OUTCOME OF INVESTIGATION OF ABUSE OF COMMERCIAL BANK LOAN FACILITIES BY CERTAIN BUSINESS ENTITIES
Through the Press Statement of 17 May 2022, the Reserve Bank of Zimbabwe (the Bank) advised the public that the Financial Intelligence Unit (FIU) was investigating certain entities for abuse of commercial bank loan facilities.
The FIU has completed investigations on possible abuse of loan facilities by 15 entities and has made the following findings:
1. The majority of the entities investigated have adopted business models based on arbitrage, whereby they make significant profit margins by borrowing at concessionary terms, stocking and then selling their products in US$ or in Zw$ at inflated parallel market exchange rates, thus enabling them to easily pay off the loans from a portion of the proceeds, and start the borrowing cycle again.
2. Most of these entities generate significant revenues, in either ZW$ or US$ or both, which are sufficient to cater for their working capital requirements. Instead of using their own revenues, they opt to fund most of their working capital requirements from the concessionary loans.
3. Some of the entities investigated abused their access to loans by “multi-dipping” across several banks. In one example, an entity concurrently accessed ZW$6.5 billion worth of loan facilities from 12 of the 16 banks. Many other entities would have loan facilities running simultaneously at 5 or more banks.
4. 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. Such arrangements are a form of abuse of the financial system for material benefit by taking advantage of cheaper borrowing and repaying when exchange rates have been depreciated.
5. 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.
On the basis of the FIU findings, the Bank has put in place the following corrective measures, with effect from 1 July 2022:
(ii) No bank shall extend a loan to an entity or individual at an interest rate below the prevailing Bank policy rate.
(ii) Banks shall implement appropriate due diligence measures to ensure that borrowing by holding entities on behalf of their subsidiaries are properly justified and that the loans are used strictly for the intended purpose. Banks shall implement similar measures in the case where an entity borrows on behalf of an associated entity.
(iii) Banks shall also –
(a) 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; and
(b) ensure compliance with the prescribed prudential lending limits provided under the Banking Regulations SI 205 of 2000, and more particularly that:
- the aggregate of loans and advances outstanding at any time or any single obligor shall not exceed 25% of a banking institution’s capital base; and
- the aggregate of loans and advances outstanding at any time to any corporate group shall not exceed 75% of a banking institution’s capital base or 25% of any single member of such corporate group.
(iv)The FIU shall monitor transactions on an ongoing basis to ensure that loan proceeds, as well as entities’ own revenues, are not diverted to the illegal foreign exchange parallel market and to take punitive action where abuses are identified.
(v) Whilst 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.
(vi)Boards of directors should enhance oversight on the management, reporting and performance of large exposures and group exposures.
(vii) The Bank will continue to monitor the effectiveness of banking institutions’ credit management practices and compliance with applicable laws and regulations.
John P Mangudya
17 June 2022