The Sunday Mail
Business Reporters
INTERBANK transactions that are meant to improve liquidity in the financial sector are still dormant as Cairo-based Afreximbank (African Export and Import Bank) works out modalities on how the US$100 million facility it availed will be operationalised.
According to the terms of agreement that were signed between the Zimbabwean Government and Afreximbank, the facility will be in the form of Afreximbank Trade Debt-backed Securities (Aftrades) that will be provided to participating banks for placements in interbank trade.
However, it is particularly open for banks active in trade finance, as Afreximbank’s major role is to promote trading.
It is envisaged that by promoting the placement of Aftrades in local banks, trade finance banks will be able to access cash from their cash-rich counterparts.
The facility is also part of a deliberate attempt to unfreeze the market.
Economists say the cash squeeze in the economy is being worsened by a non-functional interbank market, where cash is not flowing freely in the market from cash-surplus banks to those that desperately need to cover their position. It is also believed that the Reserve Bank of Zimbabwe’s inability to be a lender of last resort has deepened the cash crunch.
Information gathered by The Sunday Mail Business show that by last week, only six banks had applied to be vetted to access the Aftrades, while three banks had been placed in the category of those with liquidity “to place in the interbank market against the Aftrades instrument as security”.
The process of evaluating the various assets in the banks’ books that will be used for the “securities swap” has since begun.
Last week, Afreximbank regional manager for Southern Africa Mr Gift Simwaka said that local subsidiaries of international banks have been evaluating the level of securities they can hold.
“Regarding liquid banks who are mainly subsidiaries of international banks, they have been determining levels of the Aftrades instrument they can hold in aggregate at any given point.
“This entails them putting in place counter-party limits with Afreximbank since it will be the Issuer of the Aftrades instrument and hence the underlying Obligor.”
Specific terms and conditions governing the securities are also being finalised. While the securities were originally supposed to be used only as an instrument for interbank places, parties are exploring the possibility of an outright sale of an instrument to a third party.
This, they opine, will help increase its appeal in the market.
“It (the facility) has taken longer than anticipated on account of the uniqueness of the facility.
“Specifically, substantial amount of work has gone into contemplating various scenarios under which the instrument can be traded, such as a case for an outright sale of an instrument permitting a third party holder to hold such an instrument to maturity . . .
“It is on account of the various issues being finalised that the facility has not been rolled out and hence its impact cannot as yet be assessed,” explained Mr Simwaka.
Some analysts are sceptical on whether the facility will help to improve liquidity on the local market.
They query whether the new securities will themselves be acceptable to lenders on the interbank market, adding that the disparity between local and international markets will likely make the facility pricey.
“The disparity in liquidity positions between international banks and locally owned ones is so great that it will likely translate into a high cost of funds on the interbank market.
“While lending banks may be happy to earn this rate, it could be prohibitively costly for borrowers.
“These stringent conditions set as qualifying criteria will leave out banks that need the facility most.
“Up to now banks have essentially relied on maintaining high liquidity ratios to meet their own needs. Those that are not in dire need now will thus have little use for the facility anyway. In effect the facility may be redundant; those that need it do not qualify, those that qualify do not need it,” observes a Tetrad internal report seen by this paper.
For a lot of banks with liquidity problems, the underlying cause goes deeper than temporary swings in holdings of short-term funds.
The report goes on to note that bad loans, inadequate capital and soiled market reputations are at the core of banks’ problems.
Government, though, is presently making efforts to recapitalise the RBZ so that it assumes its rightful position as a lender of last resort.
When capacitated, the central bank will play a much more influential role in the economy by setting the prime rates. The dislocation in the market is making the cash shortages extremely worse.
Understanding how the facility works
Currently, local banks are ignorant of the financial health of their peers, and are therefore reluctant to trade among themselves. Essentially, the US$100 million facility from Afreximbank is in the form of securities – the Afreximbank Trade Debt-backed Securities (Aftrades) – they will be swapped with assets held by local banks.
The assets or securities of the local banks will be considered as collateral; this is the reason why the whole arrangement is being viewed as a “collateral swap”.
It is envisaged that the securities that are generated from the swap will subsequently be used for placement on the interbank market, helping banks to improve trading among themselves.
The interbank market is supposed to provide a platform for banks that are short to access resources from cash-surplus banks.
Experts believe that this phenomenon frees up resources for on-lending in the market, helping improve the circulation of money in the economy.
According to the memorandum of understanding signed by Afreximbank, the Zimbabwe Ministry of Finance and Economic Development and the Reserve Bank of Zimbabwe, acceptable collateral includes security for export loans originated by the participating banks secured in prime offshore receivables and for which the delivery has occurred. And this can only be for those banks that are involved in trade finance.
Trade finance is for guaranteeing smooth transactions between importers and exporters.
Banks holding the CBZ Diaspora bond, Government’s Treasury Bills and bond or security issued by grade rated investment entities are acceptable, but they will only be able to access 90 percent of the face value of the eligible assets.
Also, security for export loans originated by participating banks secured but for which the delivery has not occurred is also acceptable and banks will get 80 percent of the face value of eligible assets.
