HomeBusinessAfreximbank bails out RBZ

Afreximbank bails out RBZ

The money is part of the US$100 million fund announced by Finance minister Tendai Biti in the 2012 budget for banks to access in the event of short-term liquidity mismatches. Biti announced on Wednesday that a reputable regional bank will chip in with the money, adding that government will contribute US$20 million after liquidating part of its Special Drawing Rights with the International Monetary Fund.

Standardbusiness heard last week that Afreximbank’s president Jean-Louis Ekra is set to visit the country next month to tie the loose ends so that the money is disbursed.

On Wednesday, Biti hinted that the money for lender of last resort is “coming from an important regional bank”.

“The president of this bank will be in the country on the 9th and 10th of February and we hope to conclude all the issues that are outstanding so that we are able to have this facility in place. It is very important that banks can lend from each other, that there is overnight accommodation,” Biti said.

The proposed injection by Afreximbank comes at a time Treasury has introduced a Discounted and Tradable Paper against Reserve Bank of Zimbabwe’s (RBZ) statutory reserve liabilities to banks. The paper will be used as collateral by banks that seek overnight accommodation at the central bank. In the event of liquidity mismatches, banks are supposed to seek accommodation from the central bank by lodging security in the form of a tradable paper to access the funds.

RBZ owes banks US$83 million in statutory reserves.

RBZ scrapped statutory reserves — the amount of money any bank has to maintain with the central bank at zero percent for every deposit received from a customer — in June 2010 as “part of risk containment measures in the banking system”.

In his mid-term monetary policy statement last year, RBZ governor Gideon Gono said the limited lender of last resort fund and its complicated collateral had seen banks being more prudent by keeping unnecessarily large balances of liquid assets in cash, especially given that most of their liabilities are demand deposits.

Under normal circumstances, banks keep liquid assets in a combination of cash as well as short-term liquid and tradable instruments such as treasury bills.
However, the absence of tradable securities means that balances in Real Time Gross Settlement would be higher.

As there are no treasury bills on the market, liquidity will remain constrained and this effectively kills a vibrant secondary market of trading financial instruments, which is a critical source of revenue and liquidity for the sector.

Treasury bills are short-term securities purchased for a price that is less than their face value. When they mature, the government pays the holder the full-face value.

In developed financial markets, banks diversify their risks by investing in treasury bills and municipal bonds among others, thereby stimulating various investment avenues for the economy. Currently in Zimbabwe, banks are by default only investing in loan assets in the absence of treasury bills and other quasi-government bonds. This effectively increases concentration risk in one asset class and in turn can cause systemic risks if some of the loans being created by banks do not perform.

 

Banks insecure without tradable paper on market

 

Since the use of multi-currencies in 2009, there is no tradable paper on the market.This means that banks cannot borrow overnight from the central bank.

As such the US$7 million given to RBZ to resume the lender of last resort role in the 2011 budget was never tapped into, as banks felt the security that was in place could not be traded.

Banks were told to provide Deeds of Transfer on immovable property as security in the absence of treasury bills which are easily tradable and are a widely accepted form of security throughout the world.

The disadvantage of using Deeds of Transfer on immovable property as collateral is that it has inherent costs related to perfection, which involves bond evaluation and registration.

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