17 April 2012

Zimbabwe: Local Financial Market Ready for Securitisation


Considering increased calls by various sectors of the Zimbabwe financial and business community for Zimbabwe to securitise its mineral resources in a bid to raise funds and ease the liquidity pressure in the country, it is imperative for a closer look at the technique of securitisation.

It's common among people to ask in different ways whenever something new is talked about, "How is it done?"

While most would usually want to ask the "Why" part because most too often we easily become content with what we have.

Firstly, I will talk about the "How" part of securitisation.

Securitisation is simply a process of converting assets with predictable cash flows into securities that can be bought and sold in financial markets.

For example, loans being availed to high networth individuals and various stable companies can be securitised or simply bundled and get converted from their illiquid nature into liquid securities.

In this case of mineral securitisation, income receipts expected from sale of several minerals including diamonds by the country to other countries is used as a security to borrow funds from both local and international investors.

Worldwide developing countries are using remittance securitisation and securitisation of future flow receivables with good results.

This is helping some developing countries in maintaining access to international capital markets especially in times of crisis.

Securitisation provides cheaper and longer maturity external financing especially when innovatively structured.

Future-flow securitisation is usually used if a country does not have existing financial assets that are attractive to foreign investors.

Future assets such as future export receivables or remittances and other hard currency payment rights can be used instead. For example, Pakistan is considering a deal of this nature of about US$6 billion a year and more recently Dubai is planning to securitise airport retailer (duty free) revenues.

Securitisation provides one of the large sources of consumer financing as it allows consumers to obtain credit to finance stands, houses and cars.

Securitisation also helps companies to grow and in turn create jobs for our ailing economy by providing additional sources of funding for lenders.

For example, companies could use their future receivables in their areas of trade such as telephone receivables for a telephone company.

An organisation like Zesa could improve its lighting capacity by making use of its future cash flows to gather funds.

Other types of securitisation

I have seen several banks hustling to get that chunk of the booming property sector, but their terms are rather too exorbitant for any ordinary man in need of the house.

Mortgage-Based Securitisation

With MBS the cost of the credit is thus reduced since instalments of others can be used to source for more funds (the larger the pool the cheaper it becomes).

In Zimbabwe, the property sector is the most promising for developers since the housing backlog is too high and more and more people are moving into cities and towns.

The housing prices are ever increasing since dollarisation (i.e. in US$ terms) as opposed to critics of securitisation especially after the 2008 global financial crisis which saw property prices crash heavily more than 30 percent.

Securitisation also comes with its cons as it is blamed for the 2008/9 global financial crisis and partly for some problems in the eurozone debt crisis in which Greece and Italy's woes are blamed on their circumvention of their deficit spending parameters through such derivatives by other sectors.

In this light if securitisation is to be implemented there is high need for strong regulatory and monitoring duties to ensure debt levels are kept within reasonable limits and that frauds in rating of the receivables is never allowed as was the case in the United States.

The writer is a student at the Harare Institute of Technology studying for a B-Tech (Hons) Financial Engineering. He is currently attached at GMRI Capital.

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