Source: Foreign banks tighten screws on Zimbabwe | The Financial Gazette June 15, 2017
FOREIGN banks are demanding fully funded letters of credit (LoCs) from domestic banks meant to facilitate vital imports by customers due to a worsening foreign currency crisis in the country that threatens to wreck recovery and further ruin the frail economy.
LoCs, which are indispensable for international transactions since they guarantee payment, allow suppliers to considerably lessen the risk of non-payment for delivered goods by transferring the risk of the buyer to the bank, according to experts.
Under normal circumstances, LoCs do not require upfront funding by importers’ banks, but the situation in Zimbabwe is said to have dented the creditworthiness of local banks, resulting in rejection of unconfirmed LoCs by foreign lenders.
Unconfirmed LoCs are issued without remission of cash to the offshore bank of suppliers on the basis of trust that the originating bank would honour its commitment in the event that the buyer to whom the LoC is issued defaults on international payment commitments.
Banking sector and industry sources said the situation was now so grave that it threatened to undermine productivity in the economy, at a time government was spearheading increased output after banning the import of at least 100 products to promote the revival of local industries.
A banker said the worst affected sectors were manufacturing and mining, which are essentially the bedrock of the country’s economy and currently the critical pillars of foreign currency mobilisation.
“Foreign banks are no longer willing to take the risk of local banks,” the banker said, indicating that the problem started when the central bank started rationing offshore cash holdings by local banks, resulting in their creditworthiness becoming questionable.
He said foreign financial institutions were now only accepting “confirmed letters of credit” from Zimbabwe banks.
He said a confirmed LoC entailed the originating bank putting cash into the suppliers’ bank to guarantee that the LoC would be honoured.
“The situation has undermined international trade,” said the banker, noting that many manufacturers were failing to ramp up production because of the situation.
The Confederation of Zimbabwe Industries, the country’s main industrial body, said local banks were facing increasing difficulties in issuing guarantees.
“It is a problem that we have always had because of the country risk that we have. Not all bank guarantees from local banks have been accepted because of the internal banking challenges that we have had,” CZI president, Sifelani Jabangwe, told the Financial Gazette.
“These are the closure of banks and the inadequate currency issues that we are currently having. Foreign markets have been accepting guarantees from the big four banks because they have confidence in them.”
Bankers said the creditworthiness of local financial institutions plunged after the Reserve Bank of Zimbabwe (RBZ) directed in 2014 that all banks reduce their nostro account balances from 30 percent of total bank deposits to a paltry five percent.
A nostro account is a bank account held by a local bank with a foreign bank, usually in the currency of that country. Nostro accounts are used to facilitate foreign exchange and cross border trade transactions.
RBZ governor, John Mangudya, said then that keeping large balances in nostro accounts was tantamount to providing liquidity to offshore jurisdictions where banks held their nostro accounts.