BSR: The Great ZAMCO scam?
A creature called ZAMCO
In this note, I explain why Politically Exposed Persons (PEPs), past and present, are among the most significant beneficiaries of SI 33/2019 and the most recent Supreme Court judgment in the case of Zambezi Gas Pvt Ltd v N. R. Barber Pvt Ltd SC3/20. To appreciate their unjust windfall, you have to understand a creature called ZAMCO, created six years ago by the government.
“ZAMCO” is an acronym for Zimbabwe Asset Management Company. This company was set up by the Reserve Bank of Zimbabwe in 2014. Its mandate is to buy non-performing loans (NPLs) from the banking sector. An NPL is a loan that is not being serviced by the borrower. This is the banking language to say the borrower is not repaying their loan in terms of the agreement.
ZAMCO was principally set up to buy these NPLs from banks. This type of transaction might come as a surprise to lay people who have little understanding of how banks operate. A loan is regarded as an asset to the bank. When a bank lends money to John, it expects repayment of the loan amount (called capital) plus interest. This interest represents the profit that the bank makes on the loan.
This is why a loan is an asset to the bank. It can sell this asset just as an individual can sell their vehicle to another person. A loan that is not being serviced, however (an NPL), is no longer a good asset. In time, it might have to be written off, just as the owner of a car might have to write it off when it gets badly damaged beyond repair. But, as we see in this note, owners of NPL assets have an advantage that owners of damaged Honda Fits do not have.
A heavily indebted PEP
Let’s imagine a PEP whose associate companies borrowed from banks and has loans of up to US$50 million but these loans have become NPLs either because the PEP and his companies cannot pay or simply did not want to pay. The banks would have applied to sell these NPLs to ZAMCO because this is what ZAMCO was set up to do. ZAMCO would have considered the loans and bought them from the bank. That the borrower was a PEP would probably have had a bearing in ZAMCO's decision-making process, even though they won't admit it.
ZAMCO would have used financial instruments called Treasury Bills (TB) to pay for the NPLs. The bank could wait to redeem the TBs upon maturity but most likely, it would have sold them on to investors at a discount and walked away with cash. For the sake of simplicity, a TB with a face value of US$5 million could be sold for US$4 million cash. The bank would be happy to take the cash while the investors hope to make US$1 million profit, that being the difference between the TB’s face value and the cash they paid to the bank. TBs are traditionally considered safe and trusted instruments.
For its part, ZAMCO would restructure the NPLs and work a repayment arrangement with the debtors. For the debtor, working with ZAMCO is far more comfortable compared to dealing with a profit-driven commercial bank.
The ZAMCO justification
The government justified ZAMCO on the basis that it wanted to relieve the banking sector of the burden of too many NPLs and also to cushion borrowers in distress. However, this represents classic state intervention and interference with the market. Banks would have made bad lending decisions, especially to PEPs, on no reasonable business grounds except that they were PEPs. These PEPs might have used the borrowed cash to fund a luxury lifestyle, wasted the money on non-productive activities, making the rest of society feel bad that they were not doing as well. It's hardly surprising that the majority of NPLs were bought from state-related banks like CBZ, ZB Bank and other local banks - they are favoured by and vulnerable to PEPs.
Now, because ZAMCO is essentially a state entity, it is the taxpayer who is being asked to carry the burden of the banking sector’s bad lending decisions and the lavish lifestyles of PEPs and businessmen. Somehow, banks were being rewarded for it. Since a bank loan is a private contract between the bank and a borrower if the borrower fails to repay it’s up to the bank to pursue the borrower. It’s called debt collection; one of the cash-cow departments in law firms. The bank may have to attach and sell the property of the debtor to settle the debt. They might even seek civil imprisonment of a debtor whom they know has the resources but is refusing to meet his obligations. That’s how business works. The law of contract is designed for this.
If the bank fails to recover the debt, it’s part of the risk of a banking business. Accountants have a term for it: bad debts are written off the books when it becomes clear they are unrecoverable. If the problem is intolerable, the directors and managers of the bank must face the music. If there are independent and vigilant shareholders, they will put pressure on them to go for failing to run the business and putting their investments at risk. This is how the market is supposed to work, without the distorting interventionism of the state.
However, if the government intervenes and buys NPLs from banks that lent recklessly, as it did with ZAMCO, it’s creating what is known as a moral hazard. The moral hazard is that these banks will continue to lend recklessly, knowing that bad loans will be taken over by the government. If a reckless bank knows they will be rescued, it will probably continue to do the same things. Taking over loans without consequences for those who made bad decisions simply fuels bad behaviour.
However, a closer look shows that it is the debtors that are the biggest winners in this government-orchestrated scam. For starters, they no longer have any pressure from the banks from which they borrowed. The bank, which is driven by profit to recover its loans, is off their back. They don’t have to worry about legal action anymore. Instead, ZAMCO (and by implication the taxpayer) has taken over the loan. Government has no pressure.
This also creates another moral hazard. Debtors will know that if they don’t pay back their bank loans, they will become NPLs and one day, the government, through ZAMCO, will take over the NPLs. So they have an incentive to go on borrowing and spending as they please. They might even stash the cash overseas or buy multiple assets with the cash. Most ordinary people do not know this scam. It is well known to PEPs, businessmen and executives. In fact, reliable sources indicate that senior executives of a major bank had their own loans moved to ZAMCO and within a short period of time, they had acquired new loans - from the same bank.
Now enter SI 33/2019 and the latest Supreme Court judgment and it gets worse. By that judgment, the Supreme Court confirmed that all local US-dollar denominated debts due on or before 22 February 2019 are convertible to the RTGS$ at the command rate of one-to-one. This has major implications for ZAMCO & its “assets”, the NPLs.
On account of that decree, our PEP who owed US$50 million loans which were bought by ZAMCO now owes RTGS$50 million. Using today’s average Interbank Market rate of one-to-sixteen, our PEP’s debt obligations in US$ have fallen from US$50 million to US$3,125,000. This means US$46,875,000 has just been shed off. Just like that!
But remember the PEP would have already used the US$ that he got from the bank? He probably owns vast properties locally and abroad. Some of the cash might be in overseas banks and trusts. He would have used to it send his kids to expensive foreign universities. ZAMCO bought the loan from the bank. Unless the bank held on the TB which has now lost value due to the one-to-one conversion, it won too because it sold the TB and got US$ cash.
Audit, investigation and accountability
If the government were sincere, ZAMCO would be subject not just to a thorough forensic audit but an independent inquiry as well. This inquiry would reveal the identity of debtors whose NPLs were bought by ZAMCO from commercial banks. It would also show the extent of the great robbery that has taken place.
It would be different and slightly better if the pre-22 February 2019 US dollar-denominated debts were converted at a floating exchange rate. But the Finance Minister’s decision to use the command rate of one-to-one is proving to be one of the greatest scams of our time and we have not even started discussing the impact on savers and investors in pension schemes.
In normal democracies, one might expect parliament to lead the way to investigate what has happened. But if MPs from both ends of the political divide who borrowed and owe money are beneficiaries of the decree and the judgment that confirms it, they have no incentive to take any action. It might be left to civil society organizations that are not compromised to push for action.
This what ZAMCO says of itself on its website: "ZAMCO is committed to the principles of openness, integrity and accountability as advocated in the above Corporate Governance codes and guidelines. All business dealings and relationships with all stakeholders are conducted with honesty and integrity and in accordance with generally accepted corporate practices."
If the directors and management of ZAMCO are honourable men and women and if they truly believe in these values, they must be open and transparent about the state of ZAMCO's assets in the wake of the Supreme Court judgment. Who owes ZAMCO and how have those assets been affected by the decree and the judgment?