HomeBusiness DigestHyperinflation Leaves Mortgage Loans Meaningless

Hyperinflation Leaves Mortgage Loans Meaningless

CENTRAL African Building Society (CABS) mortgage loans during the financial year ending December 31 2008 were nothing in real terms as sellers sought foreign currency while the society could only lend in local currency.

In a statement accompanying its financial results CABS said there were limited property developments funded by the building society due to hyperinflation.

The period under review saw the increased use of foreign currency which apart from property and the stock market was the safest form of investment in the hyperinflationary environment.

“Mortgage lending was not meaningful in this period because of the hyperinflation,” said CABS chairman Leonard Tsumba. “Sellers sought for foreign currency, while the society could only lend in local currency.”

Those who qualified for the loans could not buy or build any property as no one was willing to trade in local currency. The ‘burning phenomenon’ which mushroomed last year also made the mortgages which were transferred into individual accounts worthless.

CABS said the deterioration of the economic and operational climates in which it operated reached unprecedented levels during the second half of the period under review.

“This situation raised serious operational challenges for the society. Dollarisation took effect and much business activity shifted to the informal sector. Financial volatility and unpredictability characterised the market place, making strategic and long-term planning nearly impossible,” said Tsumba.

The society however managed its liquidity position well over the period under review in spite of the absence of short-term financial instruments in the market and challenges posed by a volatile market.

CABS becomes the latest victim of the official dollarisation of the economy which brought back to the spotlight the soundness of banks and their role in the long drawn out economic crisis.

The country’s biggest building society and mortgage lender in February last week closed 37 branches around the country; 22 from Mashonaland, four from Matabeleland, five in Midlands and six from Manicaland.
CABS head of retail banking Mike Finnigan said the closure of the branches was due to the unfavourable economic environment.
“We will still be operating a contact centre at our head office for any queries you may have,” Finnigan said.
The closure of the 37 branches could slow down property developments due to delays in mortgage processing as the country’s economy is poised for a turnaround.

“We hope that in the future we will be able to return to normal business of providing you with full banking services,” Finnigan said.

There has been a halt in the construction industry owing to the cash squeeze that has hit companies and individuals alike. Building societies at one time had frozen granting mortgage loans.

FBC Building Society and Beverley have started to offer mortgage financing on a limited basis.

The economic slowdown and the shortage of foreign currency have impacted on the construction of high-rise buildings and residential properties.

The country’s macro-economic conditions have had a negative bearing on the soundness of banks faced with contraction in the economy and the challenges of unrealistic exchange rates and interest rates.

Presenting his monetary policy statement of the year on February 2, Reserve Bank Governor Gideon Gono said with the use of multiple currencies, banks should come up with strategies that will ensure that they will not be affected by any liquidity crisis to avoid curatorship.


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