Court ruling adds to banking brouhaha

The precedent coming from the Supreme Court ruling of October 11 that Standard Chartered Bank should pay China Shougang International the money taken by the central bank has sent shivers through the banking sector. CLEMENCE MACHADU talks us through the chaos.

In October 2007, the central bank directed banks to lodge all corporate foreign currency balances with them within 24 hours. About US$400m was paid into the central bank. Depositors began to nag their banks for cash, which sparked legal battles when they were refused pending repayment from the central bank.

The question uppermost in many people’s minds is whether the banks should really be the ones to pay back the depositors’ money and how that would affect the health of the banking system? The courts have so far delivered two interesting precedents – one saying that the central bank should pay and the October 11 one, which says banks should pay.

In the matter between RBZ and Trojan Mine (which had deposited its money with BancABC and was affected by the central bank’s order), the court ruled that RBZ should pay Trojan Mine with interest, arguing that the central bank intentionally induced BancABC to breach its contract with Trojan Mine and that such intentional inducement of a breach of contract was illegal.

The good news in this judgement was that the central bank was held accountable for taking money belonging to banks’ clients and failing to repay.

However, the recent Supreme Court ruling in the matter between CSI and Stanchart is likely to have catastrophic repercussions for the banking sector. By ruling in favour of CSI, a depositor which lost about US$40,000, the judge argued that the dealings of Stanchart in depositing clients’ foreign currency with RBZ were made at its own risk and did not affect its obligation in law to pay its debt to CSI on demand.

Flood of cases

The ruling, which, in my view, has punished the victim at the expense of the perpetrator, is likely to open a flood of related cases, as other depositors who also lost their foreign currencies sue their respective banks.

Do we need another judgement to decide which of the two rulings related cases might follow? No. I think the precedent from the RBZ v. Trojan Mine case should be followed. The central bank, which is supposed to promote and safeguard confidence in the banking sector, cannot be at the forefront of breaking that confidence.

The central bank has a long history of grabbing private companies’ money and failing to pay back. A case in point is that of Meikles Limited’s US$40.5m, which was taken by the central bank 12 years ago to be used for balance of payment support, but has still not been repaid.

The central bank cannot continue to unjustly enrich itself with money belonging to private companies.

Should the RBZ be left to operate like the Mafia? Stanchart has an option of going to the Constitutional Court, but even if it wins there, the government might eventually step in (like they did before) and protect the RBZ from being sued.

Earlier in the year, the central bank signed an agreement with banks that saw price controls being introduced on financial products. The Bankers’ Association of Zimbabwe (BAZ) said the agreement would see banks losing US$40m a year in revenue. Already banks like CBZ and BancABC have indicated that the agreement is hurting their operations, as they cannot adjust to market trends.

Confidence in banking

I agree with the president of BAZ that this latest court order has created uncertainty in the banking sector. While repayment of these depositors will boost much-needed confidence in the banking sector, that confidence can’t be built on uncertain bank stability.

The US$400m taken by RBZ represents about 10 per cent of the banks’ total deposits of US$4bn. If banks are to repay this money, it would hypothetically reduce bank deposits by ten per cent, or even more through speculation by depositors.

Banks may be forced to use depositors’ money to settle the money and one can only imagine the collateral damage that might result. The move will also result in less liquidity in the economy, which is already suffering from a severe liquidity crunch. The knock-on effect is that less will be available to lend to productive sectors.

We should also understand what will happen to interest rates. The reduction of loan funds will reduce the supply of loans against a high demand, thereby forcing upwards interest charges on remaining loans. This will reduce interest rates on deposits.

Ultimately, a combination of these factors will worsen our macroeconomic environment, as it will increase the cost of doing business and subsequently raise the price of goods and services.

If banks pay the depositors, instead of the central bank paying, they may face challenges in meeting their capitalisation deadlines, which are drawing near. Banks are supposed to have minimum capital of US$100bn by next year. As many banks cannot raise the resources locally, many are in the process of engaging foreign partners to bring in funds. However, foreign investors willing to partner with local banks might be discouraged from doing so, as they fear for their capital.

Looting antics

Some banks may even be forced to sell their assets to raise the money, which will result in them streamlining their operations and even shedding jobs.

The Stanchart precedent will actually encourage the central bank to continue with its looting antics, knowing that it will be immunised by either the law or the government.

The banking sector is also yet to deal with the complex issue of the millions of frozen Zimbabwean dollar accounts from when we migrated to the multicurrency system in 2009. Banks did not convert the Zimbabwean dollar account balances because of exchange rate complications.

At the time of migrating to the multicurrency system, the official exchange was US$1 to Z$121. If banks were to convert Zimbabwean dollar account balances using this rate, then the person who had Z$900 trillion in his account (which was not unusual during that time) would have been given more than US$8 trillion, which is not only unrealistic, but impossible.

Although it is viewed that repayment of these Zimbabwean dollar account balances would invigorate confidence in the banking sector, it is tricky how this will be achieved, given the exchange rate complications.

Another complication, which has the potential to cripple many companies and the economy too, arises from an appalling court ruling in the matter of an employee who was fired by Fleximail during the Zimbabwe dollar era and who approached the courts after dollarisation.

The employee won his case and Fleximail was ordered to pay the employee at an exchange rate of US1$ to Z$55. Business has been lobbying for this case to be reviewed, particularly the exchange rate, considering that it will cripple the economy, as there are many more labour cases from the Zimbabwe dollar era currently at the courts.

If the precedent of this case is followed, then there would be a business shutdown in the country.

The truth of the matter, however, is that something must urgently be done to redress the current brouhaha in the banking sector.

Post published in: Business

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