“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.- The Source
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