Overview of Zimbabwean Banking Sector (Part One)

Entrepreneurs build their business within the context of an environment which they sometimes may not be able to control. The robustness of an entrepreneurial venture is tried and tested by the vicissitudes of the environment. Within the environment are forces that may serve as great opportunities or menacing threats to the survival of the entrepreneurial venture. Entrepreneurs need to understand the environment within which they operate so as to exploit emerging opportunities and mitigate against potential threats.

This article serves to create an understanding of the forces at play and their effect on banking entrepreneurs in Zimbabwe. A brief historical overview of banking in Zimbabwe is carried out. The impact of the regulatory and economic environment on the sector is assessed. An analysis of the structure of the banking sector facilitates an appreciation of the underlying forces in the industry.
Historical Background

At independence (1980) Zimbabwe had a sophisticated banking and financial market, with commercial banks mostly foreign owned. The country had a central bank inherited from the Central Bank of Rhodesia and Nyasaland at the winding up of the Federation.

For the first few years of independence, the government of Zimbabwe did not interfere with the banking industry. There was neither nationalisation of foreign banks nor restrictive legislative interference on which sectors to fund or the interest rates to charge, despite the socialistic national ideology. However, the government purchased some shareholding in two banks. It acquired Nedbank’s 62% of Rhobank at a fair price when the bank withdrew from the country. The decision may have been motivated by the desire to stabilise the banking system. The bank was re-branded as Zimbank. The state did not interfere much in the operations of the bank. The State in 1981 also partnered with Bank of Credit and Commerce International (BCCI) as a 49% shareholder in a new commercial bank, Bank of Credit and Commerce Zimbabwe (BCCZ). This was taken over and converted to Commercial Bank of Zimbabwe (CBZ) when BCCI collapsed in 1991 over allegations of unethical business practices.

This should not be viewed as nationalisation but in line with state policy to prevent company closures. The shareholdings in both Zimbank and CBZ were later diluted to below 25% each.
In the first decade, no indigenous bank was licensed and there is no evidence that the government had any financial reform plan. Harvey (n.d., page 6) cites the following as evidence of lack of a coherent financial reform plan in those years:

– In 1981 the government stated that it would encourage rural banking services, but the plan was not implemented.
– In 1982 and 1983 a Money and Finance Commission was proposed but never constituted.
– By 1986 there was no mention of any financial reform agenda in the Five Year National Development Plan.

Harvey argues that the reticence of government to intervene in the financial sector could be explained by the fact that it did not want to jeopardise the interests of the white population, of which banking was an integral part. The country was vulnerable to this sector of the population as it controlled agriculture and manufacturing, which were the mainstay of the economy. The State adopted a conservative approach to indigenisation as it had learnt a lesson from other African countries, whose economies nearly collapsed due to forceful eviction of the white community without first developing a mechanism of skills transfer and capacity building into the black community. The economic cost of inappropriate intervention was deemed to be too high. Another plausible reason for the non- intervention policy was that the State, at independence, inherited a highly controlled economic policy, with tight exchange control mechanisms, from its predecessor. Since control of foreign currency affected control of credit, the government by default, had a strong control of the sector for both economic and political purposes; hence it did not need to interfere.

Financial Reforms

However, after 1987 the government, at the behest of multilateral lenders, embarked on an Economic and Structural Adjustment Programme (ESAP). As part of this programme the Reserve Bank of Zimbabwe (RBZ) started advocating financial reforms through liberalisation and deregulation. It contended that the oligopoly in banking and lack of competition, deprived the sector of choice and quality in service, innovation and efficiency. Consequently, as early as 1994 the RBZ Annual Report indicates the desire for greater competition and efficiency in the banking sector, leading to banking reforms and new legislation that would:

– allow for the conduct of prudential supervision of banks along international best practice
– allow for both off-and on-site bank inspections to increase RBZ’s Banking Supervision function and
– enhance competition, innovation and improve service to the public from banks.

Subsequently the Registrar of Banks in the Ministry of Finance, in liaison with the RBZ, started issuing licences to new players as the financial sector opened up. From the mid-1990s up to December 2003, there was a flurry of entrepreneurial activity in the financial sector as indigenous owned banks were set up. The graph below depicts the trend in the numbers of financial institutions by category, operating since 1994. The trend shows an initial increase in merchant banks and discount houses, followed by decline. The increase in commercial banks was initially slow, gathering momentum around 1999. The decline in merchant banks and discount houses was due to their conversion, mostly into commercial banks.

Source: RBZ Reports

Different entrepreneurs used varied methods to penetrate the financial services sector. Some started advisory services and then upgraded into merchant banks, while others started stockbroking firms, which were elevated into discount houses.

From the beginning of the liberalisation of the financial services up to about 1997 there was a notable absence of locally owned commercial banks. Some of the reasons for this were:

– Conservative licensing policy by the Registrar of Financial Institutions since it was risky to licence indigenous owned commercial banks without an enabling legislature and banking supervision experience.
– Banking entrepreneurs opted for non-banking financial institutions as these were less costly in terms of both initial capital requirements and working capital. For example a merchant bank would require less staff, would not need banking halls, and would have no need to deal in costly small retail deposits, which would reduce overheads and reduce the time to register profits. There was thus a rapid increase in non-banking financial institutions at this time, e.g. by 1995 five of the ten merchant banks had commenced within the previous two years. This became an entry route of choice into commercial banking for some, e.g. Kingdom Bank, NMB Bank and Trust Bank.

It was expected that some foreign banks would also enter the market after the financial reforms but this did not occur, probably due to the restriction of having a minimum 30% local shareholding. The stringent foreign currency controls could also have played a part, as well as the cautious approach adopted by the licensing authorities. Existing foreign banks were not required to shed part of their shareholding although Barclay’s Bank did, through listing on the local stock exchange.

Harvey argues that financial liberalisation assumes that removing direction on lending presupposes that banks would automatically be able to lend on commercial grounds. But he contends that banks may not have this capacity as they are affected by the borrowers’ inability to service loans due to foreign exchange or price control restrictions. Similarly, having positive real interest rates would normally increase bank deposits and increase financial intermediation but this logic falsely assumes that banks will always lend more efficiently. He further argues that licensing new banks does not imply increased competition as it assumes that the new banks will be able to attract competent management and that legislation and bank supervision will be adequate to prevent fraud and thus prevent bank collapse and the resultant financial crisis. Sadly his concerns do not seem to have been addressed within the Zimbabwean financial sector reform, to the detriment of the national economy.

The Operating Environment

Any entrepreneurial activity is constrained or aided by its operating environment. This section analyses the prevailing environment in Zimbabwe that could have an effect on the banking sector.

Politico-legislative

The political environment in the 1990s was stable but turned volatile after 1998, mainly due to the following factors:

– an unbudgeted pay out to war veterans after they mounted an assault on the State in November 1997. This exerted a heavy strain on the economy, resulting in a run on the dollar. Resultantly the Zimbabwean dollar depreciated by 75% as the market foresaw the consequences of the government’s decision. That day has been recognised as the beginning of severe decline of the country’s economy and has been dubbed “Black Friday”. This depreciation became a catalyst for further inflation. It was followed a month later by violent food riots.
– a poorly planned Agrarian Land Reform launched in 1998, where white commercial farmers were ostensibly evicted and replaced by blacks without due regard to land rights or compensation systems. This resulted in a significant reduction in the productivity of the country, which is mostly dependent on agriculture. The way the land redistribution was handled angered the international community, that alleges it is racially and politically motivated. International donors withdrew support for the programme.
– an ill- advised military incursion, named Operation Sovereign Legitimacy, to defend the Democratic Republic of Congo in 1998, saw the country incur massive costs with no apparent benefit to itself and
– elections which the international community alleged were rigged in 2000,2003 and 2008.

These factors led to international isolation, significantly reducing foreign currency and foreign direct investment flow into the country. Investor confidence was severely eroded. Agriculture and tourism, which traditionally, are huge foreign currency earners crumbled.

For the first post independence decade the Banking Act (1965) was the main legislative framework. Since this was enacted when most commercial banks where foreign owned, there were no directions on prudential lending, insider loans, proportion of shareholder funds that could be lent to one borrower, definition of risk assets, and no provision for bank inspection.

The Banking Act (24:01), which came into effect in September 1999, was the culmination of the RBZ’s desire to liberalise and deregulate the financial services. This Act regulates commercial banks, merchant banks, and discount houses. Entry barriers were removed leading to increased competition. The deregulation also allowed banks some latitude to operate in non-core services. It appears that this latitude was not well delimited and hence presented opportunities for risk taking entrepreneurs. The RBZ advocated this deregulation as a way to de-segment the financial sector as well as improve efficiencies. (RBZ, 2000:4.) These two factors presented opportunities to enterprising indigenous bankers to establish their own businesses in the industry. The Act was further revised and reissued as Chapter 24:20 in August 2000. The increased competition resulted in the introduction of new products and services e.g. e-banking and in-store banking. This entrepreneurial activity resulted in the “deepening and sophistication of the financial sector” (RBZ, 2000:5).

As part of the financial reforms drive, the Reserve Bank Act (22:15) was enacted in September 1999.

Its main purpose was to strengthen the supervisory role of the Bank through:
– setting prudential standards within which banks operate
– conducting both on and off-site surveillance of banks
– enforcing sanctions and where necessary placement under curatorship and
– investigating banking institutions wherever necessary.

This Act still had deficiencies as Dr Tsumba, the then RBZ governor, argued that there was need for the RBZ to be responsible for both licensing and supervision as “the ultimate sanction available to a banking supervisor is the knowledge by the banking sector that the license issued will be cancelled for flagrant violation of operating rules”. However the government seemed to have resisted this until January 2004. It can be argued that this deficiency could have given some bankers the impression that nothing would happen to their licences. Dr Tsumba, in observing the role of the RBZ in holding bank management, directors and shareholders responsible for banks viability, stated that it was neither the role nor intention of the RBZ to “micromanage banks and direct their day to day operations. “

It appears though as if the view of his successor differed significantly from this orthodox view, hence the evidence of micromanaging that has been observed in the sector since December 2003.
In November 2001 the Troubled and Insolvent Banks Policy, which had been drafted over the previous few years, became operational. One of its intended goals was that, “the policy enhances regulatory transparency, accountability and ensures that regulatory responses will be applied in a fair and consistent manner” The prevailing view on the market is that this policy when it was implemented post 2003 is definitely deficient as measured against these ideals. It is contestable how transparent the inclusion and exclusion of vulnerable banks into ZABG was.

A new governor of the RBZ was appointed in December 2003 when the economy was on a free-fall. He made significant changes to the monetary policy, which caused tremors in the banking sector. The RBZ was finally authorised to act as both the licensing and regulatory authority for financial institutions in January 2004. The regulatory environment was reviewed and significant amendments were made to the laws governing the financial sector.

The Troubled Financial Institutions Resolution Act, (2004) was enacted. As a result of the new regulatory environment, a number of financial institutions were distressed. The RBZ placed seven institutions under curatorship while one was closed and another was placed under liquidation.

In January 2005 three of the distressed banks were amalgamated on the authority of the Troubled Financial Institutions Act to form a new institution, Zimbabwe Allied Banking Group (ZABG). These banks allegedly failed to repay funds advanced to them by the RBZ. The affected institutions were Trust Bank, Royal Bank and Barbican Bank. The shareholders appealed and won the appeal against the seizure of their assets with the Supreme Court ruling that ZABG was trading in illegally acquired assets. These bankers appealed to the Minister of Finance and lost their appeal. Subsequently in late 2006 they appealed to the Courts as provided by the law. Finally as at April 2010 the RBZ finally agreed to return the “stolen assets”.

Another measure taken by the new governor was to force management changes in the financial sector, which resulted in most entrepreneurial bank founders being forced out of their own companies under varying pretexts. Some eventually fled the country under threat of arrest. Boards of Directors of banks were restructured.

Economic Environment

Economically, the country was stable up to the mid 1990s, but a downturn started around 1997-1998, mostly due to political decisions taken at that time, as already discussed. Economic policy was driven by political considerations. Consequently, there was a withdrawal of multi- national donors and the country was isolated. At the same time, a drought hit the country in the season 2001-2002, exacerbating the injurious effect of farm evictions on crop production. This reduced production had an adverse impact on banks that funded agriculture. The interruptions in commercial farming and the concomitant reduction in food production resulted in a precarious food security position. In the last twelve years the country has been forced to import maize, further straining the tenuous foreign currency resources of the country.

Another impact of the agrarian reform programme was that most farmers who had borrowed money from banks could not service the loans yet the government, which took over their businesses, refused to assume responsibility for the loans. By concurrently failing to recompense the farmers promptly and fairly, it became impractical for the farmers to service the loans. Banks were thus exposed to these bad loans.

The net result was spiralling inflation, company closures resulting in high unemployment, foreign currency shortages as international sources of funds dried up, and food shortages. The foreign currency shortages led to fuel shortages, which in turn reduced industrial production. Consequently, the Gross Domestic Product (GDP) has been on the decline since 1997. This negative economic environment meant reduced banking activity as industrial activity declined and banking services were driven onto the parallel rather than the formal market.

As depicted in the graph below, inflation spiralled and reached a peak of 630% in January 2003. After a brief reprieve the upward trend continued rising to 1729% by February 2007. Thereafter the country entered a period of hyperinflation unheard of in a peace time period. Inflation stresses banks. Some argue that the rate of inflation rose because the devaluation of the currency had not been accompanied by a reduction in the budget deficit. Hyperinflation causes interest rates to soar while the value of collateral security falls, resulting in asset-liability mismatches. It also increases non-performing loans as more people fail to service their loans.

Effectively, by 2001 most banks had adopted a conservative lending strategy e.g. with total advances for the banking sector being only 21.7% of total industry assets compared to 31.1% in the previous year. Banks resorted to volatile non- interest income. Some began to trade in the parallel foreign currency market, at times colluding with the RBZ.

In the last half of 2003 there was a severe cash shortage. People stopped using banks as intermediaries as they were not sure they would be able to access their cash whenever they needed it. This reduced the deposit base for banks. Due to the short term maturity profile of the deposit base, banks are normally not able to invest significant portions of their funds in longer term assets and thus were highly liquid up to mid-2003. However in 2003, because of the demand by clients to have returns matching inflation, most indigenous banks resorted to speculative investments, which yielded higher returns.

These speculative activities, mostly on non-core banking activities, drove an exponential growth within the financial sector. For example one bank had its asset base grow from Z$200 billion (USD50 million) to Z$800 billion (USD200 million) within one year.

However bankers have argued that what the governor calls speculative non-core business is considered best practice in most advanced banking systems worldwide. They argue that it is not unusual for banks to take equity positions in non-banking institutions they have loaned money to safeguard their investments. Examples were given of banks like Nedbank (RSA) and J P Morgan (USA) which control vast real estate investments in their portfolios. Bankers argue convincingly that these investments are sometimes used to hedge against inflation.

The instruction by the new governor of the RBZ for banks to unwind their positions overnight, and the immediate withdrawal of an overnight accommodation support for banks by the RBZ, stimulated a crisis which led to significant asset-liability mismatches and a liquidity crunch for most banks. The prices of properties and the Zimbabwe Stock Exchange collapsed simultaneously, due to the massive selling by banks that were trying to cover their positions. The loss of value on the equities market meant loss of value of the collateral, which most banks held in lieu of the loans they had advanced.

During this period Zimbabwe remained in a debt crunch as most of its foreign debts were either un-serviced or under-serviced. The consequent worsening of the balance of payments (BOP) put pressure on the foreign exchange reserves and the overvalued currency. Total government domestic debt rose from Z$7.2 billion (1990) to Z$2.8 trillion (2004). This growth in domestic debt emanates from high budgetary deficits and decline in international funding.

Socio-cultural

Due to the volatile economy after the 1990s, the population became fairly mobile with a significant number of professionals emigrating for economic reasons. The Internet and Satellite television made the world truly a global village. Customers demanded the same level of service excellence they were exposed to globally. This made service quality a differential advantage. There was also a demand for banks to invest heavily in technological systems.

The increasing cost of doing business in a hyperinflationary environment led to high unemployment and a concomitant collapse of real income. As the Zimbabwe Independent (2005:B14) so keenly observed, a direct outcome of hyperinflationary environment is, “that currency substitution is rife, implying that the Zimbabwe dollar is relinquishing its function as a store of value, unit of account and medium of exchange” to more stable foreign currencies.

During this period an affluent indigenous segment of society emerged, which was cash rich but avoided patronising banks. The emerging parallel market for foreign currency and for cash during the cash crisis reinforced this. Effectively, this reduced the customer base for banks while more banks were coming onto the market. There was thus aggressive competition within a dwindling market.

Socio-economic costs associated with hyperinflation include: erosion of purchasing power parity, increased uncertainty in business planning and budgeting, reduced disposable income, speculative activities that divert resources from productive activities, pressure on the domestic exchange rate due to increased import demand and poor returns on savings. During this period, to augment income there was increased cross border trading as well as commodity broking by people who imported from China, Malaysia and Dubai. This effectively meant that imported substitutes for local products intensified competition, adversely affecting local industries.

As more banks entered the market, which had suffered a major brain drain for economic reasons, it stood to reason that many inexperienced bankers were thrown into the deep end. For example the founding directors of ENG Asset Management had less than five years experience in financial services and yet ENG was the fastest growing financial institution by 2003. It has been suggested that its failure in December 2003 was due to youthful zeal, greed and lack of experience. The collapse of ENG affected some financial institutions that were financially exposed to it, as well as eliciting depositor flight leading to the collapse of some indigenous banks.

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Eastern European Banking Model

A traditional banking model in a CEEC (Central and Eastern European Country) consisted of a central bank and several purpose banks, one dealing with individuals’ savings and other banking needs, and another focusing on foreign financial activities, etc. The central bank provided most of the commercial banking needs of enterprises in addition to other functions. During the late 1980s, the CEECs modified this earlier structure by taking all the commercial banking activities of the central bank and transferring them to new commercial banks. In most countries the new banks were set up along industry lines, although in Poland a regional approach has been adopted.

On the whole, these new stale-owned commercial banks controlled the bulk of financial transactions, although a few ‘de novo banks’ were allowed in Hungary and Poland. Simply transferring existing loans from the central bank to the new state-owned commercial banks had its problems, since it involved transferring both ‘good’ and ‘bad’ assets. Moreover, each bank’s portfolio was restricted to the enterprise and industry assigned to them and they were not allowed to deal with other enterprises outside their remit.

As the central banks would always ‘bale out’ troubled state enterprises, these commercial banks cannot play the same role as commercial banks in the West. CEEC commercial banks cannot foreclose on a debt. If a firm did not wish to pay, the state-owned enterprise would, historically, receive further finance to cover its difficulties, it was a very rare occurrence for a bank to bring about the bankruptcy of a firm. In other words, state-owned enterprises were not allowed to go bankrupt, primarily because it would have affected the commercial banks, balance sheets, but more importantly, the rise in unemployment that would follow might have had high political costs.

What was needed was for commercial banks to have their balance sheets ‘cleaned up’, perhaps by the government purchasing their bad loans with long-term bonds. Adopting Western accounting procedures might also benefit the new commercial banks.

This picture of state-controlled commercial banks has begun to change during the mid to late 1990s as the CEECs began to appreciate that the move towards market-based economies required a vibrant commercial banking sector. There are still a number of issues lo be addressed in this sector, however. For example, in the Czech Republic the government has promised to privatize the banking sector beginning in 1998. Currently the banking sector suffers from a number of weaknesses. A number of the smaller hanks appear to be facing difficulties as money market competition picks up, highlighting their tinder-capitalization and the greater amount of higher-risk business in which they are involved. There have also been issues concerning banking sector regulation and the control mechanisms that are available. This has resulted in the government’s proposal for an independent securities commission to regulate capital markets.

The privatization package for the Czech Republic’s four largest banks, which currently control about 60 percent of the sector’s assets, will also allow foreign banks into a highly developed market where their influence has been marginal until now. It is anticipated that each of the four banks will be sold to a single bidder in an attempt to create a regional hub of a foreign bank’s network. One problem with all four banks is that inspection of their balance sheets may throw up problems which could reduce the size of any bid. All four banks have at least 20 percent of their loans as classified, where no interest has been paid for 30 days or more. Banks could make provisions to reduce these loans by collateral held against them, but in some cases the loans exceed the collateral. Moreover, getting an accurate picture of the value of the collateral is difficult since bankruptcy legislation is ineffective. The ability to write off these bad debts was not permitted until 1996, but even if this route is taken then this will eat into the banks’ assets, leaving them very close to the lower limit of 8 percent capital adequacy ratio. In addition, the ‘commercial’ banks have been influenced by the action of the national bank, which in early 1997 caused bond prices to fall, leading to a fall in the commercial banks’ bond portfolios. Thus the banking sector in the Czech Republic still has a long way to go.

In Hungary the privatization of the banking sector is almost complete. However, a state rescue package had to be agreed at the beginning of 1997 for the second-largest state bank, Postabank, owned indirectly by the main social security bodies and the post office, and this indicates the fragility of this sector. Outside of the difficulties experienced with Postabank, the Hungarian banking system has been transformed. The rapid move towards privatization resulted from the problems experienced by the state-owned banks, which the government bad to bail out, costing it around 7 percent of GDP. At that stage it was possible that the banking system could collapse and government funding, although saving the banks, did not solve the problems of corporate governance or moral hazard. Thus the privatization process was started in earnest. Magyar Kulkereskedelmi Bank (MKB) was sold to Bayerische Landesbank and the EBDR in 1994, Budapest Bank was bought by GE Capital and Magyar Hitel Bank was bought by ABN-AMRO. In November 1997 the state completed the last stage of the sale of the state savings bank (OTP), Hungary’s largest bank. The state, which dominated the banking system three years ago, now only retains a majority stake in two specialist banks, the Hungarian Development Bank and Eximbank.

The move towards, and success of privatization can be seen in the balance sheets of the banks, which showed an increase in post-tax profits of 45 percent in 1996. These banks are also seeing higher savings and deposits and a strong rise in demand for corporate and retail lending. In addition, the growth in competition in the banking sector has led to a narrowing of the spreads between lending and deposit rates, and the further knock-on effect of mergers and small-hank closures. Over 50 percent of Hungarian bank assets are controlled by foreign-owned banks, and this has led to Hungarian banks offering services similar to those expected in many Western European countries. Most of the foreign-owned but mainly Hungarian-managed banks were recapitalized after their acquisition and they have spent heavily on staff training and new information technology systems. From 1998, foreign banks will be free to open branches in Hungary, thus opening up the domestic banking market to full competition.

As a whole, the CEECs have come a long way since the early 1990s in dealing with their banking problems. For some countries the process of privatization still has a long way to go but others such as Hungary have moved quickly along the process of transforming their banking systems in readiness for their entry into the EU.

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Offshore Online Banking Guide – Critical Information You Must Know

There are several legal and regulatory compliance implications with offshore banking that I’d like to cover in this article. However, please don’t construe information on this site as legal guidance. I am providing this information for free based on my own experiences. Please consult your professional attorney or CPA (accountant) before you get involved with offshore internet banking.

What is an Offshore Bank

To be over simplistic, an offshore bank is a financial institution outside the shores of your country. If you are in Australia, a bank in the United States is an offshore bank to you. If you are in the United States, a bank in Singapore is an offshore bank to you. Therefore, the idea of offshore banking is relative.

A business or an individual, in this case you, may select an offshore bank account in a jurisdiction that is typically favorable in terms of taxes (often referred to as a tax haven by media), as well as in terms of legalities. In addition to choosing a jurisdiction with no to little income tax, for many, privacy and “secrecy” of banking activities are two of the bigger key considerations.

It goes without saying that access to your funds is important, as well as protection from corruption and stability in terms of certainty.

List of Common Offshore Online Banking Services

This is a brief list of services offered by offshore banks. This list is by no means a full comprehensive list of an offshore bank’s offerings, but rather a list of some of the most common offshore online banking services that businesses and individuals are offered:

  • Remote Deposits of funds
  • Direct Deposits of funds
  • ACH / Wire Transfers / EFT – Electronic Fund Transfers
  • Consumer and Commercial Lending
  • All Basic Credit Activities
  • Access to Capital – Offshore Debit Cards
  • Forex – Currency Exchange
  • Wealth Management
  • Offshore Trading Account
  • Offshore Brokerage Account
  • Administrative Services
  • Trustee Services

Note: Offshore banks typically tend to focus on either consumer or commercial banking. Within consumer, banks differentiate between retail consumer (the average individual) or private banking (meant for high net worth individuals).

Because each concentration involves a different cost structure from the bank’s perspective, when selecting an offshore bank for yourself, be clear on what type of consumer you are and what offshore online banking services you need. Gaining this clarity will ensure you are not disappointed in your choice.

List of Common Offshore Banks

No doubt the two most common names in offshore online banking are Switzerland and Cayman Islands. Just pick up any business journal or pop in a business based Hollywood flick. There is likely a mention of a Swiss bank account somewhere.

This is because as of at least 2012, these two jurisdictions held the most number of total deposits amongst all offshore online banks. Some other jurisdictions that offer offshore online banking are the following:

  • Singapore
  • Malaysia
  • Panama
  • Cook Islands
  • Dominica
  • Saint Kitts and Nevis
  • Antigua
  • Malaysia
  • Anguilla
  • New Zealand
  • Luxembourg
  • Bahamas
  • Barbados
  • Bermuda
  • British Virgin Islands
  • Cyprus
  • Cook Islands
  • Channel Islands
  • Monaco
  • Mauritius
  • Hong Kong
  • Malta
  • Macau
  • Regulating Offshore Online Banking

With complexity comes increasing regulation. The regulation around offshore online banking activities has steadily increased over the years, but according to many of its supporters it is still not enough. This means much more is in the pipelines. Regulation has particularly increased significantly after the significant events of September 11, 2011.

Regulatory guidance is issued and monitored by global bodies such as the International Monetary Fund or the IMF, who require financial institutions worldwide to maintain a certain level of operating or performance standard, specifically in terms of capital adequacy and liquidity. These key performance indicators are to be reported by banks on a quarterly basis to its designated regulator (such as the Fed or the FDIC in the United States).

The list of regulations is endless and quite comprehensive to say the least. Some notables are the Anti Money Laundering (AML) regulation and the Bank Secrecy Act (BSA). These acts require banks and financial institutions to immediately report suspicious activity resembling money laundering to local government authorities despite stepping out of the BSA jurisdiction.

Another example is the information sharing requirements between a certain group of countries with regards to capital flow and taxation which was initiated by members of the European Union. On the other side of the pond, the taxing body of the United States, the Internal Revenue Service (IRS) requires financial institutions to report to it names of businesses and individuals who benefited from interest income resulting from deposits in US based institutions.

The most notable in my opinion of recently enacted regulations is the US Patriot Act, which permits the US Government to seize all assets of a financial institution if it suspects that the institution holds assets that belong to a potential criminal. Several other countries have since followed suit.

I personally feel these regulations strengthen the global banking infrastructure. But then again I am just one person. There are others who feel in all sorts of ways about offshore online banking.

Interesting Fact: Did you know that just until the 1990s, individuals were allowed to create their very own offshore banks. This practice was stopped and now only large institutions are allowed to do so.

Connotations and Implications of Offshore Online Banking

It is not illegal to conduct offshore online banking, but such activities tend to carry with them a certain set of connotations and legal implications that you must be aware of and comply with. There can be severe fines, penalties and legal repercussions if you fail to comply with the legal and regulatory requirements.

Why you must be thinking? Because offshore banking historically has been used and abused by those who intended to evade taxes, as well as those that used funds for illegal causes. For example, organized crime networks heavily use offshore online banking to launder money.

But like I said, conducting offshore online banking isn’t an illegal activity. All persons conducting offshore online banking are required by most countries (depending on their residency) to disclose the activities and the outcomes, such as interest income for example.

Specifically in the United States for example, a US resident’s income is taxed on a global basis. This means that even interest earned overseas is subject to taxation by US authorities. Now although financial institutions are not required to disclose this information to countries of interest due the bank secrecy guidelines, individuals are required to disclose this information.

Similarly, one can legally avoid taxes in certain situations. For example, a resident of Country X living and working in the United Arab Emirates (UAE) may not have to pay taxes if Country X does not tax the individual’s global income.

Because there is no taxation on income earned in many Arab nations, interest income earned from deposits in a UAE bank account is not subject to tax. Further, the income is also not taxed in Country X. This is a common reason why so many affluent folks change residency and citizenship status, one that resonates most with their financial goals and objectives.

It’s a very interesting dynamic and there is a ton of opportunity for strategizing as you can imagine.

Dollar Concentration in Offshore Online Banking

Although offshore online banking is not a subject delved into by the average individual, the numbers involved (concentration of wealth and financial activity) are quite significant. You may find a lot of these simply fascinating.

For example, specialized banking economists and analysts indicate that half of the global capital (money) flows through one of the many offshore banks out there. The so called Tax Havens (think Switzerland) have over a quarter of the global wealth (think high net worth individuals and big companies). These Havens also hold over 30% of profits generated by companies based in the United States.

And that’s not it. Over 6 trillion US dollars owned by high net worth individuals are also reported to be held in offshore bank accounts in one shape or another.

Illegal Monies in Offshore Bank Accounts

Opportunists have identified weaknesses in the offshore banking system and thus have taken advantage of the systems to launder monies generated through illegal means and used for illegal purposes. According to the IMF, this amount is as large as 1.5 trillion US dollars on an annual basis. To put things in perspective for you, this is roughly 5% of the world’s total Gross Domestic Product (GDP).

In addition to illegal monies, there are also monies that have evaded taxation as well as monies that were generated through fraud, graft and corruption. All in all, the amounts are super significant. And as I stated above, the two jurisdictions with the biggest concentration of these amounts are the Cayman Islands and Switzerland (as of 2012).

Offshore Internet Banking for Corporations of All Sizes

I have already stated this earlier, but offshore online banking is not only for large companies, but companies of all sizes as well as individuals. There are a certain set of requirements that any institution, an individual or a company have to meet in order to open and maintain an offshore bank account.

In fact, it is easier for individuals to open and maintain an offshore bank account before companies are required to complete additional forms in a specific manner when establishing an offshore internet bank account.

Corporations typically engage in offshore online banking when they contemplate one or any mix of the following purposes.

  • Cost containment (bank fees and charges)
  • Paying and receiving payments from vendors and customers in local jurisdictions
  • Asset protection strategies
  • International acquisitions and investments
  • Compensating local employees in an offshore jurisdiction
  • Political reasons – Stability and predictability
  • Establishing a local business presence
  • Again, this is not a comprehensive list of why companies engage in offshore online banking. There are several other reasons why a company may decide to establish an offshore bank account. The only true way to find out the best offshore bank for you, and whether your objectives will be met through offshore internet banking is by speaking to a professional who can walk you through the entire process.

Concluding Thoughts on Offshore Internet Banking

I gave you a ton of information to read and digest in this article. As you have read, offshore internet banking is used by several different constituencies for several different purposes with several different intentions.

There are some significant advantages that can be derived from opening an offshore bank account such as entering new global markets and some serious offshore tax planning. I obviously recommend opening an offshore bank account for the right reasons, with full compliance with laws and regulations. For those contemplating abusing the system, understand that bank secrecy is a weakening concept, and one that will continue to weaken over the years.

Countries are increasingly sharing information, some voluntarily and some while succumbing to pressure by more powerful nations such as the United States.

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