RBZ institutes measures to curb abuse of loans by companies

By ZBC Reporter
THE Reserve Bank of Zimbabwe (RBZ) has with effect from next month introduced new measures aimed at avoiding the abuse of loan facilities from banks by some companies. The move is among other factors aimed at ensuring that loan proceeds by the beneficiary entities are not diverted into the parallel market activities.
In a statement RBZ governor Dr John Mangudya said the corrective measures are being put in place after central bank authorities through the Financial Intelligence Unit discovered rampant abuse of loan facilities by the 15 entities that were under investigation. Some of the corrective measures will also see banks not extending loans to individuals or firms at an interest rate below the prevailing rate.
“No bank shall extend a loan to an entity or individual at an interest rate below the prevailing Bank policy rate. 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,” read part of the central bank’s statement.
The RBZ also revealed that The Financial Intelligence Unit shall be monitoring 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.
Any entity that will be found to be actively engaged to exchange rate manipulations shall also be liable to prosecutions.
“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,” said the RBZ Governor, Dr John Mangudya.
Boards of directors for entities have also been directed to conduct regular checks on their companies loan exposures to remove illicit loan transactions.

Following investigations into how entities are accessing and utilizing bank loans, the RBZ discovered that 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 United States dollars or in the local currency 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.
It was established that most of these entities generate significant revenues, which are sufficient to cater for their working capital requirements but instead of using own revenues, they opt to fund most of their working capital requirements from the concessionary loans.
“Some of the entities investigated abuse 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,” said Dr Mangudya.
Some entities investigated would also access loans, ostensibly 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 through taking advantage of cheaper borrowing and repaying when exchange rates have been depreciated,” noted Dr Mangudya.