Banks dread bond notes

LOCAL banks, which on the surface appear to be supporting the introduction of US$200 million worth of the new promissory currency in bond notes into the market, fear a nightmare over accounting standard chaos and operational headaches, the Zimbabwe Independent has been told.

By Bernard Mpofu

This comes as bankers yesterday met Finance minister Patrick Chinamasa over a series of issues affecting the sector, including the bond notes introduction in a few days’ time.

Zimbabwe is reeling from a severe liquidity crunch which has worsened markedly since the announcement of bond notes in May. Government’s bond notes intervention has triggered market fears and panic, as well as hostile resistance.

While banks in the public seem to support the measure, behind the scenes they are sceptical as they dread this might wreak havoc within the financial system and even worsen the crisis.

Bond notes, according to Reserve Bank of Zimbabwe (RBZ) governor John Mangudya, are backed by a US$200 million African Export and Import Bank (Afreximbank) facility and are largely an export incentive.

A huge publicity campaign is currently underway to soften market resistance ahead of the start of the injection of US$75 million worth of bond notes — through a “drip-feeding” strategy — in the next couple of days.

Documents gleaned by the Independent and details from banking executives show banks are scared of multifaceted problems ranging from legal, operational to accounting standard glitches which might cause bottlenecks and turmoil.

Bank executives say there is an urgent need for interventions by fiscal and monetary authorities to avert the looming crisis triggered by bond notes.

“There are too many unknowns and uncertainties that come with the introduction of bond notes in a few days’ time,” a senior bank executive said yesterday. “There are numerous grey areas and unexplained system-related and operational issues. It doesn’t look good; it might cause confusion.”

A confidential document seen by the Independent circulating in the banking sector proposes critical interventions and urges caution on the issue.

“It would be advisable for banks to maintain separate entries in customers’ accounts for bond notes and foreign currency. A customer who deposits bond notes cannot insist on payment in foreign currency. A customer who deposits foreign currency can however do so even though he cannot immediately sue the bank for as long as the regulations are extant,” the document says. “If the bond notes are subsequently hit by inflation as widely feared, the necessity of having this distinction will become even more important in terms of defining the bank’s liability to its customers.

Upon expiry of the bond notes, those customers who would have deposited foreign currency would be entitled to demand their funds in foreign currency.”

Another senior bank executive said: “There is something we call accounting standard in banking. It is a principle that guides and standardises accounting practices so that financial statements are rational and meaningful across the system and business at large. Bond notes, which are not an orthodox currency, bring a new and serious challenge vis-à-vis that.

“The other issue is that discouraging banks from having bond notes internal accounts may make it practically impossible for banks to keep an audit trail on the notes being deposited, especially for exporters, when one deposits bond notes but needs the bank to approach RBZ to provide the same amount for purposes of cross-border transactions.”

It is understood a proposal by local banks to create mirror accounts in their back offices to monitor the stock of bond notes was rejected by the central bank. Mangudya could not be reached for comment at the time of going to press.

Banking officials are also raising concerns over the lack of transparency on the US$200 million Afreximbank facility after President Robert Mugabe invoked the Presidential Powers (Temporary Measures) Act to gazette Statutory Instrument 133 giving legal effect to the introduction of bond notes.

The measure is now subject to a court challenge. Bond notes themselves have also been challenged in the courts before they are out, leaving the promissory currency entangled in further controversy.

“We note that there is no reference at all in the regulations to the US$200 million facility from Afreximbank which, according to the Reserve Bank of Zimbabwe, will be used to finance the export incentives. Without this limitation, there is nothing to stop the central bank from introducing bond notes whose value exceeds the US$200 million,” another document says. “It is inevitable that if the bond notes flood the market, a parallel market for foreign currency will find its way back. This will certainly be boosted by the fact that the regulations peg the bond note as being at par with the United States dollar. The return of the black market will have the attendant effects of fueling inflation in the country.”

The central bank says government will appoint an independent committee to monitor the introduction of bond notes into the system and ensure that they are printed within the parameters of the Afreximbank facility.

One banker said: “In previous policy statements, the central bank has indicated that the bond notes will run parallel with the basket of foreign currencies currently in place. It is alarming that the regulations now provide that a tender of payment in bond notes is valid to discharge foreign currency liabilities. The law should allow people to freely choose the currency that they wish to trade in. This will become significant when the bond notes result in parallel market dealings and fuel inflation. Trade will become impossible as the exchange rate is fixed in the regulations.

“What happens in a scenario where a client wants to do external transactions and comes in with bond notes? Will the bank be obliged to exchange these for US dollars? What happens in a scenario where the client comes in requesting for US dollars in the bank instead of bond notes? In as much as there is scope for constitutional challenge of this statutory instrument, the statutory instrument is currently law and the banks should apply it in their operations, until the success of any legal contests.”

Another senior bank executive warned that experiences that banks had in getting indemnity from the central bank following the flood of litigation in the aftermath of the China Shougang ruling signals the attitude the central bank will take.

“It (RBZ) will not assist the banks. For preparedness, we need to ensure that the bond notes are created as a currency in the system so that they are captured accordingly,” the banker said.

In 2013, the Supreme Court ruled in favour of China Shougang International which had sued Standard Chartered Bank for not reimbursing it deposits worth nearly US$49 000 which were raided by the RBZ during its quasi-fiscal operations at the height of the economic meltdown and hyperinflation which ended after the introduction of the multi-currency regime in 2009.

Asked to comment on the issue, Bankers’ Association of Zimbabwe president Charity Jinya said banks would stand guided by the RBZ rules on bond notes.

“Banks will roll out bond notes in line with the operational guidelines that will be issued by the Reserve Bank of Zimbabwe,” Jinya said. “Once these parameters are communicated, banks will stand ready to comply with the regulatory requirements. The Reserve Bank of Zimbabwe is on record that the bond notes will be supported by the US$200 million Afreximbank facility and, as banks, we are guided by that statement.”

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