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Dr Sanderson Abel
Financial system development depends critically on the legal framework in order to ensure contract enforcement, define the rights of creditors and debtors, determine property rights, and establish rules governing financial institutions and transactions.

The efficiency of the judiciary also has a major effect on the availability and cost of credit. When the legal and judicial foundations for finance are weak, banks tend to avoid unfamiliar risks and require higher interest rate spreads to cover the added cost and uncertainty involved in recovering problem loans.

Consequently, legal and judicial reforms are essential for overcoming some of the root causes of limited access to credit and high borrowing costs for local enterprises.

When property rights are well defined, secure, and readily transferable, land and buildings serve as the most important form of loan security for small businesses.

Conversely, weak or insecure land and property rights, and limitations on the transfer of title, are serious impediments to the development of credit markets.

It is in this light the BAZ has been calling for the strengthening of the 99 year leases so that holders can utilise them as collateral for lending purposes.

Another area that requires strong legal framework is the bankruptcy and insolvency laws.

Well-designed bankruptcy and insolvency laws are needed to determine the rights of creditors and debtors and establish procedures for the orderly settling of claims for entities that cannot meet their obligations.

In economic terms, bankruptcy law should provide a court-mandated vehicle allowing businesses with a legacy of excess debt but viable future prospects to restructure their debts and emerge from bankruptcy with a fresh opportunity to grow.

For overly indebted companies with poor prospects, the law should provide an efficient liquidation procedure to settle the debts and free any remaining assets for more productive uses.

The legal and judicial system must also facilitate the enforcement of other creditor claims against debtors who default on loans.

The ease of executing claims is a serious concern for borrowers as well as lenders, because it is has an important influence on the availability and cost of credit. Currently the legal processes in Zimbabwe seem to be very slow.

Whether it is litigation for a failed contract or a bank is suing for default on a loan, the process is slow. Banks in Zimbabwe have been advocating for a special Commercial Court that will speed up resolution of commercial disagreements particularly with respect to recovery of loans granted to defaulting borrowers and the execution of collateral.

The Government is currently working on it and sooner or later the commercial court will be up and running. It is a fact that a large portion of non-performing loans in the banking are with borrowers who are simply taking advantage of the legal system.

Some borrowers may be defaulting wilfully due to the fact that they are aware that once the loan dispute gets to court it will be a long time before they actually have to pay back the loan.

A sound all-encompassing corporate governance framework supported by strong legislative backing is also required in the country as means to enhancing accountability and rebuilding confidence.

There have been suggestions that the new Corporate Governance Code be subsumed in the Companies Act.

This should be expedited and the framework put in place to guide the operations of the corporates and the banking sector too.

Legal instruments are now in place to pave way for the creation of the credit reference bureaus in the country. These are important as they help banks in the process of credit provision especially as regards the issue adverse selection and moral hazard.

Banks are advocating for a strong credit reference framework that will protect consumers from irresponsible lending practices and over indebtedness. At the same time the Credit reference framework will reintroduce a responsible credit culture in the country where people own up to their financial obligations.

Such a framework is indispensable in the promotion of a positive investment climate in the country. There is need for enabling legislation such as a National Credit Act which will safeguard against reckless lending.

Zimbabwe continuously gets adverse rankings on the ease of doing business index due to complex or lengthy legal processes governing issues ranging from the registration of new businesses, the transfer of property, complex labour laws amongst a few.

Zimbabwe is also known to have a record number of different legal instruments and laws governing businesses and there is room for rationalisation/harmonisation of such laws to make the environment less complex and hence more amenable to both domestic and foreign investors.

As bankers we can state for a fact that legal barriers have been cited particularly by the SME sector as hindering their efforts to grow into formal businesses.

Legal barriers are also negatively affecting financial inclusion efforts e.g. KYC standards, tax legislation, municipal laws which are unfriendly and also late EMA regulations.

•  Dr Sanderson Abel is an Economist. He writes in his capacity as Senior Economist for the Bankers Association of Zimbabwe. BAZ expressly invites stakeholder to give their valuable comments and feedback related to this article to him on [email protected] or on numbers 04-744686 and 0772463008.