A RESERVE Bank of Zimbabwe directive compelling banking institutions to invest in bonds tied up to the sizes of their balance sheets has no basis at law,
private legal counsel to an unidentified financial institution indicated.
The counsel was given by Advocate Adrian de Bourbon now based in Cape Town.
The advice, a copy of which was obtained by businessdigest this week, was given to a local commercial bank which sought legal opinion on the central bank’s order forcing banks to invest part of their assets in the five-year Financial Sector Stabilisation Bonds and seven-year Economic Stabilisation Bonds.
The Economic Stabilisation Bond was suspended following an outcry by banks that take-up could throw financial institutions into bankruptcies, while the take-up threshold for Financial Sector Stabilisation Bonds was reduced over similar concerns.
The effect of the bonds was to lock up close to 90% of banking institutions’ cash resources in long-term instruments, leaving them without funds to support short-term obligations.
Part of the money is locked up in statutory reserves kept by the central bank at zero interest.
In his advice, advocate de Bourbon said there was nothing in the Banking Act that gave the governor powers to force banks to invest their money in the bonds.
“It is my view that there is nothing in the Banking Act or the regulations made in terms of that Act which in any form regulates the issuance of the bonds, or the directions given by the governor as to the holding of the bonds,” said de Bourbon.
He said the central bank did not have express authority under the Reserve Bank of Zimbabwe Act to force banks to take up the bonds.
“The decision of the Reserve Bank is illegal in the sense that it is made without statutory power both with regard to the creation of the two types of the bonds and in relation to the mandatory obligation imposed on the financial institutions to convert a large percentage of their assets into bonds,” said de Bourbon.
He said while the RBZ had a mandate to regulate financial institutions and fight inflation, this had to be done within the parameters of the law.
“It must be remembered that the Reserve Bank has a role as a regulatory authority, but its role in that regard is one strictly stipulated by the legislation, and it does not have executive powers outside the legislation,” he said.
“In my view, no statutory power exists to enable the Reserve Bank to compel a financial institution to convert 45% of its asset base shown in its balance sheet into particular instrument, no matter the monetary policy motivation of such a decision,” said de Bourbon.
He said while he acknowledged the role of the RBZ in implementing monetary policy, “it is nonetheless clear to me that the powers of the Reserve Bank in that regard are not unlimited”.
Advocate de Bourbon said there were strong grounds for the banks to challenge the RBZ’s decision because the directive was “grossly unreasonable”, warning that if implemented it would have a negative impact on the global ratings of financial institutions in the country.
He said the banks could argue that the bonds could lead to a cash crunch that could force them to borrow from the central bank at punitive interest rates to finance short-term obligations.
“With the recent increase in accommodation rates, this will have a significant impact on financial institutions, but will undoubtedly benefit the Reserve Bank as it will become a major profit-making institution,” de Bourbon said.
He warned that any legal challenge against the RBZ on the issue should not be made by a single financial institution since this would provoke the wrath of central bank governor Gideon Gono.