Zimbabwe: Can livestock really be used as bank collateral?

How effective is using livestock as bank collateral?


Zimbabwe’s slide into yet another economic crisis has hit the headlines over the past week because of the government’s plan to allow livestock to be used as bank collateral.

A bill requiring banks to accept “moveable assets” as collateral against bank loans was put before parliament last week. Motor vehicles, machinery, televisions, refrigerators, computers and other household appliances come under this category but it is the inclusion of cows, sheep and goats that has captured the headlines.

It is now 37 years to the day since Zimbabwe became independent, but the economy shows no sign of stabilising after the upheaval of the past two decades. Finance Minister Patrick Chinamasa said that the reform would “promote financial inclusion to small and medium enterprises, women, youths and other under-banked groups”.

It is true that almost all parts of Africa are drastically underbanked, with most of the population unable to access bank loans. However, bank lending has slowed significantly in Zimbabwe over the past three years. There is also a big disconnect between the formal and informal economies that only innovative measures will be able to bridge.

The use of farm animals to back bank loans may help to tackle both of these issues but it also emphasises the weakness in the Zimbabwean economy. Yet the policy is not as outlandish as it may seem, as livestock is accepted as collateral in Nigeria and Ghana.

Chinamasa said: “As minister in charge of financial institutions, I feel there is a need for a change of attitude by our banks to reflect of our economic realities [as banks are] stuck in the old ways of doing things and failing to respond to the needs of our highly informalised economy.” One of the biggest questions over the move is whether banks will be able to accurately value such assets in the first instance, as well as being able to measure depreciation.

The policy also appears designed to enable farmers to gain access to finance when they do not hold legal title deeds. This is a particular problem on farms that were seized from white Zimbabwean farmers, often by party loyalists. There was no doubt that deep-seated land reforms were needed but the policy has not proved a success in economic or agricultural terms.

The country is in the middle of the biggest financial crisis since the hyperinflationary crisis of 2008-09, which saw the government abandon the Zimbabwean dollar in favour of the US dollar and to some extent the South African rand. The economy grew rapidly for the first three years after the currency switch but this now appears to have merely been the country clawing back some of the GDP lost over the previous decade. The economy contracted by 0.3% last year but the IMF predicts a far more severe 2.5% fall in GDP this year.

Parallel currencies

Harare issued bond notes last year to circulate in parallel with the US dollar, in order to compensate for a lack of greenbacks. In addition, the maximum withdrawal from cash machines has been cut to $50 a day. The bond notes have the same value as the US dollar and are underpinned by a $200m bond facility from the African Export-Import Bank. However, it is reported within the country that retailers still prefer US dollars, which have a higher value on the black market, but if the system collapses it appears that the fault will lie with the economy as a whole rather than the bond notes themselves.

Economist Prosper Chitambara commented: “We also have a domestic debt crisis emanating from a fiscal deficit. There are low levels of confidence in the economy. This makes attracting foreign direct investment impossible. Inflationary pressures are already there as evidenced by the February inflation rate, which brought Zimbabwe out of deflation. If government supplies more bond notes, beyond the $200m, inflation could rise faster.”

The economic crisis is not the only big problem facing the country. The government will sooner or later have to deal with the thorny issue of who succeeds President Robert Mugabe. He is the only leader the independent nation has ever known but is 93 years old and currently undergoing medical treatment in Singapore. Finally, Transparency International Zimbabwe reports that the country loses upwards of $1bn a year to corruption.

Neil Ford

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