Billion-dollar loans used to manipulate exchange rate

Fifteen major companies have been creating huge extra profits by borrowing billions of dollars, often from several banks, at concessionary interest rates, stocking up and then selling in US dollars and Zimbabwe dollars using black market exchange rates, so driving up prices, the Reserve Bank of Zimbabwe (RBZ) has confirmed after detailed investigations.

These complicated financial arrangements, besides pushing up prices, also create the liquidity that feeds the black market, and that also pushes up prices.

A wide range of reforms and strong measures have now been put in place by RBZ Governor Dr John Mangudya announced in a statement yesterday, that will force banks lending money to tighten up their controls, ensure that interest rates are never below the Reserve Bank policy rate, and ensure that the borrowers use the loans only for their intended purposes, with banks making actual visits to the borrowers if necessary.

All corrective measures will be in force from July 1.

The Financial Intelligence Unit (FIU) of the Reserve Bank, which uncovered the serious abuses, will itself be monitoring companies already caught out to ensure that neither loans nor the companies own revenues are diverted to the illegal black market.

While the investigated companies were able from yesterday to resume borrowing, with their suspensions lifted, "any entity found to have actively engaged in exchange rate manipulation in order to derive illicit gains from loans shall also be referred for prosecution", Dr Mangudya warned.

Describing what the FIU uncovered, Dr Mangudya said it had finished investigations into 15 entities. These are companies, groups of companies or more complex linked companies.

The majority had adopted business models based on arbitrage, where they profit from the difference prices in different markets. These entities "make significant profit margins by borrowing at concessionary terms, stocking and then selling their products in US dollars or in Zimbabwe dollars at inflated parallel market exchange rates, enabling them to easily pay off the loans from a portion of the proceeds and start the borrowing cycle again".

Most of these entities generated significant revenues, in either local currency or US dollars or both, which were sufficient to cater for their working capital requirements. But instead of using their own revenues, they opted to fund most of their working capital requirements from the concessionary loans.

"Some of the entities investigated abused their access to loans by "multi-dipping" across several banks. In one example, an entity concurrently accessed $6,5 billion worth of loan facilities from 12 of the 16 banks. Many other entities would have loan facilities running simultaneously at five or more banks.

"There were instances, where the entities investigated, would access loans for their own working capital, but in reality for the benefit of third-party entities either within the same group or unrelated. There were also instances where a holding entity, with little or no operations of its own, would borrow heavily for subsidiaries, who themselves would be accessing similar cheaper loan facilities directly from the banks," he said.

Dr Mangudya said such arrangements were a form of abuse of the financial system for material benefit by taking advantage of cheaper borrowing and repaying when exchange rates have fallen and the value of the loans depreciated.

"In some cases, loans were accessed as working capital, but diverted to third-party entities for purposes of funding purchases of foreign exchange on the auction on behalf of the funding entities," he said.

Among the measures, no bank shall extend a loan to an entity or individual at an interest rate below the prevailing bank policy rate.

Dr Mangudya said banks shall implement appropriate due diligence measures to ensure that borrowing by holding entities on behalf of their subsidiaries is properly justified and that the loans are used strictly for the intended purpose.

"While the suspension of lending to the investigated entities has been lifted with effect from 17 June 2022, any entity found to have actively engaged in exchange rate manipulation in order to derive illicit gains from loans shall also be referred for prosecution.

"Banks shall implement similar measures in the case where an entity borrows on behalf of an associated entity. Banks shall also ensure effective credit risk management, including loan monitoring and enforcement of loan covenants, client visits and other measures to ensure that borrowings are used for the intended purposes," he said.

Dr Mangudya said banks should ensure compliance with the prescribed prudential lending limits provided under the Banking Regulations SI 205 of 2000.

This means that the total of loans and advances outstanding at any time for a single borrower cannot exceed a quarter of a bank's capital base, and the aggregate of loans and advances to any corporate group cannot exceed three quarters of the bank's capital base and nowsingle member in such a corporate group can have loans exceeding a quarter of the bank's capital base.

The capital base of a bank is far less than the money it can lend out, since it also has access to some of the money deposited in the bank by others. But minimum capital requirements are large, and the sort of limits that Dr Mangudya is laying down means that some entities must be borrowing huge amounts, already confirmed with his revelation that one corporation had managed to borrow a total of $6,5 billion from 12 banks.

Besides banks being charged to upgrading significantly their watchdog and enforcement functions Dr Mangudya wants company boards to be more effective.

"Boards of directors should enhance oversight on the management, reporting and performance of large exposures and group exposures. The Reserve Bank will continue to monitor the effectiveness of banking institutions' credit management practices and compliance with applicable laws and regulations," he said.