8 June 2014

Zimbabwe: Afreximbank Throws Lifeline to Local Banks

The African Export-Import Bank's (Afreximbank) guaranteed a US$100 million interbank facility will be operational by the end of next month, a senior executive said last week.

Lawyers were already working on the terms and conditions, underlying financial instruments and trading activities in the secondary market.

In March, Afreximbank came up with a US$100 million facility designed as a collateral swap whereby it will lend its securities to local banks in exchange for eligible collateral.

This would help ease liquidity challenges facing the banking sector by unlocking idle surplus funds at some banks and thereby resuscitating interbank trading.

The facility will be in the form of securities, the Afreximbank Trade Debt-backed Securities (Aftrades), which would be swapped for assets held by local banks.

"We think that this should be up and running before end of July at the latest although the aim is to activate it earlier than that," Gift Simwaka, Afreximbank's regional manager for southern Africa told Standardbusiness last week.

Simwaka said a substantial amount of work had gone into contemplating various scenarios under which the instrument would be traded, such as the case for an outright sale of an instrument permitting a third party holder to hold such an instrument to maturity.

"This is in contrast to the case of using the instrument as security for interbank placements, which was the only scenario originally contemplated. It is our belief that permitting for secondary traders to trade the instrument as they so wish will increase its market acceptance as a liquid financial instrument," Simwaka said.

"In parallel to drafting the governing terms and conditions for the facility, trading limits are being determined for would-be participating banks."

Simwaka said the process had been delayed by the "drafting of the unique terms and conditions aimed at ensuring that they are exhaustive and capable of ushering into the market an instrument with appropriate features to meet the purpose for which the facility has been designed".

"Otherwise we are actively working on the facility with an aim to implement it as soon as is practicable," he said.

Government and Afreximbank have been in constant touch on progress made towards the introduction of the facility.

Last week central bank chief John Mangudya met Afreximbank's president Jean-Louis Ekra during the bank's annual meetings in Libreville, Gabon.

The annual meetings ran from Tuesday and ended yesterday (Saturday). The introduction of the interbank facility is part of the ongoing reforms meant to improve the liquidity situation.

The banking sector has been operating without an active interbank market under the multi-currency regime introduced in 2009 due to the absence of acceptable collateral.

This resulted in the market being segmented with some banks having huge surpluses while other banks had liquidity challenges.

Under normal circumstances, liquidity would have moved from the surplus institutions to those experiencing shortages through the interbank market.

Banks with excess liquidity were averse to lending to those experiencing shortages due to credit risk issues associated with those institutions.

In a market report last month, AfrAsia Kingdom Bank said the success of the facility in unlocking the interbank market hinged on the ability of deficit banks (tier II banks) to raise the eligible collateral.

"Most of the market players who need liquidity support do not have the required security, hence might lead to the slow take-up of the facility. What makes the situation worse is that most eligible assets from tier II banks are likely to be found in grade C and D which carries hair cut of 30% and 50% respectively," it said.

"The banks with assets in these classes will be forced to pump out more assets for a given amount of Aftrades. The cost is exorbitant and banks may even find it difficult to create assets using this facility."

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