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  • International Review of Research in Emerging Markets and the Global Economy (IRREM)

    An Online International Research Journal (ISSN: 2311-3200)

    2015 Vol: 1 Issue: 3

    441 www.globalbizresearch.org

    Threats and Opportunities Facing Banking Institutions in Emerging

    Economies in their Desire to Adopt and Implement the Basel II

    Capital Accord: A Case Study of the Zimbabwean Economy in the

    Dollarization Era

    Ephraim Matanda,

    Faculty of Commerce,

    Department of Banking and Finance,

    Great Zimbabwe University,

    Zimbabwe.

    Email: eematanda@gmail.com

    ___________________________________________________________________________________

    Abstract

    The global banking environment has become potentially riskier and unpredictable than before

    because of the recent developments in financial products and services, which have massively

    changed the ways and means banks employ in their day to day operations. The main aims of

    the Basel II Capital Accord were initially to strengthen the financial soundness and stability

    of the international banking system by encouraging banks to improve their own risk

    management practices and frameworks. The Basel II Capital Accord was heavily criticised by

    monetary authorities and governments of emerging market economies, which felt that the

    Accords recommendations were meant to pursue the growth and development of the Great-

    10 developed states and had nothing to offer for developing nations. The study at hand sought

    to examine the adoption and implementation threats and opportunities of the Basel II Capital

    Accord in emerging economies. The respondents of the study were drawn from the

    populations of interest that comprised the Reserve Bank of Zimbabwe (RBZ) and commercial

    bank employees, economic analysts and academics. The study generated data from

    respondents using questionnaires and interviews, as well as audited financial statements of

    selected commercial banks, which were then processed and assessed using both qualitative

    and quantitative techniques. The findings of the study were that commercial banks in

    emerging economies were in their initial stages of implementing the Accord and faced a

    plethora of threats or challenges that ranged from lack of good corporate governance,

    through poor regulation and supervision frameworks and imperfect markets to collapse and

    crowding out of the sector. The study concluded that although capital adequacy standards

    were not very appropriate for emerging market economies, they were going to adopt them

    without any meaningful adjustments. It was recommended that banks should comply with

    provisions of the Accord as these constituted sound and measurable benchmarks that were

    suitable for inclusion in corporate governance and business ethics frameworks of such

    financial institutions. The study also recommended that Central Banks in emerging economies

    needed to continue investing in research and development to do with relevance of the Accord

    to banks in emerging economies and robust management of capital that matched very well

    their risk appetite levels in the dollarization era.

    ___________________________________________________________________________

    Keywords: Emerging economy, dollarization era, corporate governance, plethora business

    ethics.

    mailto:eematanda@gmail.com

  • International Review of Research in Emerging Markets and the Global Economy (IRREM)

    An Online International Research Journal (ISSN: 2311-3200)

    2015 Vol: 1 Issue: 3

    442 www.globalbizresearch.org

    1. Introduction

    It is advocated that the Basel Committees Basel II Capital Accord could be a very useful

    framework for protection of the international financial system from all types of challenges

    and risks that may force major banks of the world to collapse. This postulation led to the

    need by this study to explore and examine both threats and opportunities that emerging

    market economies Faced in the implementation of the Basel II Capital Accord in their desire

    to grow and develop in service delivery to their nations. The study was therefore undertaken

    in order to generate answers to the threats if any faced by emerging market economies in their

    quest to adopt and implement the Basel II Capital Accord efficiently and effectively. The

    ability of such economies to manage potential banking threats and risks was to ensure that

    they grow and develop towards greater similarity with banking sectors of developed

    economies of the world.

    The study also had interest in examining the opportunities banking institutions could

    exploit upon adoption and successful implementation of the Basel II Capital Accord

    Framework on a regular basis in their operations. Most banking institutions in developed

    countries that adopted and implemented the Basel II Bank Capital Accord were already

    enjoying the benefits drawn from prudent and ethical use of the framework in their operations

    internally and globally. Therefore writer in this paper discusses in much detail the Basel II

    Bank Capital Accord, threats and opportunities that emerging market economies faced in the

    adoption and implementation of the framework, in their desire to achieve sustainable

    economic and financial development particularly in the 21st century. The study also tries to

    evaluate the Basel II Bank Capital Accord relative to the June 2010 Basel III Bank Capital

    Accord in order to determine their relevance, points of convergence and departure as well as

    significance and impact on operations of banking institutions in emerging economies.

    2. Literature Review

    The Basel II Capital Accord was instituted and approved by the Basel Committee on

    Banking Supervision (BCBS) in June 2004 in order to strengthen the soundness, viability and

    stability of the global banking system. According to Blair (2011) the (BCBS) framework

    encouraged banks to improve their risk management practices, so as to incorporate new risks

    into the allocation of capital and enhancement of transparency, accountability and discipline

    among banks. The Basel II Capital Accord was a global revolution that was led by the

    progressive innovation in risk management field (Caruana, 2006). Based on the definitions

    above the Basel II Capital Accord was meant to strengthen efficiency and effectiveness,

    transparency, accountability, responsibility and discipline of banking players on both

    domestic and global markets through financial innovation and use of advanced forms of

    technology. The implementation of the Basel II Capital Accord is a phenomenon that has

  • International Review of Research in Emerging Markets and the Global Economy (IRREM)

    An Online International Research Journal (ISSN: 2311-3200)

    2015 Vol: 1 Issue: 3

    443 www.globalbizresearch.org

    gained a lot of enthusiasm in both national and international forums as well as within the

    Zimbabwean financial sector boundaries. It is argued that a multiplicity of threats and

    opportunities surrounded the adoption, supervision and implementation of the Basel II Accord

    by emerging market economies such as Zimbabwe.

    Studies generated from developed states have revealed that banks and similar financial

    institutions had either fully or partially adopted and implemented the Basel II Capital Accord,

    which was enough evidence that the institutions compliance with the framework was fraught

    with operational challenges and /or threats. According to Sahajwala and Vanden Bergh

    (2000), the implementation of the Basel II Capital Accord in many countries was associated

    with a myriad of challenges based on large project implementation processes. It was also

    revealed that from 1965 to 1981, about 8 USA banks were in bankruptcy positions (Caruana,

    2006) just because of savings and loan crises, that is, they were lending extensively while

    countries external levels of indebtedness were escalating at unsustainable or unprecedented

    levels. Hence, because of such developments in the global financial sector, the potential for

    collapse of banks due to bankruptcy of major international banks grew as a result of low

    security (Blair; 2011). The literature generated from studies in developed countries of the

    world gave testimony that there was a myriad of operational challenges faced by banking

    institutions that attempted to adopt and implement the Basel II Capital Accord. Some of the

    operational challenges faced by potential bank adopters of the accord were sophisticated

    implementation processes and techniques, technological inadequacies, external indebtedness,

    liquidity and bankruptcy challenges.

    The Bank for International Settlement (BIS; 2008) argues that after the great collapse of

    the Bankhaus Herstatt (Bank) of Germany and Franklin National Bank of USA (1974), the

    Group of 10 (G-10) Central Bank Governors set and agreed to institute the BCBS, in

    1987.These Central Banks Governors and Supervisory Authorities of G-10 countries, met in

    1987 in the City of Basel in Switzerland, Europe. The Committee came up with a document

    which they called the Basel I Capital Accord. The document was mainly based on

    international minimum amounts of capital banks had to hold or maintain so as to be free from

    getting into bank runs and /or liquidit

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