THE recent milestone ruling by the Supreme Court ordering Standard Chartered Bank to reimburse a client’s funds which the bank surrendered to the Reserve Bank of Zimbabwe (RBZ), following the central bank governor Gideon Gono’s directive last year, could open floodgates for lawsuits against banking institutions, further bleeding an already haemorrhaging economy.
China Shougang International dragged Standard Chartered Bank to court to recover US$47 739, 86 which the financial institution had flatly declined to repay, arguing it had surrendered the funds to the RBZ on Gono’s orders.
In October 2007, the RBZ moved to officially seize all money in corporate foreign exchange accounts, which amounted to hundreds of millions of dollars and converted this to local currency. The same month, the RBZ issued a monetary statement where it directed that all foreign exchange earnings by corporates would be centrally held at the RBZ.
Following the adoption of multi-currencies in February 2009, corporates whose foreign exchange had been raided by the central bank approached their banks for re-imbursement. However, banks were unable to return this money as it had been used up by the RBZ.
On October 11 this year, the Supreme Court ruled that Standard Chartered Bank was obliged to re-imburse China Shougang, one such company affected by the Reserve Bank’s action six years ago. Standard Chartered had appealed against a High Court ruling compelling it to make good its obligations to Shougang. The Supreme Court upheld the High Court’s ruling.
“… As has been demonstrated above, the dealings by the appellant (Standard Chartered) with the deposits in the accounts, namely, the payment to the RBZ, were made at its own risk and did not affect its obligation in law to pay its debt to the respondent (China Shougang international) on demand. The appeal is accordingly dismissed with costs,” Justice Vernanda Ziyambi said in a nine-page judgment which was concurred by Justices Paddington Garwe and Ben Hlatshwayo.
Analysts said a flurry of similar demands by Standard Chartered Bank’s clients and on other commercial banks, could negatively impact on the banks’ balance sheets and affect market confidence in the financial sector. An official in the Ministry of Finance who spoke anonymously this week said they were working on measures to protect banks from possible lawsuits and these could be captured in the national budget to be presented by Finance minister Patrick Chinamasa.
“We are doing something to protect our banks.” The official said. “We cannot throw our banks to the wolves,” he said.
This was confirmed by Chinamasa on Wednesday who said Treasury will assume legal responsibility for all the RBZ debts to restore confidence in the financial sector.
Ironically, in a related matter, the Reserve Bank was ordered to return US$1 million to Bindura Trojan Nickel Mine — money the central bank seized from the mine’s foreign currency (forex) account with BancABC at the height of the country’s economic meltdown in 2007.
High Court judge Justice Nicholas Mathonsi ruled that the RBZ, with immediate effect, return the seized amount, effectively opening floodgates for the RBZ to be sued despite it enjoying immunity from prosecution under the State Liabilities Act.
The Act forbids companies and institutions that lost foreign currency balances held with local banks, from directly suing the central bank due to its immunity granted by government to protect its assets.
But it has been stated and not denied that while the RBZ is immune from prosecution, it remains liable for debts.
Bankers Association of Zimbabwe(Baz) president George Guvamatanga told our sister paper NewsDay recently that the Supreme Court order “had created uncertainty” in the banking sector.
“As a nation, we need a political solution to the problem that takes the issue of the economy into account,” Guvamatanga said.
“We are having consultations with various stakeholders and not just the Finance minister (Chinamasa) and the Reserve Bank of Zimbabwe governor (Gideon Gono). It’s a number of stakeholders and I don’t want to pre-empt the discussions.”
He added: “Some people expect banks to pay, but we cannot talk of class action here because there is another case where the client, Trojan Mine, sued the RBZ directly and it was ruled that the RBZ should pay and another where a bank and the central bank are jointly sued.”
Prominent lawyer and businessman Sternford Moyo told delegates at the Baz Summer School in Nyanga recently there is need to remove immunity of the Reserve Bank of Zimbabwe to inspire confidence in the central bank.
Economic analyst Takunda Mugaga said the lawsuits compelling individual banks to repay money they surrendered to the RBZ will definitely affect the banks’ balance sheet.
“Within a bank, we could see the eroding of the balance sheet and a threat on the capitalisation of banks,” Mugaga said.
He said it will also have a negative impact on confidence in the affected banks, but added it was highly unlikely to prompt a run on the banks exposed to litigation. He put the probability of that happening at 18%.
Mugaga said litigation against banks could further affect the share price of financial institutions listed on the stock exchange. Economic analyst John Robertson said should the affected banks respect the court order, it will seriously reduce the banks’ asset base.
“It is a very tricky issue,” Robertson said, “If the banks are to pay the money back they cannot take it out of the deposit base. They have to take money out of their assets.”
He said the financial institutions could be forced to liquidate their assets to settle successful lawsuits.
Robertson said this could result in banks failing to meet the RBZ’s increased minimum capital requirements which will be gradually increased to US$100 million by June next year.
“All the banks are very anxious as they will delve into their capital and this means that their capital adequacy figure will disappear to below the minimum capital threshold,” he said.
He added that the immunity currently being enjoyed by the RBZ was not in its best interest going forward.
Robertson said the ruling in favour of China Shougang International was seen by some as a politically motivated ruling to protect Sino-Zimbabwe relations, an assertion Mugaga disagrees with.
Mugaga said the development is not peculiar to Zimbabwe alone as such rulings were common worldwide.
Even some within Zanu PF have added their voice for changes at the Central Bank. Masvingo Urban Member of Parliament Daniel Shumba, in his contribution during a parliamentary portfolio committee on Industry and Commerce in which the Zimbabwe National Chamber of Commerce had been invited to give its views on what needs to be done to improve capacity utilisation, said there was need to cleanse the Reserve Bank to attract much-needed investment.
He said the previous quasi fiscal activities the central bank was involved in “cannot just be wished away,” as industry as well as local and international banks lost money.