65.

3. “William Engdahl, “Financial Tsunami: The End of the World as We Knew It,” Global Research (September 30, 2008).

4. Mark Pittman, Bob Ivry, “U.S. Pledges $7.7 Trillion to Ease Frozen Credit,” Bloomberg (November 25, 2008).

5. Mark Pittman, et al., “Fed Denies Transparency Aim in Refusal to Disclose,” Bloomberg (November 10, 2008).

6. “The Bank of North Dakota,” New Rules Project (2007).

7. Richard Sisson, et al., The American Midwest: An Interpretive Encyclopedia (2007), page 41; Liz Wheeler, “Bank of North Dakota Keeps Student Loan Funds Flowing,” Northwestern Financial Review (September 15, 2008).

Retail Banking Categories

Retail banking refers to the type of bank activities that deals directly with the consumers instead of corporations or other banking institutions. The services offered by the various types of retail banks may include savings, checking, mortgages, personal loans, debit cards and credit cards.

A Commercial Bank may either fall in any of its two definitions:

  • a type of bank that is not an investment bank.
  • a bank or a bank division that generally does business regarding deposits and loans from conglomerates or large businesses. This is the department of banking which is regarded as the most successful.

The Community Bank is one that is locally operated as a financial institution that allows employees to decide on matters regarding the services they offer to customers and to their partners.

A Community Development Bank is a controlled bank which offer financial services and credit to citizens who are ‘financially under-served’. The purpose of this type of retail bank is to prod economic advancements especially in locations with low-to-moderate income. Shorebank, with headquarters based in the Chicago neighborhood is the largest and the oldest community development bank.

A Postal Savings Bank is a essentially a bank in a post office. This system of banking was initially implemented in postal offices to make available a method of saving money to depositors without access to banks. This also encourage the poor people to save. Great Britain was the first country to offer this set up in the year 1861.

A Private Bank primarily services to individuals with a net worth of more than 2 million dollars in managing their assets. This has somehow changed, however, since some private banks are now open to private investors with lower net worth of $250,000. In essence, this type of retail banking renders to clients a more personal service with regards to wealth management, savings, inheritance and tax planning.

An Offshore Bank is a bank situated outside the country where the depositor resides, usually in areas having low taxation and not so strict regulations. Majority of Offshore Banks operate as Private Banks. An Offshore Bank provides numerous financial and legal advantages which includes greater privacy, less (or possibly none at all) tax, ease of access to deposits and the defense against local political or financial insecurity.

A Savings Bank is primarily servicing clients who wish to open a savings account but may also perform other functions. This type of financial institution holds its roots in Europe during the 18th – 19th century.

A Building society is also a form of retail banking, owned by its members to whom it offers banking services such as mortgage lending. The first Building society was founded in Birmingham during the year 1774. Landesbanken refers to the group of state owned banks in Germany.

An Ethical Bank concerns itself with social and environmental effects of investments and loans. Its priority is a transparent operation and only engages on investments which are regarded as socially-responsible.

The Islamic Bank is a financial institution whose activities conform with the Sharia (the Islamic Law and its application to improve the Islamic economy.

Gold Bullion Money Making Success System – Micro Gold Bullion Personal Bank Creation

In pursuit of gold bullion to end the rat race of debt and income bondage; banks and other financial interest have all figured out that if these businesses and financial institutions could systematically increase the number and amounts of fees associated with banking in general for all accounts; this include personal and business accounts which were all changed several years ago to include a series of new bank fees, in essence would make traditional banking less desirable in the short and long term for account holders in a number of ways.

Example banks realized that the new fees created and applied to all accounts had proven to be so profitable for banks; that they decided to increase these fees threefold to insure a strong windfall of profits regardless of how the economy was fairing, now take the overdraft fees that all banks have now implemented nationwide, if your account is overdrawn {meaning you have spent more than what was in your account} even if it’s only 3cents would cost you a whopping $30 to $38 in overdraft fees concurrently.

These changes also include non FDIC securing money market accounts, wire transfer fees and regulated amounts which can be sent, checking s account new fees, check writing new fees, non account use fees, excessive account use fees, ATM additional fees, bank teller fees plus a litany of other creative fees including the removal of all free accounts which include personal and business accounts, procedures and policies that only a bank can conceive all at the expense of account holders.

And to make matters worse, bank policy forbid bank tellers or bankers from reimbursing account holders overdraft fees even if the account holder is a preferred client, this set of new rules only serves to further enrich banks and their stock holders which in my opinion is not sustainable in the medium and long term in terms of new account openings by the public.

Where does gold bullion fit in this financially altered environment, well as of 1-1-2011 some banks will begin excepting gold bullion as collateral, how much gold bullion will these banks except as collateral will be determined by economic conditions and prevailing financial realities as it relates to the real economy, as gold and silver bullion are expected to rise exponentially over the next two years thus increasing its global value beyond spot market pricing.

The Gold Bullion Micro Bank:

Little is known about the currency world before banking was introduced as a solution for uniform transactions in commerce and labor, however under such conditions which exist today begs for a viable alternative to banks, an alternative which must have at its core, every potential to rival traditional banking as it were.

This system can be called Gold Bullion Micro Banking for the do it yourself proactive remedy to bank usury, now let’s look at some of the viable aspects of what makes the Gold Bullion Micro bank necessary today:

a. The micro gold bullion bank as its source of capitalization should or could be gold and silver bullion equaling 60% assets, with paper currency equaling at least 30% of the micro bank with the remaining 5% being world currencies of low inflation or debt and the other 5% being services provided from consulting to cross referred services etc between the bank and its clientele.

b. The micro gold bullion bank may be formed by an individual or as a collective endeavor of non traditional banking function {this bank is not by any means a traditional bank but a depository of mutual and viable commerce between parties}taking into consideration the environment in which business is transacted as well as a clear understanding of the needs of your respective clientele.

c. To make this enterprise sound and viable will require that the entrepreneur become a precious metals enterpriser for many obvious reasons, one being that gold and silver bullion can be acquired directly from the source {meaning the cottage industry miners from around the world}making your cost highly competitive and profitable in the early stages of the gold bullion micro bank, which makes it much easier to service your clients

d. Acquiring clients is the easy part, start with businesses that are operational, has cash flow and operate on sound business fundamentals, with regard to individuals you may require collateral of value three times the value or even provide specific skilled clients with the option of trading their skills to cross clients and work off their loan amount through such creative and equitable methods well designed to meet everyone’s needs sustainably, of course the details of how this micro gold bullion bank should function is beyond the limits of this article however resources are listed below the end of the article.

Currently traditional banking for the elite isn’t plagued with the new banking rules created for the public as a permanent system of banking mechanisms, but has the benefit of a very different banking environment similar to the freedoms of which a micro gold bullion bank is designed to offer on a small scale to all involved.

Example, wealthy families such as the Oppenheimer’s or Schoolchild’s institutions require an account of $10.000.000 up to $ to enjoy the privy of privacy as well as a litany of benefits and opportunities to earn substantial earnings from such an association certainly unavailable to the masses except for the implementation of a micro gold bullion bank.

The micro gold bullion bank mechanism serves as a true and sustainable structure which through its primary use can ultimately do away with traditional banking as a viable and beyond alternative source of wealth formation for both the entrepreneur and the communities of choice.

Example number two, what are banks actually offering of value? CD’s {certificates of deposit} that pay 1.0% interest per year which is about standard for all services which they provide in terms of accounts, or is it checks that take 72 hours or longer to clear, the reason being is that the banks make money from those checks which often take days even weeks to clear depending upon the amount and where the check originates from.

The Gold Bullion Micro Bank can solve these problems in record time:

1. Need a car? One 24 karat 10 ounce gold bullion bar of 999.9 purity will cover the cost. 2. Need a business loan of $100k? 8- 24karat 10 ounce gold bullion bars of 999.9 purity will equal over $100k or 50 kilograms of alluvial gold dust of 93% to 96% purity is worth once refined $2.2 million US dollars of real value and will fit into a small briefcase for portability

Are you starting to see what is possible with the micro gold bullion bank as a viable answer to traditional banking with its usurious policies which by all measure undermines the very clientele of which these institutions claim to serve.

Why Bank Levies Fail

I am not a lawyer, I am a Judgment Broker. If you ever need any legal advice or a strategy to use, please contact a lawyer.

What if you know for sure where a Judgment Debtor (JD) banks, then pay a Sheriff to levy their bank account, and the bank responds with “no funds” or “account closed”?

In some places, bank levies are expensive, with the cost of finding the bank account, paying the court, the Sheriff, and a process server.

Getting a “no funds” or “account closed” letter can be frustrating. There are usually six reasons for this result, in order of probability:

1) The JD is poor, or closed their bank account.

2) The Sheriff, you, or someone else, made an error or a typographical error that caused the levy to fail.

3) Either you, or your information source was wrong, and the judgment debtor never had a bank account at that bank, or at that branch.

4) The debtor uses an AKA, or is only an authorized signer on the bank account, and has no ownership of the money.

5) The bank made a mistake.

6) The bank is lying or is protecting the judgment debtor.

The most common reasons are the judgment debtor either never had an account, closed their account, is only a signer on the account, or uses an AKA name.

When your judgment debtor is poor, bank levy results will rarely cover the money you spent.

At judgment debtor examinations, when you ask judgment debtors where they bank, many will lie. Even when you know for sure where a judgment debtor banks, some judgment debtors change banks accounts as often as most people change their socks.

There are many laws that protect everyone’s private banking information, including JDs. Very few methods of locating a bank account are perfect. Many bank location services use historical records, that are not completely current or accurate, especially with poor or clever JDs.

If the JD uses an AKA, you might need to get an affidavit of identity approved by the court, with proof that links the judgment debtor with the names they actively use.

When the JD owns a DBA business, to get an affidavit of identity approved by the court, you will need a certified copy of their fictitious name statement filing.

Bank accounts have owner(s). There may also be authorized signers, or benefactors that inherit the funds upon death of the owner(s).

Sometimes “no funds” means the judgment debtor is only an authorized signer on the bank account. That means the judgment debtor is only linked to the account, and has no ownership of the money that could be reached by a levy.

Some people open bank accounts for their children, under The Uniform Transfers to Minors Act. Some use their child’s account as their personal checking account that is off-limits to creditors, because they do not own the account.

Some people get ripped off, after they add a new authorized signer to their bank account. Laws can punish people who make mistakes as much as the crook who defrauded them.

For example, a man meets a new girlfriend that moves in with him. Later, he adds her as an authorized signer on his checking account. She then deposits $15,000 in forged checks, and when the 3-day hold is over, she withdraws all the money, and absconds to an unknown location.

Within a few weeks, the checks are returned as forgeries, and are charged back to the owner’s account. Surprisingly, the owner of the account is now responsible for repaying the bounced checks.

The criminal that bounced checks and stole money is not going to be charged and made to repay, unless they can be found, and the charges are proven in court, and if they have assets that might eventually be recovered.

Sometimes banks made mistakes. More than once a bank has lied, tipped off, or in some other way protected the funds of a judgment debtor.

If you are confident you know the right bank for the judgment debtor, and that money was in the account at the time of the levy; you might schedule, subpoena, and serve a judgment debtor for an examination at the court.

A subpoenaed request for the production of documents is known in some courts as a Subpoena Duces Tecum (SDT). SDTs served on banks should be worded to include any and all accounts associated with the judgment debtor.

You can subpoena a request for the production of documents, from both the judgment debtor and their bank as a third-party. From the bank, you can request a copy of the documentation served by the Sheriff.

One goal can be to get both the bank and the judgment debtor in court at the same time to answer questions and produce documents. It is difficult for two parties to lie exactly the same.

You could request a year’s worth of records. You might find records for an account that “did not exist”. In California, and probably other states, if the debtor is a person, one needs to first serve them a “notice to the consumer”.

If the judgment debtor does not show up, you can keep trying to recover the judgment. If the bank does not show up, you might be able to sue them, when local laws (in California, CCP 1992) allow.

If you can prove the bank had funds in the name of the judgment debtor at the time your levy was served, you could start by writing a demand letter to the bank, politely demanding the balance in the account on the levy date, up to the amount required to satisfy the judgment. Include the proof you knew the bank account existed, the Sheriff’s documentation, and the bank’s memorandum of garnishee, that shows their previous statement of “no accounts”.

Some banks pay after getting a polite demand letter, other banks you will have to sue. In these kinds of circumstances, many times the bank or credit union will settle a lawsuit before the trial.

Reasons Why Local Banks in Cameroon Failed Within the 1980-1990 Peroid

Financial distress has afflicted numerous local banks IN Cameroon, many of which have been closed down by the regulatory authorities or have been restructured under their supervision. In
Cameroon banks such as the B.I.C.I.C. Meridian B.I.A.O. Cameroon Bank were closed
Many more local banks were distressed and subject to some form of
“holding action”. Failed local banks accounted for as much as 23 per cent of total commercial
bank assets in Cameroon.

The cost of these bank failures is very difficult to estimate: much of the data is not in
the public domain, while the eventual cost to depositors and/or taxpayers of most of the
bank failures which occurred between the 1988 to 2004 period will depend upon how much of the failed banks’ assets are eventually recovered by the liquidators. The costs are almost certain to be substantial.

Most of these bank failures were caused by unprofitable loans. Areas affecting more
than half the loan portfolio were typical of the failed banks. Many of the bad debts were
attributable to moral hazard: the adverse incentives on bank owners to adopt imprudent
lending strategies, in particular insider lending and lending at high interest rates to borrowers
in the most risky segments of the credit markets.

Insider lending

The single biggest contributor to the bad loans of many of the failed local banks was
insider lending. In at least half of the bank failures referred to above, insider loans accounted
for a substantial proportion of the bad debts. Most of the larger local bank failures in Cameroon,
such as the Cameroon Bank, B.I.A.O. Bank and B.I.C.I.C. Bank, involved extensive insider
lending, often to politicians. Insider loans accounted for 65 per cent of the total loans of
these local banks, virtually all of which was unrecoverable.

Almost half of the loan portfolio of one of the local banks local banks had been extended to its directors and employees .The threat posed by insider lending to the soundness of the banks was exacerbated because many of the insider loans were invested in speculative projects such as real estate development, breached large-loan exposure limits, and were extended to projects which could not generate short-term returns (such as hotels and shopping centres), with the result that the maturities of the bank assets and liabilities were imprudently mismatched.

The high incidence of insider lending among failed banks suggests that problems of moral
hazard were especially acute in these banks. Several factors contributed to this.
First, politicians were involved as shareholders and directors of some of the local banks.
Political connections were used to obtain public-sector deposits: many of the failed banks,
relied heavily on wholesale deposits from a small number of firms.

Because of political pressure, the small banks which made these deposits are unlikely to have
made a purely commercial judgement as to the safety of their deposits. Moreover, the
availability of micro deposits reduced the need to mobilize funds from the public. Hence
these banks faced little pressure from depositors to establish a reputation for safety.
Political connections also facilitated access to bank licences and were used in some cases to
pressure bank regulators not to take action against banks when violations of the banking laws
were discovered. All these factors reduced the constraints on imprudent bank management.

In addition, the banks’ reliance on political connections meant that they were exposed to
pressure to lend to the politicians themselves in return for the assistance given in obtaining
deposits, licences, etc. Several of the largest insider loans made by failed banks in Cameroon
were to prominent politicians.

Second, most of the failed banks were not capitalized, in part because the minimum
capital requirements in force when they had been set up were very low. Owners had little of
their own funds at risk should their bank fail, which created a large asymmetry in the
potential risks and rewards of insider lending. Bank owners could invest the bank deposits
in their own high-risk projects, knowing that they would make large profits if their projects
succeeded, but would lose little of their own money if they were not profitable
The third factor contributing to insider lending was the excessive concentration of
ownership. In many of the failed banks, the majority of shares were held by one man or one
family, while managers lacked sufficient independence from interference by owners in
operational decisions. A more diversified ownership structure and a more independent
management might have been expected to impose greater constraints on insider lending,
because at least some of the directors would have stood to lose more than they gained from
insider lending, while managers would not have wanted to risk their reputations and careers.

The high cost of funds meant that the local banks had to generate high earnings from
their assets; for example, by charging high lending rates, with consequences for the quality of
their loan portfolios. The local banks almost inevitably suffered from the adverse selection of
their borrowers, many of who had been rejected by the foreign banks (or would have been
had they applied for a loan) because they did not meet the strict creditworthiness criteria
demanded of them. Because they had to charge higher lending rates to compensate for the
higher costs of funds, it was very difficult for the local banks to compete with the foreign
banks for the “prime” borrowers (i.e. the most creditworthy borrowers). As a result, the
credit markets were segmented, with many of the local banks operating in the most risky
segment, serving borrowers prepared to pay high lending rates because they could access no
alternative sources of credit. High-risk borrowers included other banks which were
short of liquidity and prepared to pay above-market interest rates for inter bank deposits and
loans. We all experienced in Douala and Yaounde how some of the local banks were heavily exposed to finance houses which collapsed in large numbers in the 1990s.

Consequently, bank distress had domino effects because of the extent to which
local banks lent to each other.

Within the segments of the credit market served by the local banks, there were probably
good quality (i.e. creditworthy) borrowers as well as poor quality risks. But serving
borrowers in this section of the market requires strong loan appraisal and monitoring
systems, not least because informational imperfections are acute: the quality of borrowers’
financial accounts are often poor, many borrowers lack a track record of successful business,
etc. The problem for many of the failed banks was that they did not have adequate
expertise to screen and monitor their borrowers, and therefore distinguish between good and
bad risks. In addition, credit procedures, such as the documentation of loans and loan
securities and internal controls, were frequently very poor. Managers and directors of these
banks often lacked the necessary expertise and experience.

Recruiting good staff was often difficult for the local banks because the established banks
could usually offer the most talented bank officials better career prospects. Moreover, the
rapid growth in the number of banks outstripped the supply of
experienced and qualified bank officials.

Macroeconomic instability to an extent contributed to these failures;

The problems of poor loan quality faced by the local banks were compounded by
macroeconomic instability. Periods of high and very volatile inflation occurred in Cameroon, just before the devaluation of the FCFA. With interest rates liberalized ,nominal lending rates were also high, with real rates fluctuating between positive and negative levels, often in an unpredictable manner, because of the volatility of inflation .
Macroeconomic instability would have had two important consequences for the loan
quality of the local banks. First, high inflation increases the volatility of business profits
because of its unpredictability, and because it normally entails a high degree of variability in
the rates of increase of the prices of the particular goods and services which make up the
overall price index. The probability that firms will make losses rises, as does the probability
that they will earn windfall profits .This intensifies both adverse selection and adverse incentives for borrowers to take risks, and thus the probabilities of loan default.
The second consequence of high inflation is that it makes loan appraisal more difficult for
the bank, because the viability of potential borrowers depends upon unpredictable
developments in the overall rate of inflation, its individual components, exchange rates and
interest rates. Moreover, asset prices are also likely to be highly volatile under such
conditions. Hence, the future real value of loan security is also very uncertain.
Conclusively ,we should not be scared when we see micro financial houses multiplying in the economic capital of Cameroon, Douala, and Yaounde today, all, heavily involved in the banking sector, it is merely as a result of these huge bank failures recorded in the past years.

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)

Indonesia’s Banking Outlook and Risks in 2013

In 2012 we saw solid performance of Indonesia’s banking industry, however, the question now is how it will perform in 2013, and if it would be able to maintain the momentum.

For the last one year, the banking industry remained strong. As of June 2012 the key performance drivers shown remarkable results. Operating Profit increased by 40%, Net Profit grew 23% on year on year, asset quality also showed improvement with Non Performing Loan (NPL) declined to 2.2% level from 2.7% with flat NPL balance.

These excellent results were contributed by aggressive lending strategy taken by the banks, with 26% increase in credit growth year on year, that was driven by strong economy reflected by Gross Domestic Product (GDP) growth at the level of 6%, one of the highest in the world.

Besides strong top line results, another strategy taken by banks to drive performance was improvement in efficiency. Efficiency indicator, operating cost divided by operating profit, reduced significantly to 75% from 86% last year. Many initiatives, particularly in technology, such as electronic banking, contributed to cost saving in banking operational process, which in turn affecting favourably the bottom line performance of the banks. In spite of many critiques on bankers’ salary, banks show that they were able to run the businesses more efficient.

A stable non – performing loan (NPL) confirmed that growing asset was followed by prudential principle to maintain booking quality. Banks were able to balance the asset growth and solid Risk Management process. This was crucial aspect to ensure the sustainable growth of the banking sector in the future.

In terms of capital adequacy, banks have been able to maintain it at healthy level. Capital Adequacy Ratio (CAR) stayed stable compared to 2011, stood at 17.5%, which was above the regulatory requirement of 8% CAR. Amidst the fast growth in credit, which required significant capital to support it, capital position remained strong. Bank was in solid condition to face any adverse internal or external shocks.

Considering solid performance in 2012, banks have a strong base to enter 2013.

However, the banks should be prepared to face several risks in 2013.

First, liquidity risk. The fast credit growth in 2012 was not followed by same growth at funding, putting pressure on the gap between credit and funding. Loan Deposit Ratio (LDR), which is the parameter applied by Indonesia’s central bank to monitor the gap, currently stands at high-end range of 83%, with the highest being 100%. Looking even deeper into the bank segments, pressure in LDR is more pertinent in middle size banks, as some banks have LDR > 90%. However, this is not a new trend, as LDR has been increasing since 2006 level of 62%.

Second, banks should be watchful with the trend of fast consumer lending growth. Given the fact that consumer lending portion is still relatively low compared to other credit types, faster growth rate in this segment should be expected in 2013. While the consumer lending’s high margin is very attractive, it also tends to have higher risk profile. Banks must prepared themselves with the right and timely strategy, infrastructure and expertise; in order to avoid condition whereby the risk of consumer lending is disproportionately higher than the revenue. Newcomers or banks with limited prior experience in this credit segment must be extra vigilant in entering the segment.

Third, various regulations that were launched in 2012 will start to have bigger impact in 2013. Bank of Indonesia issued several important regulations, such as new maximum level of Loan to value (LTV) ratio for mortgage and new minimum down payment percentage for auto loan, which have been effective in 2012, and new Credit Card regulation which will be effective in Jan-13. Close monitoring is a must to ensure any adverse effect of new regulations to banks’ performance could be mitigated timely and accordingly.

Overall, 2012 was a very good year for Indonesia’s banking industry. This fact enables the banks to enter 2013 with good performance base and more solid fundamentals to face challenges in 2013, although uncertainties still linger in global economy.