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Gono sheds light on nostro accounts

The issue, according to one senior government, was discussed at a high-level government on Tuesday. Zimbabwe Independent Chief Investigative Reporter Owen Gagare (OG) this week interviewed Reserve Bank of Zimbabwe governor Gideon Gono (GG, pictured right) to seek clarification on the contentious matter. Find below excerpts of the interview.


OG: Governor, a lot has been written and said about Zimbabwean banks holding money outside the country in nostro accounts.  The Minister of Finance Tendai Biti and yourself have directed that this money be returned to Zimbabwe. Can you, in simple terms, enlighten our readers on what these nostro accounts are, their purpose and why local banks opened them in the first place?

GG:  Well, well, that’s a mouthful of a question which requires an equally mouthful  answer. Financial institutions the world over establish relationships with other financial institutions in foreign countries to facilitate receipts and payments of funds for and on behalf of their clients and themselves.

When a local Zimbabwean bank has a relationship with a foreign bank, the foreign bank becomes its correspondent bank or counterparty.

A correspondent bank is defined as a financial institution that provides financial services on behalf of another financial institution residing outside the jurisdiction of the correspondent bank. Since physical movement of currency and establishment of branches in every country is impractical, the correspondent bank conducts business transactions, accept deposits and gather documents on behalf of the foreign financial institution.  Thus, it acts as a domestic bank’s agent abroad through correspondent accounts.

Correspondent Banking is one of the core areas of international banking activity which dates as far back as 1800 in the US when interbank deposits were established to provide a means of redeeming bank notes outside of one’s own geographical area. Correspondent accounts usually take the form of two accounts called the nostro and vostro accounts.

OG: Can you define and breakdown these nostros and vostros in simple terms governor?

GG: A nostro account is a bank account held in a foreign country by a domestic bank, usually denominated in the currency of that foreign country. The word “nostro” is borrowed from a Latin word “noster” which translates to “ours”.  In simple terms, a “nostro” account is interpreted as “our account of our money, held by you”.

On the other hand, a “vostro” account derived from “voster” is a bank account of foreign bank held with a local bank in domestic currency. In simple terms, a “vostro” account is interpreted as “your account of your money, held by us”.

OG: Before we move on, may you further unpack the issue of correspondent accounts.

GG: Correspondent accounts are used by banks internationally to undertake financial transactions in jurisdictions where they generally have no physical presence.

There is a wide range of services that can be settled through a correspondent banking relationship, which include the following:

receipts and payments in foreign currency;
access to lines of credit;
investments in foreign instruments;
receipt of investment funds;
custodian account arrangements; and
trade finance transactions — receipt of export funds and payment of imports such as raw materials and other commodities and services.
OG: Are there any other important details you would want to add on this issue?

GG:  Furthermore, a correspondent bank relationship also helps local banks and their clients to access external lines of credit and other syndicated loans as well as access to foreign markets.

Nostro accounts are useful when facilitating settlement of foreign exchange and trade transactions.  Many cross-border payments are actually settled in a specific country’s domestic settlement system.

For example, a Zimbabwean company making a Rand payment to a South African company; the local bank debits the company’s local account with the equivalent US dollar amount, and transfers the Rand amount from its Rand account held by a South African correspondent bank (eg Nedbank, Absa or First National Bank) to the South African company’s Rand bank account in South Africa.

Clearing of cheques and drafts is one of the most basic services traditionally provided by correspondent banks through nostro accounts.  A correspondent account can be used as a means of settlement for cheques drawn on foreign banks.

A correspondent bank can facilitate access to offshore credit facilities and their settlement. The contracted offshore lines of credit are deposited in the nostro accounts, whilst repayments including interest are also done through the same account.

Besides, a correspondent bank can be of particular service to a local bank in managing its investment portfolio and meeting liquidity requirements. These services include trading of securities; safekeeping and custodial services; and investment advice. Trading in these securities is done using excess balances in their nostro accounts.

OG: A lot of exchange control directives have been issued to banks of late as well as ministerial orders on this matter such that our readers are having trouble keeping pace with them. Can you again, in simple language, explain what Zimbabwe’s regulatory framework is regarding the operation of nostros accounts so that exporters, investors and individuals get a clearer picture on this?

GG: Well, it is true indeed that there are various exchange control directives that we have issued out as a bank since 1996. Work is under way to consolidate them taking into account the new multicurrency environment.  Some are outdated while others are still valid.

All Zimbabwean banking institutions are required to seek Reserve Bank approval to open and operate such accounts. This requirement ensures that the central bank can monitor developments in those accounts.

Zimbabwean banks including the Reserve Bank hold nostro accounts largely for the purpose of facilitating foreign receipts and payments.

The Reserve Bank has correspondent relationships with fellow central banks and other reputable financial institutions in various parts of the world.

If not closely monitored, correspondent banking relationships could be vulnerable to money laundering and terrorism financing. In this regard, banks are expected to do risk and due diligence assessments before entering into correspondent relationships.

It is for this reason that most financial regulatory institutions, including Zimbabwe authorities, have regulations that govern correspondent banking relationships.

OG: Can you explain why this plethora of regulations directives and intensity of monitoring, besides the need to improve the country’s internal liquidity situation?

GG: Apart from monitoring the nostro accounts for our balance of payments purposes, we have an obligation within the community of central banks to ensure that the money in our backyards and beyond is both fully accounted for and that it is used in a legal and proper manner.

To be continued next week… See  also Businessdigest Page 1.

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