HARARE, March 9 (The Source) – Individual and institutional investors can pledge their shares as collateral to borrow funds from banks and other lenders through the Chengetedzai Depository, the securities depository firm has said.
Chengetedzai runs Zimbabwe’s sole central securities depository (CSD), which went live in September 2014.
“The purpose of using securities as collateral security is to motivate the banks to lend guaranteed or backed by securities as a way to deepen transactions or activities in the securities market”, Chengetedzai said.
Pledging refers to a process in which the borrower (pledgor) of funds uses securities as a form of collateral security to secure the funds it borrows or takes from the lender (pledgee).
Most banks are now preferring to hold treasury bills instead of extending loans to individuals and corporates owing to default risk, which has seen the emergence of mounting high non-performing loans. Post-dollarisation bad bank loans peaked at over 20 percent in 2012, but have since come down to just under 8 percent following the creation of a central bank vehicle to purchase non-performing loans from the sector.
Chengetedzai said the pledged securities will not be used for other transactions since they will be locked until the pledgor settles the debt for which the securities were used as collateral.
Additionally, in order to mitigate credit risk, Chengetedzai said once securities are pledged, no new pledge can be registered on the same securities.
However, the pledgor will be entitled to all the dividends or interest payments due during the tenure of the pledge.
“The dividend/interest payment will be paid to the debtor/ pledgor during the term of the pledge and not the creditor. During the life of the pledge, ownership of the pledged securities remains with the pledgor as well as the right/ entitlement to any corporate action executed during that period,” Chengetedzai said.
Given the credit risk facing banks and lending financial institutions, security pledging can shield financial institutions from too much exposure to unsecured loans and government treasury bills. According to the Reserve Bank of Zimbabwe (RBZ) governor, John Mangudya Zimbabwe currently has about $2.1 billion worth of treasury bills in the market, issued to bridge the government’s funding gap and clear the central bank’s debt, among other purposes.
Most Zimbabwean banks have a very significant exposure in government TBs on their balance sheets.
Given that the government is running a budget deficit owing to insufficient revenue collections, and its growing debt overhang, TBs pose a default risk which could potentially cause a catastrophic crisis in the banking sector.
Despite the potential risk, the banks say the government has not defaulted on its obligations to them.
However, although securities pledging might prove to be a handy shield against potential default, the poor performance of the securities market shows the downside of such transactions.