QUESTION 1

Read the two cases of Barbican Bank and Intermarket ofZimbabwe and answer the questions below:

Barbican Bank (BB)

Barbican Bank was formed in the late 1990s at the height of arush into the financial services sector by domestic investors. Itwas born out of an asset management company. The founder
was a flamboyant businessman who was a public figure in thefinancial services sector. At formation the bank declared its focuswould be the elite market. Its products were therefore
targeted specifically at the top market. The bank also declared anintention to operate a very small branch network, no more than fivebranches. Barbican started experiencing liquidity
problems in early 2003 and was placed under the curator in March2003. Before being placed under the curator Barbican had beenreporting fabulous profits most of them having come
from non interest transactions. According to the Central Bank,Barbican ‘‘was experiencing serious liquidity problems as a resultof imprudent banking behaviours. There was no clear separationbetween various related entities within the group which led tocross funding of operations and excessive risk taking among othershortcomings.’’ The Central Bank also noted
that the bank was involved in ‘‘questionable cross-border foreignexchange activities.’’ The bank had shifted funds to South Africafrom local operations with the object of establishing a
new company in South Africa. During its operation the bankintroduced the derivatives (junk bonds) market, which had beennon-existent in the country’s financial sector. Whenliquidity
problems besieged Barbican the Central Bank placed the bankingdivision under the curator and the asset management company underliquidation. At the time of taking these measures
the Central Bank had injected money into the bank as liquiditysupport but the bank appeared to be on a serious slide. The bankhas since failed to repay on time the loan from the Central
bank’s Troubled Bank Fund. On seeing his financial companies indifficulties, the Chief Executive (the founder) skipped thecountry. Despite problems in the home operations, the
founding chief executive was trying to set up another financialservices company in South Africa. During his tenure the ChiefExecutive is said to have been so dominant the board
appeared clueless and powerless to restrain him. The bank has nowbeen placed into liquidation by the Central Bank. It will beamalgamated into a merger of liquidated banks to form a newbank.

Intermarket (IM)

The founder established Intermarket Holdings during the late1990s through acquisitions. At the time of inset of financialdistress, the founder owned 72 percent of IntermarketHoldings
through an investment company called Transnational Holdings.Transnational Holdings comprised companies in banking and insuranceamong others. Its influence in the financial
services sector was in every sphere. Intermarket BankingCorporation one of the subsidiaries of the holding company startedshowing signs of liquidity problems in early 2004. This was
during the period of a cash crisis in the country. Much as allbanking institutions were affected by the cash crisis, Intermarketappeared completely outstretched by the crisis. In March 2004
the bank was placed under the management of a curator by theCentral Bank when it appeared it could not pay its creditors anddepositors on demand. On investigation, the Central Bank
discovered that the Executive Chairman had loaned himself Z$90billion of depositors’ money and the insider loans were not beingserviced. The Executive Chairman was said to have been so dominanthe had the veto power on everything that took place in thecorporation. Investigations by the appointed curator have led to arise in the figure for insider loans to
Z$174 billion. The Executive chairman fled the country whenauthorities appeared to point at him as the main contributor tofinancial distress in the institution. Intermarket has beentrying
to enter into partnership with other banking institutions, in orderto shore up its capital, without much success. Instead Finhold,another Zimbabwean financial institution whose banking
subsidiary is owed Z$100 billion is positioning itself to take overmajor shareholding in Intermarket Bank through a combination ofcash and debt swap. Finhold’s strategy is an
attempt to protect possible collapse of Intermarket since it is amajor creditor. Intermarket has to raise its capital base to Z$10billion before 30 September 2004 as per regulatory authority
requirements. Fraud by some IM employees taking advantage of weakmanagement systems has exacerbated financial distress inIntermarket. The curator has however opened the banking divisionfor limited services to depositors.

Questions:

a) The liquidity problems experience by Barbican Bankand Intermarket bank were as a result of poor risk management.Discuss?

b) Identify the speculative risk that was taken byBarbican Bank?

c) Lack of board independence inadvertently creates anepicentre for corporate governance failures. Discuss using the twocases and outline the ideal role of a board in corporate governanceand risk management