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Tawanda Musarurwa

Although banks and other lenders are likely to take a hit from the landmark ruling on United States dollar debts, the decision should also affect firms that are significantly dependent on interest income, analysts have said.

Interest income is the amount paid to an entity for lending its money or letting another entity use its funds.

But from a broader perspective, interest income is the amount earned by an investor’s money that he places in an investment or project.

Insurance and pension firms, for example, which are heavily bonds or other interest-bearing investments are some of the companies that are likely to take a hit.

Last week, the Supreme Court ruled that all debts incurred before February 22, 2019 must be settled in the local currency at a 1:1 rate against the US dollar in line with Statutory Instrument (SI) 33 of 2019.

“Companies that are wholly dependent on interest income have been extensively affected by this,” said analysts at Morgan & Co.

Questions sent to Insurance and Pensions Commission (IPEC) pensions director Josphat Kakwere, on the possible kind of impact, were unanswered by the time of publication.

Another problem for insurance and pension firms that are heavily invested on the Zimbabwe Stock Exchange, for example, is that in real value terms, the total market capitalisation of the local bourse is currently worth just over US$1,8 billion, a significant decline from its circa US$20 billion valuation at the end of 2018.

This, in addition to the devaluation of the local currency, works to further erode these companies’ investment income from such investments. IPEC, in its Pensions report for the third quarter of 2019, warned of such investment risks.

“Inherent investment risk is high on account of the limited investment options and the inflationary environment resulting in negative real returns.

“Under the circumstances, the industry is struggling to preserve value in the environment characterised by absence of high yielding assets, low occupancy levels in the properties market and inflationary pressure on fixed income securities,” said the sector regulator.

And for banks, which will be the hardest hit players due to their role in extending long-term loans such as mortgages, the analysts have said financial institutions that broke tradition from the simple interest income revenue model are poised.

“Interest income for a number of financial institutions in Zimbabwe has not grown in line with inflation. On the other hand, most financial institutions have managed to stay afloat by diversifying their top-line through venturing into non-interest income projects such as promoting the use of mobile POS machines.” they said.