BY MELODY CHIKONO
ZIMBABWE’S banking sector, under pressure from authorities to inject billions of dormant foreign currency indexed liquidity on their books into industries, this week demanded concrete legal guarantees to collect repayments in United States dollars in the event of another currency change.
Banks have been the subject of rebuke since July, when the permanent secretary in the Ministry of Finance and Economic Development, George Guvamantanga disclosed that while industries were battling to raise up to US$2 billion for rebuilding bleeding companies following a prolonged meltdown, at least US$1,7 billion was locked up in their vaults.
This marked the first time that authorities have expressed disquiet over the decade-long cautious lending strategy being pursued by banks. Financial institutions have been terrified by potentially high-level defaults in Zimbabwe, where an industrial crisis has been compounded by tepid demand triggered by Covid-19 induced hard lockdowns.
Following Guvamatanga’s remarks, Reserve Bank of Zimbabwe (RBZ) governor John Mangudya has been piling pressure on banks to act and help stabilise jittery markets. Banking Sector non-performing loans were estimated at a healthy 0,3% in August this year. But experts said the figure was low because loans to both individuals and companies were extremely low during the first eight months of 2021.
In frank remarks to Finance minister Mthuli Ncube in a paper that outlines the sector’s expectations for the 2022 national budget, the Bankers Association of Zimbabwe (BAZ) said the government was pushing banks to lend US dollars loans without making legal guarantees to assure banks they can collect proceeds of such loans in the hard currency.
“The RBZ continues to encourage banks to leverage on the forex deposits (which are estimated at US$1,7 billion) to enhance financial intermediation,” BAZ said in the seven-page submission titled Input into the 2022 Fiscal Budget.
BAZ said forex indexed loans had already been injected into some companies but legal guarantees to this effect were important.
It also said banks were worried that judgements to cases of previously unsettled foreign currency-indexed debts had allowed clients to repay in Zimbabwean dollars.
“In response to this moral suasion, the banks have been increasingly underwriting FX (foreign currency) loans to businesses and individuals alike, thereby assisting in reducing demand of FX at the (foreign currency) auction,” BAZ said.
“That being the case, there is still concern around the supportive legal framework regarding FX loans given the challenges that were faced in the past following currency changeover.
“Two aspects bear reference upon the banks’ current ability to lend prudentially: The lawful right to pursue the repayment of loans in foreign currency where this is the contractually agreed currency between parties and the other, that judgment debts pursuant to a legal action are currently payable in local currency,” it added.
BAZ said the banking community was requesting for “a legislative provision making all debts incurred in USD or in any other stipulated currency owing to a banking institution repayable in the currency contractually agreed to by the parties until such debts are extinguished in adherence with the terms of the contract.
“This will address the need for reliability with respect to the enforceability of contracts. Where debts have been incurred in USD or in any other stipulated currency, we request that there be a legal provision that allows for sales in execution and foreclosures to be conducted in foreign currency with assets being disposable in foreign currency,” it noted.
BAZ said the foreign currency auction system had run into serious problems due to glaring mistakes by the RBZ, which has been allotting more funds than was available. Funds allotted on the foreign currency auction system have taken up to 15 weeks to be settled, according to the Confederation of Zimbabwe Industries (CZI), which has warned that at that rate, the central bank could be creating the groundwork for bankruptcies. In June, the CZI said the RBZ had failed to release up to US$200 million in allotted funds, as industries battled to fund operations. BAZ said the lengthy period had eroded confidence in Zimbabwe’s foreign currency auction system.
“We submit that the exchange rate on the auction market reflects the market fundamentals and allocations should match available FX,” BAZ said.
“Admittedly, this may result in an initial exchange rate depreciation with some transitory inflationary impact. That said, the FX market needs to be supported by a tighter control of Reserve Money targets as well as the RTGs component of the money supply. The attendant reduction in parallel market premium will reduce opportunities for arbitrage and address some of the speculative demand of FX at the auction, whilst incentivising the exports,” it said.