HOUSING FINANCE

IN ZIMBABWE

Prepared For:

The Office of Housing and Urban Programs

Agency for International Development

By:

Daniel S. Coleman

Vice President, International Programs

and

Randoloh S. Lintz

Economic Development Consultant

National Council of Savings Institutions

 TABLE OF CONTENTS

PAGE

The Financial Sector 1

A. Introduction 1

B. Structure of the Sector 1

1. Reserve Bank of Zimbabwe 3

2. Commercial Banks 4

3. Merchant Banks 5

4. Discount Houses 7

5. Finance Houses 9

6. Post Office Savings Bank 9

7. Building Societies 10

8. Insurance Companies 10

9. Pension and Provident Funds 11

10. Agricultural Finance Corporation 11

C. Financial Sector, Trends 12

1. The Reserve Banks of Zimbabwe 12

2. Commercial Banks 13

3. Merchant Banks 14

4. Discournt Houses 15

5. Finance Houses 15

6. The Post Office Savings Bank 16

7. Building Societies 17

8. Insurance Companies 21

9. Pension, Provident and Retirement

Annuity Funds 21

. The Housing Finance Market 22

A. Introduction 22

B. Overview of the Primary Market 22

C. Private Sector Finance Activities 24

1. The Building Societies 24

2. Other Private Sector' Inputs 36

Table of Contents - P&ge 2

D. Government Housing Finance Activities 37

1. Role of Government Ministries and Authorities 37

2. The National Housing Fund 38

3. The Housing and Guarantee Fund 44

4. MCNH Administration 50

E. Local Authorities 51

III. Resource Mobilization 53

A. Sources of Housing Finance 53

1. Domestic Savings Generations 53

2. Government Budgetary Contributions 54

3. Redirecting Funds from Other Financial

Institutions 55

4. External Sources 56

5. Municipal Finances 56

6. Secondary Mortgage Sources 57

B. Constraints on Resources Mobilization 58

1. Taxation 58

2. The Budget Deficit and its Effect on Domestic

Savings 60

3. Recent GOZ Policy Changes 62

4. Rent Controls 64

IV. Recommendations for a Rejuvenated

Housing Finance Program in Zimbdbwe 67

A. Recommendation #1 67

B. Recommendation #2 68

C. Recommendation #3 69

D. Recommendation #4 69

Table of Contents - Page 3

TABLES

Table I-1
- Zimbabwe: Structure of the Financial

System 2

Table 1-2
- Zimbabwe: Banking Sector Deposit,

Lending and Inflation Rates, 1980-1984 6

Table 1-3
- Zimbabwe: Holding of Public Securities

by the Private Sector - Summary 8

Table 1-4
- Savings and Fixed Accounts of the Post

Office Savings Bank 17

Table 1-5
- Zimbabwe: Savings with Financial

Institutions, 1980-1984 19

Table II-1
- Total Housing Investment 23

Table !1-2
- Building Society FY 1984 Balance Sheets 26

Table 11-3
- Building Societies Loan Portfolio 27

Table 11-4
- Building Society FY 1984 Income

Statements 28

Table 11-5
- Building Society Mortgage Loans

1980-1984 30

Table 11-6
- Analysis of Savings Accounts 32

Table 11-7
- Building Societies' Consolidated

Balance. Sheet 34

Table 11-8
- National Housing Fund Investments

1980/81-1984/85 39

Table 11-9 - GOZ Housing Investments ­

1980/81-1984/85 40

Table II-10 - Outstanding Balance, Capital Loans

National Housing Fund 40

Table II-11 - National Housing Fund Balance Sheets 41

Table 11-12 - National Housing Fund Income Statement 42

Table 11-13 - Local Authorities Loan Arrears to

National Housing Fund 44

Table of Contents
- Page 4

Table 11-14
- Housing and Guarantee Fund Loan

Guarantees
46

Table 11-15
- Housing and Guarantee Fund Loan

Forezlosures
47

Table 11-16
- Housing and Guarantee Fund Income

Statement 48

Table 11-17
- Housing and Guarantee Fund Income

Statement 49

Table 11-18
- MCNH Administrative Expenses (Housing
Administration Only) so
Table 11-19
- MCNH FY 1984 Total Adminiscrative
Costs
51
Table III-1
- Zimbabwe: Savings and Budget
Deficit Ratios 61

STATISTICAL APPENDIX

Table SA-I - Zimbabwe: Holdings of Public

Securities by the
Private Financial Sector, 1980

Table SA-2 - Zimbabwe: Holdings of Public

Securities by the
Private Financial Sector, 1981

Table SA-3 - Zimbabwe: Holdings of Public

Securities by the
Private Financial Sector, 1982

Table SA-4 - Zimbabwe: Holdings of Public

Securities by the
Private Financial Sector, 1983

Table SA-5 - Zimbabwe: Holdings of Public

Securities by the
Private Financial Sector, 1984

 CURRENCY EQUIVALENTS

(February, 1985)

Zimbabwean Dollar - Z$

US$1.00 = Z$1.59

Z$1.00 = US$0.63

Fiscal Year

For all financial institutions the fiscal year

(FY) is July 1 to June 30

 PREFACE

This document is the report of a study undertaken in early 1985 on

Housing Finance in Zimbabwe. The report is divided into four major

sections. Section I covers the financial sector in general and it

discusses the present structure of the various financial institutions in

Zimbabwe, their role in the economy and the present trends and projec­
tions as they affect the housing market. The second section covers the

housing finance sector, with a major discussion on the buildings socie­

ties as well as government programs and plans. Section III discusses the

issue of resource mobilization, including the potential for increasing

the flow of financial resources to the housing sector. In that respect,

this section covers fully the economic and government policy constraints

that retard the flow of resources.

Finally, the last section makes a number of recommendations to

improve the housing firiance syster in general and to direct new and

supplementary sources to the sector. These recommendations are limited

to four in order to facilitate the government in making policy decisions.

Calculations of the need and demand fcr housing are normally an

integral part of any housing finance analysis. Those calculations,
however, are not included in this report as they are being prepared
separately by another consulting firm, the Urban Institute. To
complement the National Council's report on housing finance in Zimbabwe,
the Urban Institute's report on housing need and demand should be read
concurrently.
This report was prepared by Daniel Coleman and Randolph Lintz of

the National Council of Savings Institutions. It is one component of a

feasibility study for the establishment of a National Housing Corporation

in Zimbabwe.

 EXECUTIVE SUMMARY

Zimbabwe has a sophisticated and well-developed financial sector,

including three building societies which have been the country's major

ource of housing finance. To a large extent, the majority of the

institutions comprising the financial sector have existed primarily to

serve the needs of the private sector, especially the commercial and

corporate entities. However, since independence, the financial sector

has been called upon to serve the growing financial needs of the public

sector. This has been occasioned by soaring expenditures (and

concomitant revenue shortfalls) of the Government of Zimbabwe's (GOZ)

large-scale social services and other programs and the growth of

state-owned enterprises. The GOZ's dependence on the financial sector

and the imposition of a myriad of operational controls to supplement

these revenue shortfalls (primarily domestic savings) have had serious
ramifications among financial intermediaries. The resultant highly

regulated financial system has significan:ly hampered the building

societies' ability to mobilize resources for housing finance. As such,

the ability of the building societies to meet the need and demand for

housing is severely constrained.

The housing finance market can generally be segmented into two

groups with respect to urban areas. Loans to purchase husing for middle

and upper income families are obtainable from the Lilding societies while

access to financial assistance by lower income families has been

principally through government channels.

As of the end o fiscal year (FY' 1984, the three building socieites'

collective loan portfolio consisted of 29,500 mortgages with a value of

Z$416 million. During FY 1984, collective profits were less than

Z$870,000. Although the spread between the socieities' average cost of

money and average return on investment exceeds 4 percent points,

administrative and operational costs consume the spread. These costs are

primarily attributed to the cost of maintaining thousands of small

savings accounts. Since 1980 mortgage loans have grown very slowly

relative to pre-independence, primarily the result of minimal growth of

deposits and share capital which in turn is attributable to the tax

advantage available to savers at the GOZ's Post Office Savings Bank.

Other GOZ policies have also contributed to the downward trend in

mortgage loans. The building societies' ability to proviCd more housing

finance is therefore contingent upon GOZ regulatory changes.

A number of GOZ agencies intervene directly and indirectly in the

provision of finance to the housing sector. Although the GOZ's financial

resources have been strained over the past five years, the GOZ has

provided Z$152 million in loans below market rate for the development of

housing schemes. The Ministry of Construction and National Housing

administers two major programs which have directed these GOZ funds to the

housing sector: The National Housing Fund (NHF) and the Housing and

Guarantee Fund (HGF).

 The NHF functions as a financial intermediary for GOZ and other

loans to local government authorities for the development and sale of

low-income housing solutions. While in the past loans were made to the

NHF by private sector financial institutions and the City of Harare, the

GOZ is presently the sole source of funds. Although the NHF is mandated

to be self-sufficient, total income in the past two years was inadequate

to cover expenses. As a result, the GOZ has made annual contributions to

the NHF to cover the deficit. Local government authorities are in

arrears to the NHF and, although some of this debt is being rescheduled,

the weak financial position of local government suggests that this

problem is likely to grow. The effectiveness of the NHF is significantly

constrained by its dependence on GOZ funds, and until it can generate

additional resources, its effectiveness as a primary supplier of low-cost

housing funds will continue to be constrained.

The HGF operates a guarantee scheme, whereby a portion of a mortgage

loan obtained from a private financial institution is guaranteed for

repayment, as well as a rental housing ownership and management scheme.

During the 1980-1984 period, the HGF guaranteed nearly 11,000 building

society loans, almost evenly divided between public servants and the

general public. The value of the HGF is that the guarantee scheme has

helped assure the flow of building society funds to the relatively soft

housing market. Since the inception of the HGF, the fund has accumulated

real properties presently valued at Z$7.2 million, primarily the result

of foreclosures on guaranteed loans. Rental (and occasionally the sale)

of these properties to GOZ employees has generated a surplus for the HGF.

The mobilization of domestic resources which can be channelled to

housing credit is the key to a viable housing development program.

Zimbabwe's domestic savings can only be additionally tapped as a source

of housing finance if the GOZ institutes policy changes. These changes

relate to present policies which inhibit the flow of savings to the

building societies and the various funds which would in turn make

resources available in the form of housing credit. In order to enable

the housing funds to maintain their value, GOZ's loans for low-cost

housing should reflect an interest rate closely in line with the rate of

inflation so as not to decapitalize the funds. Additionally, housing

loans made to the NHF in perpetuity would insure a steady flow of

resources for low-income housing. The redirection of a portion of the
assets of life insurance companies and pension and provident funds, now
invested in government and quasi-government securities, to the housing

market would permit a steady and reliable source of resources. Although

the GOZ has recently begun to rely on external loans for housing

development, this source is quite limited. The GOZ's principal source of

external funds to date, the IBRD and USAID, have made it clear that it is

not within their mandate to provide all housing requirements. The

potential for raising new funds for housing through the sale and purchase

of existing mortgages is limited only by the demand for housing finance.

Since an institutional framework already exists in Zimbabwe which could

be adapted to oversee a secondary mortgage operation, a secondary

mortgage market operation could, in theory, be established under the
auspices of the discount houses.
- ii -
 Since existing housing finance institutions cannot presently cater

to the needs of all Zimbabweans, the team poses several recommendations

in an attempt to provide policymakers with a concrete agenda whereby

through a public and private joint effort, many of Zimbabwe's housing

finance problems can be overcome. The building societies are the

country's only specialists in housing credit and must be competitive in

their ability to attract savings in order to generate mortgages.

Therefore, it is recommended that the tax-free status and/or allowable

ceilings of POSB accounts be modified. Assuming that the demand for

housing is sufficient to warrant the establishment of a secondary

mortgage market system to generate additional housing funds, it is

recommmended that the GOZ study the possibility of allowing the building

societies to raise funds through the sale of its mortgage portfolio or of

participations thereof. Besides Harare and Bulawayo, 15 other urban

councils are trying to meet their constituents' demands for an expanded

level and range of municipal services, especially housing. As such, it

is recommended that loans to all urban councils be included in the list

of approved assets required to be held by financial institutions.

Finally, the team recommends that GOZ budgetary loans for housing for
low-income families be directed to district and rural councils which
would enable housing credit to be extended to an even lower income
segment of the Zimbabwean population.

- iii ­
I. The Financial Sector

A. Introduction

At independence, the Government of Zimbabwe (GOZ) initiated a

strategy of "Growth With Equity" with increased living standards as a key
component of the strategy. Also since independence, there has been a
marked increase in the GOZ's participation in the economy. It is against
this backdrop that the proposal for a National Housing Corporation
emerged - a proposal to increase the living standard of all Zimbabweans
througn greater participation by the public sector. Prior to endorsing
such a public sector solution to a significant problem, an analysis of
the existing private financial system is In order to ascertain whether
the creation of an entirely new financial entity is truly warranted.

This section is intended to describe the financial system as it

exists today in Zimbabwe and to trace and analyze the trends in the
system since independence. The purpose of this exercise is to: (a)

ascertain whether the existing financial system, reported to be unique on

the African continent, is capable of providing mortgage credit; (b)

identify any constraints inhibiting its performance; and (c) assess its

future potential for providing housing finance.

B. Structure of the Financial Sector

Zimbabwe has a sophisticated and well-developed banking system

consisting of the Reserve Bank, five commercial banks, four accepting

houses or merchant banks, two discount houses, five finance houses, three
building societies and the Post Office Savings Bank. In addition to
these deposit-taking intermediaries, there are approximately 50
registered insurance companies and over 1,300 registered pension,
provident and retirement annuity funds operating in the country. There
are also several institutions designed to channel government and/or
private sector capital subscription funds to specific economic activities
such as agriculture and industry. The most important of these entities
is the Agricultural Finance Corporation. Table I-1 depicts the structure
and total assets of the financial system since 1980.
To a large extent, the majority of institutions comprising Zimbabwe's

financial sector have existed primarily to serve the financial needs of

the commercial and corporate sector. These institutions include the

commercial banks, the merchant banks, the discount houses, the finance

houses and the insurance companies. The financial requirements of

private individuals, on the other hand, have been addressed by commercial

banks, finance companies, building societies, the Post Office Favings

Bank and the pension plans.

 TABLE I-1

Zimbabwe: Structure of the Financial System

(Current Z$ Millions; End of Period)

Total Assets Proportion of Total

1980 1981 1982 1983 19841/ 1980 198 1 1982 1983 198 4

Reserve Bank 423.2

662.0 695.9 1,015.8 1,031.6
9.6 12.6 11.6 14.7 13.8

Commercial Banks 980.9 1,227.3 1,438.9 1,503.7 1,lE 12 22.0 23.3 24.0 21.9 21.1

Merchant Banks 313.5

264.8 3CB .4 305.2 342.8 7.0 5.0 5.1 4.4 4.6

Discount Houses 101.3 110.2 104.7 131.1 145.6 2.3 2.1 1.7 1.9 1.9

Finance Houses
136.2 134.8 176.8 202.1 210.9 3.0 2.9
3.5 2.9 2.8

Post Office Savings Bank 271.7 313.2 375.1 445.4 572.6 6.1 5.9 6.3 6.5 7.6

Building Societies 596.3 605.8 643.4 652.0 649.8 13.3 11.5 10.7 9.5 8.7

Insurance Companies 691.1 772.2 921.4 1,025.2./ 1,140.4-Y 15.5 14.7 15.4 14.9 15.2

Pension and Provident Funds 809.9 985.2 1,166.0 1,390.0 1,56B .I2 / 1.1 1B.7 19.4 20.2 20.9

Agricultural Finance Corporation 139.3 141.9 166.3 219.4 250.7 3.1 2.7 2.8 3.2
3.3

Total 4,46B .4 5,267.4 5,996.9 6,894.9 7,495.7

Sources: Central Statistical Office, Quarterly Digest of Statistics

Report of the Registrar of Financial Institutions and Building Societies

Report of the Registrar of Insurarce

Report of the Registrar of Pension and Provident Funds

Reserve Bank of Zimbabwe, Quarterly Economic and Statistical Review

I/ End of June

2-/ Estimate
 - 3 -

In recent years, however, these institutions have been called upon to

serve the growing financial needs of the public sector and in many
respects this has influenced the shape, performance and direction of the
financial sector. The effects of the GOZ's growing reliance on the
financial sector will be discussed below in Section C.

In separate sections below, each of the financial intermediaries of

Zimbabwe's financial sector are described and analyzed in terms of their

activities, control of financial resources and their investment

portfolios. Quantative data pertaining to each sector grouping are

summarized in Tables I-1 and 1-3 and delineated on a yearly basis in

Tables SA-I through SA-5 in the Statistical Appendix.

1. Reserve Bank of Zimbabwe

The Reserve Bank of Zimbabwe (RBZ) stands at the apex of the

banking and monetary system. Established by the Reserve Bank Act of

1964, RBZ acts in the national economic interest in exercising its

responsibilities regarding the money supply, the administration of

government loans and treasury bills and the custodianship of the

country's foreign exchange reserves. As the allocator of foreign

exchange funds, the RBZ operates a sophisticated allocation system

involving both the public and private sectors in the determination of an

appropriate level of foreign exchange available to each sector and

components thereof.

The RBZ carries out all the traditional functions of a central bank,

serving as both the banking system's and the GOZ's banker. It issues

currency, provides clearinghouse facilities and acts as a lender of the

last resort. The RBZ sets liquidity and reserve requirements, regulates

and supports the commercial financial sector and intervenes directly in

the market to impact the level of interest rates through its influence on

the setting of prices at the weekly treasury bill auction.

Besides its control over the country's foreign exchange reserves, the

RBZ handles the nation's gold output. All gold production in Zimbabwe is

required to be sold to the RBZ and is treated as an export receipt in the

country's balance of payments estimates.

As depicted in Table I-1, the assets of the RBZ have increased by

over 40 percent since 1980. As of mid-1984, the RBZ controlled 14

percent of the country's financial resources.

 - 4­

2. Commercial Banks

A full range of retail banking services are available throughout

the country at branches of Zimbabwe's five commercial banks. These are:

Bank of Credit and Commerce Zimbabwe Limited

Barclays Bank of Zimbabwe Limited

Grindlays Bank plc

Standard Chartered Bank Zimbabwe Limited

Zimbabwe Banking Corporation Limited

As illustrated in Table 1-1, these banks have controlled between 21

percent and 24 percent of Zimbabwe's financial assets during the

1980-1984 period.

Commercial banks provide deposit (variable term) and current accounts

(for which a fee is assessed) to both individual and corporate clielits.

The majority of commercial bank lending activity is short-term, primarily
for working capital and commercial agriculture finance. These loans are
almost exclusively drawn on an overdraft basis, usually secured by real

property or commercial assets. In some instances, 5-7 year medium-term

loans can be arranged, although this type of credit is generally provided

by merchant bank subsidiaries. Not surprisingly, the bulk of commercial

banking activity is concentrated in Harare with 78 percent of total

deposits by value transacted.

Commercial bank deposit and lending rates for the past five years are

depicted in Table 1-2. Through a vehicle known as the Register of

Cooperation, a cartel agreement among the principal banks, interest rates

and charges are fixed with the intent of providing the banking sector a

stable environment in which to operate.

During the 1980-1984 period, the commercial bank lending rate was

raised to 13 percent in 1981, while deposit rates have fluctuated from a

low of 4.4 percent in 1980 to a high of 14,2 percent during 1983. At

mid-1984, the commercial bank deposit rate stood at 10.5 percent.

Despite a significant increase in the lending rate, commercial bank

advances have risen by over 152 percent since the beginning of 1980,

partially the result of increased lending to statutory bodies.

Presumably attracted by higher deposit rates, savings with commercial

banks has increased by over 135 percent since the beginning of 1980.

The Reserve Bank of Zimbabwe sets capital, liquidity and reserve

requirements for the commercial banks. The most notable of these

requirements is for a minimum of 35 percent of the banks' assets

portfolio to consist of "approved" liquid assets. These approved assets

consist of registered government and quasi-government securities and

loans with a maturity of less than 6 years. Table 1-3 illustrates that

commercial bank holdings of approved assets increased from Z$397 million

 - 5­

in 1980 to a high of Z$559 million in 1982 before declining to Z$492

million in mid-1984. The 1980 and 1984 increases in the statutory liquid

asset ratio (to 35 percent and 40 percent respectively) undoubtedly

placed the banks in a tight liquidity position, primarily to the benefit

of short-term GOZ borrowers such as the Treasury and the Agricultural

Marketing Authority. Tables SA-I through SA-5 in the Statistical

Appendix provide more detailed information on the yearly composition of

commercial bank holdings of approved assets.

3. Merchant Banks

There are four merchant banks in Zimbabwe which are technically

known as registered accepting houses. These include:

Merchant Bank of Central Africa Limited

RAL Merchant Bank Limited

Standard Chartered Merchant Bank Zimbabwe Limited

Syfrets Merchant Bank Limited

As depicted in Table I-1, this group of banks controlled between 4 and 7

percent of the country's financial resources during the 1980-84 period.

The services offered by these institutions are geared closely to

corporate needs and large account holders. Services include the

financing of imports and exports through acceptance credits, the

processing of commercial letters of credit and foreign hills of exchange,

the provision of shortand medium-term financing, bridging finance and

foreign exchange transactions and dealings. Together with the commercial

banks, merchant banks are the country's only authorized foreign currency

brokers. In the area of acceptance finance, the merchant bank group

handles acceptances for the Tobacco Marketing Board. These banks also

specialize
in the flotation of public companies and are authorized to

underwrite new issues. They can also

manage- portfolios, raise

development capital, undertake the capital reconstruction of companies

and arrange for mergers and takeovers.

Merchant bi:k deposit and lending rates are illustrated in Toble 1-2.

Also internall>, fixed, both deposit and lending rates

have f'uctuated

over the 1980-84 period. The deposit rate increased from 4.4 percent in

1980 to a high of 14 percent in 1981 then declined in 1982, rose again in

1983 and declined to 10.5 percent as of mid-1984. The merchant bank

lending rate has mirrored the deposit rate fluctuations and stood at

10.75 percent at mid-1984.

While rrarchant banks' capital and reserves are regulated by the

Reserve Bank, they are not required to carry as high a level of approved

assets as commercial banks. The merchant bank group's share of required

central and local government and parastatal securities as a proportion of

 TABLE 1-2

Zimbabwe: Banking Sector Deposit, Lending and Inflation Rates 1980 - 1984
(Percent at End of Period)

Deposit and Lending Rates for

Post Office

Commercial Banks Merchant Banks Finance Houses

Savings Bank Building Societies

Residential Commercial Inflation

Deposit Lending Deposit Lending Deposit Lending

Deposit Only!_ Deposit!/ Lending!. Lending Rate5_

1980 4.40 7.50 4.40 6.00 5.25

11.00 4.50 4.75
7.75 8.50 7.2

1981 12.00 13.00 14.00 11.25 9.13 17.00 8.50

9.75 13.25 14.75 13.9

1982 10.50 13.00 10.75 10.65

9.13 18.30 8.50 9.75
13.25 14.75 14.6

1983 14.20 13.00 13.00 11.00

9.13 20.00 8.50
9.75 13.25 14.75 19.6

1984!' 10.50 13.00 10.50 10.75 9.13 20.00

10.00 9.75 13.25
14.75 14.81/

Sources: Central Statistical Office, Quarterly Digest of Statistics

Reserve Bank of Zimbabwe, Quarterly Economic and Statistical Review

l/ Maximum 12-month deposit rate and minimum lending rate

2/ Tax-free interest rate

3/ Non-fixed deposit rate is presently 7.75%

4/ Rate on loans over Z$12,000; under Z$12,000 the rate is 12.5%

5/ Calculated as the mean of the averages of 12 monthly figures of the consumer price indices of urban
high- and low-income families

6/ First six months

7/ First nine months

 - 7­

their total assets declined significantly between 1980 and 1983 but rose

again in 1984 to Z$38.7 million, presumably in response to higher rates

of return on approved securities (Table 1-3).

The group's rather sluggish rate of growth in total assets (Table

I-1) is primarily attributable to disappointing price levels for
Zimbabwe's exports in international markets and reduced foreign exchange
allocations for commerce and industry, thus reducing trade-related
financing needs.
4. Discount Houses
There are two discount houses which service the money market.
These include:
BARD Discount house Limited
The Discount Company of Zimbabwe
The discount houses, modeled along the lines of London institutions,
accept call money from various financial and nonfinancial institutions

and invest the funds into a wide range of financial assets mainly with
short maturity: Treasury bills, Agricultural Marketing Authority bills,
bankers acceptances, negotiable certificates of deposit and short-term
public sector issues. Between 1980 and 1984, the discount houses

controlled a relatively stable 2 percent of the country's financial

resources (Table I-1).

Longer term financial vehicles such as Tobacco Authority bills are

discountable for up to four months. An additional longer-term
instrument, the negotiable certificate of deposit (NCD)!/, has an
active secondary market which is managed by the discount houses. In
addition to maintaining an active secondary market in NCDs, the discount
houses maintain markets in Treasury bills, bankers acceptances,
Agricultural Marketing Authority bills, and the stocks of central

government, municipal governments and the Electricity Supply Commission,

which generates substantial turnover of these financial instruments.

Such expertise in the maintenance of secondary markets could be put to

use in the event of the creation of a particpating mortgage bond scheme

or related secondary mortgage market scenario aimed at generating

resources for housing finance (see Section III-A-6).

1/ NCDs are issued in any denomination with a minimum amount of Z$10,000

or in any multiple of Z$5,000 thereafter. NCDs can be issued by

commerciil banks, merchant banks and finance houses for periods ranging

from three months to five years.

 TABLE 1-3

Zimbabwe: Holdings of Public Securities by the Private Financial Sector - Sunmary

(Current Z$ Millions; End of Period)

Securities I/
Percentage Change

Investor 1980 1981

1982 1983 1984- 1980/81 1981/82 1982/83 1983/84 1980/4

Comnercial Banks 396.6 438.0 559.0 507.8 492.2 10.4 27.6 -9.2 -3.1 24.1
Merchant Banks 38.3 28.7
21.4 19.4 38.7 -25.1 -25.4 -9.3 99.5
1.0

Discount Houses 75.5 28.5 69.1

40.2 50.1 -62.3 142.5 -41.8 24.6
-33.6

Finance Houses 17.0

23.5 20.6 23.1
24.3 38.2 -12.3 12.1 5.2 42.9

Post Office Savings Bank 248.0 286.7 340.2 392.3 171.7 15.6 18.7 15.3 20.2 90.2 Co

Building Societies 192.5 167.9 154.8 145.4 140.0

-12.8 -7.8 -6.1
-3.7 -27.3

Insurance Companies 291.9 303.9 368.2

484.4 522.6-1/ 4.1 21.2 31.6 7.9
79.0

Pension and Provident Funds 404.8 482.2

576.4 762.3 848.1 3-/ 19.1 19.5 32.3 11.3
109.5

Total 1,637.6 1,759.4 2,109.7 2,374.9 2,587.7

7.4 19.9 12.6 9.0 50.8

Source: Tables SA-1 through SA-5

1/ Includes securities of central governent, local authorities and statutory bodies, Agricultural
Marketing Authority and Treasury Bills and
loans to local authorities and statutory bodies.
2/ End of June
3/ Estimate

 -9­

5. Finance Houses

The financial sector also includes five finance houses or hire

purchase companies which provide a range of commercial and retail term
finance facilities. The group is comprised of:

FINCOR
Grindlays Finance Limited
SCOTFIN Limited
Standard Finance Limited
udc Limited
Together this group has controlled a relatively stable 3 percent share of

the country's financial resources since 1980 (Table I-1). Total assets

of these finance houses stood at Z$145.6 million at mid-1984.

In addition to their hire-purchase and lease-hire business, finance

houses can provide direct term financing. Such financing is an

alternative to that available through commercial banks which is

relatively difficult to arrange on a routine basis. These term loans

(p,Imarily medium-term) are funded through commercial deposits, which by

statute must be deposited for periods of 30 days or more due to the

longer-term nature of these institutions their lending operations. Table

1-2 illustrates that finance houses' deposit and lending rates were

increased significantly in 1981 and as of mid-1984 were 9.13 percent and

20 percent respectively. Although there are no limitations on the rate of

interest which can be offered, competition within the group assures that

rational ranges are maintained. The finance houses' statutory liquid

asset ratio was raised from 15 percent to 20 percent in the second

quarter of 1981. Table 1-3 depicts these institutions' holdings of

approved assets over time and illustrates that their total holdings of

these assets has increased to Z$24.3 million since 1980.

6. Post Office Savings Bank

Although the Post Office Savings Bank (POSB) has been in

operation for eighty years, its predominance as a deposit taking

institution serving the entire cour.ry is a relatively new phenomenon.

At the end of December 1984, the POSB had a total of 858,000 accounts
being served by over 160 offices nationwide, the majority outside of
major commercial centers. As illustrated in Table 1-1, total assets have
increased Ill percent during the 1980/84 period. The POSB is not allowed
lending operations to the private sector but is required to invest the
bulk of its funds in government stocks.

Tables 1-3 and SA-I through SA-5 illustrate the proportion of the

POSB's assets invested in securities of the GOZ, local authorities and

statutory bodies over time. These investments represented 71 percent of

 - 10 ­

the portfolio in 1980 and had grown to 82 percent by mid-1984. The

POSB's other assets consist primarily of call money with the discount

houses and deposits with commercial banks.

7. Building Societies

Zimbabwe's three building societies receive deposits from the

public and provide mortgage finance primarily for residential development

and some commercial building construction. This financial sector is

composed of:

Beverley Building Society

Central Africa Building Society

Founders Building Society

The building society movement in Zimbabwe is over thirty years old and is

governed by legislation contained in the 1951 Building Societies Act

which was last revised in 1965. Interest rates on both deposits and
mortgages are regulated, as are mortgage terms. Table 1-2 illustrates

maximum allowable deposit and lending rates in effect at mid-1984. The

building societies are allowed to offer 9.75 percent on a 12-month fixed

deposit, and lending rates for residential and commercial properties are
13.25 percent and 14.75 percent respectively, for a period up to 25 years.

Deposits with the building societies, which are essential in order

for the societies to grant mortgages, have stagnated since 1980. This
development is primarily related to the unattractiveness of allowable
deposit rates relative to other institutions, most notably, the POSB.
Table I-1 depicts the steady decline in the share of the country's total
financial assets held by building societies from 13.3 percent at the end

of 1980 to 8.7 percent at the end of June, 1984. Building societies are

required to maintain 15 percent of their assets in liquid (under 6-year

maturity) government and quasi-government securities; Table 1-3 depicts
the magnitude of these public holdings. Tables SA-l through SA-5
delineate these holdings over the 1980-84 period.
8. Insurance Companies

At the end of 1982, there were 48 direct insurers registered to

operate in Zimbabwe including both life and non-life companies which

control in excess of 15 percent of the country's financial resources

(Table I-1). The industry is represented by international firms as well
as Zimbabwean companies and offers a full range of personal and
commercial insurance to a rapidly growing number of individuals and
firms. The industry's share of Zimbabwe's total financial resources has
remained relatively constant during the 1980-84 period althought the
assets of the industry have grown at an average annual rate of 14 percent
since 1980 (Table I-1). Assets are estimated to increase by

approximately 25 percent during 1985.

 - 11 -

Although the insurance industry is inherently conservative in its

investment policy, it has been obliged to become more so as a result of

an increase in the industry's statutory requirement on the ratio of

approved assets (stocks, bonds and bills issued by the GOZ, municipal

governments and parastatals) held in its investment portfolio. The

requirement for life insurance companies has been increa:ed in two steps

from 35 percent to 60 percent (20 percent to 30 percent for non-life

insurance companies) since 1980. Table 1-3 illustrates that as of

mid-1984, insurance company holdings of approved assets totalled

Z$522.6. Tables SA-I through SA-5 delineate the yearly approved asset

holdings of the insurance industry between 1980 and 1984.

9. Pension, Provident and Retirement Ar,,ity Funds

There were 1,222 registered pension, provident and retirement

annuity funds at the end of 1982. Of these, 76 pension and 26 provident

funds were self-adninistered and 1,105 pension and provident funds and 15

retirement annuity funds were administered by insurance companies.

These funds controlled over 20 percent of the nation's financial

assets as of mid-1984 (Table I-1). These assets have grown at an average

annual rate of 18 percent during the 1980/84 period as a result of steady

increase in the number of contributing members and the attractive returns

earned by the funds' cumulativk assets. Assets are expected to increase

by at least 20-25 percent during 1985. As in the case of life insurance

companies, the pension funds are required to hold 60 percent of their

assets in government and quasi-government securities. Tables AI-l

through AI-5 depict the magnitude and growth *of these approved assets

held by the pension funds since 1980. At mid-1984, the pension and
provident funds total portfolio of approved assets stood at Z$848.1
million (Table 1-3).

10. Agricultural Finance Corporation

There are several institutions that are designed to channel
funds from the GOZ (or capital subscription by the private sector) to

sperific areas of economic activity, particularly agriculture and

industry, These institutions include the Agricultural Finance

Corporation (AFC) the Industrial Development Corporation, the Zimbabwe

Development Bank, and Ipcorn Limited. Howpver, the most important of

these entities is the AFC which is owned and funded entirely by the GOZ.

An institution to provide finance to various components of the

agricultural sector has existed in one form or another since the 1930's.

In an effort to centralize agricultural sector finance, the AFC was

estiblished in 1971, incorporating all the services provided by previous

orgapizations. The AFC is primarily oriented towards supporting the
countr-,'s small-scale farmers by providing variable term loans at fixed
interest rates. During the 1981/82 season, the AFC provided assistance
to mor. than 28,000 small producers. Commercial banks, on the other
 - 12 ­

hand, cater to the needs of larger commercial farmers and finance is

provided by merchant banks to tobacco and other export crop producers.

Agricultural equipment purchases are mostly financed by the finance

houses.

As illustrated in Table I-1, the AFC's share of the nation's

financial resources has remained at a relatively steady 3 percent since

1980. During the 1980-84 period, assets of the AFC increased at an

average annual rate of 16 percent. A predecessor to the AFC, the Land

and Agricultural Bank was involved in a housing finance scheme prior to

its merger wit.h the AFC. Although discontinued, mortgages from that

program are still carried on the AFC's books.

C. Fir ancial Sector Trends

Five years of independence have brought substantial changes to

Zimbabwe's economy, private sector and financial system. Considerable

pressure has been brought to bear upon the financial system forcing

alterations in response to the opening of the economy to

a

recessiondepressed world market, the intervention of an enlarged public

sector with a myriad of new operational controls and GOZ's desire to

provide development opportunities for every level of the black majority
population.
While the demands of the more competitive environment brought about
by the system's dealings with the outside world are controllable due to
the dynamic nature of the system, the growing financial needs of the
public sector mark a fundamental shift away from this sector's earlier
pattern of operation. The GOZ's large-scale social services and other
programs together with the growth of state-owned enterprises have
resulted in soarii expenditures and significant revenue shortfalls. The
GOZ's subsequent dependence upon the financial sector to supplement these
shortfalls has serious implications for both the RBZ and for financial
intermediaries. The building societies' ability to mobilize resources

for housing finance has been particularly hampered by the new financial

environment.

This section attempts to identify the trends that have emerged from

this new environment and what impact these may have for the mobilization

of private resources to finance residential construction.

1. The Reserve Bank of Zimbabwe

Numerous interventions in the market on the part of the RBZ have

been brought about almost entirely as a result of GOZ revenue falling

short of its expenditures. Beginning in 1980 with increased minimum

wages and other changes in the economy, the money supply almost doubled

by the end of 1981. With the GOZ continuing its policy of far reaching

social programs and expenditures continuing to exceed revenue, the GOZ

 - 13 ­

has found it increasingly necessary to resort to borrowing to finance its

deficit. Probably the most significant cause of money supply growth in

recent years has been an increased rate of lending to the GOZ with the

resultant generation of inflationary pressure.

While the relationship between growth of the money supply and

inflation is complex, involving varying degrees of influence and delay

between cause and effect, the extent to which inflation actually results

will depend on the manner in which the resources loaned to the COZ are

spent. Since the majority of these funds go toward the financing of

recurrent costs (see Section III-B-2 below), GOZ deficit spending leads

directly to inflation.
Due to a finite amount of financial resources available, the two
RBZ-directed interest rate increases have primarily served to enhance the

competitive position of the GOZ in its efforts to borrow from the public
to fund its deficit. However, the GOZ's large expenditures have forced

it to turn not only to private banks to fund the deficit but also to the

Reserve Bank. Since 1980, RBZ loans and advances to central government

and statutory bodies rose by 725 percent to Z$403.5 million in mid-1984.

Likewise, the increases since 1980 in the statutory approved asset ratio,

the statutory liquid asset ratio and the statutory reserve ratio have

inhibited the financial sector's operation by crowding out private sector

investment, thereby allowing the GOZ access to resources to fund its

deficits (see Section III-B-2 below). In addition to raising the

statutory approved asset ratio for insurance companies and pension funds,

the RBZ recently increased the yields on government stocks by up to .9

percentage points depending on maturity, thereby further encouraging cash

to be drawn out of the private sector.

With the 1984/85 budget deficit estimated at Z$648 million, an

increase of nearly 3 percent over 1983/84 levels, the GOZ's competition

for private resoures appears likely to continue. This is especially true

in light of recently enacted Usury legislation, presumably designed to

more tightly control competition for private resources.

2. Commercial Banks

The rapid growth in total assets of the commercial banks since

1980 has resulted in a subsequent increase in the bank's holdings of

approved assets (Tatles SA-I SA-5). The increase in the dollar value of

these assets since 1980 is primarily attributable to additional credit

extended to the Agricultural Marketing Authority (AMA). The sharp

increase in advances to the AMA in 1981 was for the accumulation of maize

stocks. Credit to the AMA continued to increase as it resorted to the

banking system to finance the trading losses of its subsidiary

agricultural marketing boards, resulting from the underprovision of GOZ

subsidy payments to the boards for the 1982/83 season's losses and

because of delays in adjustment of the boards' selling prices for

1983/84. Due to these increases in loans to the AMA, the proportion of

government stocks and bonds in the banks' portfolio declined during the

1980-84 period.

 - 14 -

In an effort to promote GOZ financing outside the banking system,

yields on government stocks were increased during the fourth quarter of
1983 and this action was followed by an increase in the statutory
requirement on the ratio of approved assets (government and

quasi-government securities and loans) held by insurance companies and

pension funds from 50 percent to 60 percent. To meet the higher

statutory requirement, the insurance companies and pension funds were

forced to change their portfolios by reducing assets, especially deposits

with commercial banks. This action was responsible for an abrupt

liquidity squeeze in the money market which drove the 90-day NCD rate up

to 15.5 percent in December 1983. To counter this liquidity squeeze, the

monetary authorities temporarily lowered the commercial banks' stautory

liquid asset ratio from 35 percent to 30 percent. By May 1984, however,

the authorities had again raised the ratio to 40 percent. The new policy

undoubtedly pushes the banks into a tighter position, primarily to the

benefit of GOZ short-term borrowers such as the Treasury and the AMA.

3. Merchant Banks

Trade and loan finance is the merchant banks' main raison

d'etre. Their specialized functions bear directly on the financial ne-es

ofb-uinesses and, therefore, their financial health is a function of the

business environment. The opening of the economy to the

recessiondepressed world market with the resultant decline in Zimbabwe's

exports has had a serious impact on business turnover, thus affecting the

demand for working capital finance. The banks' investments in the mining

sector has not provided the envisaged attractive returns due to depressed

world commodity prices, although the devaluation of the Zimbabwe dollar

has, to a large extent, helped the metals industry.

The foreign exchange squeeze and cutbacks in capital projects have

adversely affected the group and is likely to continue to do so in the

medium-term. Foreign exchange allocations to industry and commerce have

declined 60 percent in real terms since independence. This restraint has

reduced imports, which the group would normally have financed, of badly

needed raw materials, spare parts and new machinery with which to

modernize the country's aging capital stock.

Investment authority for loans, new private stock issues and capital

restructuring has recently been shifted from the RBZ to the Treasury

(Ministry of Finance, Economic Planning and Development) where decisions

have been delayed. This development has not been considered helpful to

the operation of the merchant bank group.

Growth of the merchant bank group will be dependent upon the future

size and composition of the private sector and especially the demand for

new equity finance and medium-term investment.

 - 15 ­

4. Discount Houses

The main function of the discount houses are to provide

liquidity for the banking system. Banking institutions leave money at

call with the discount houses which earns interest and forms part of
their statutory liquid assets ratio. The discount houses also act as
dealers in various securities.

By the end of 1983, the rate of growt'h of the money supply was
marginally higher than the years before but this trend reversed itself
and by September 1984, it was 32 percent higher than the previous year.
The primary reason for this growth was the GOZ's payment of Z$230 million

forthe foreign securities pool (see Section III-B-3)o The RBZ's

announcement that blocked funds may be used to purchase external

bonds

(also see Section III-B-3) caused a further flow of funds into commercial

bank demand deposits, much of which was in turn kept on call with the

discount houses. Banking sector call deposits with the discount houses

increased from Z$80 million to Z$120 million between July and September

1984. However, the RBZ subsequently neutralized 75 percent of this

payment from the foreign securities pool by issuing Z$173 million in

non-rediscountable and non-transferable bills.

Market liquidity was

further reduced by a 5 percent rise in commercial banks' statutory liquid

asset ratio.

During the 1983-84 period, some Z$370 million was raised by the RBZ

on behalf of the GOZ by various stock issues. This provided the discount

houses dealing opportunities to match these s'curities with investors in

the market.

The continued role and expansion of the d-iscount houses will

depend
on public/private trade finance ratios, the nature of private sector
finance structures and policies regarding government and quasi-government
borrowing.

5. Finance Houses

The finance houses cannot accept deposits from the public for

less than 30 days and their depositors include the discount houses, the

building societies, insurance companies, municipalities and private

individuals.

Finance houses include both NDCs and fixed deposits as their main

source of finance. They hold both AMA bills and, to a greater extent,

government stock as part of their prescribed liquid assets

which

presently stands at 20 percent of total.

During the past number of years, these institutions have begun to

favor lending to proddctive sectors over hire-purchase consumer durable

financing although the latter is still an important function. However,

the increasing levels of sales tax, especially

on consumer durables, has

significantly cut demand for leasing and thus negatively affected finance

house activities.

 - 16 ­

6. Post Office Savings Bank

At the end of December 1984, the POSB had a total of 842,375

savings (non-term) accounts with a total value of Z$363.3 million and
15,160 fixed (term) accounts with a total value of Z$210.7 million.
Table 1-4 depicts the structure of these POSB accounts and their

respective principal values.

The data in Table 1-4, which is characteristic of several other

points in time, strongly suggests that a significant majority of account

holders use their savings accounts as current (or demand) accounts. As

of the end of December 1984, a point in time when the month's balance

would have been drawn down, 77 percent of these accounts had principal

balances less than Z$100. The use of these accounts in this manner can

be traced to the fact that commercial banks charge over Z$100 per year

for personal banking ser-ices. Rather surprisingly, this large

proportion of savings accounts represents only 3.2 percent of the total
principal balance of all accounts. Over 91 percent of all savings
accounts had principal values under Z$500. Fixed accounts, on the other
hand, represent a mere 2 percent of all POSB accounts. On the basis of

the data presented in Table 1-4, it can be assumed that saving is not a

high priority with the vast majority of POSB account holders in spite of
the tax-free interest offered.

Although the balances of these low principal accounts are quite

volatile and are therefore of little use for investment purposes, the

proportion of the total value of all accounts represented by these

accounts under Z$500 is rather negligible. It is the relatively small

number of account holders whose accounts represent nearly the total value

of all deposits who have been attracted to the POSB by its tax-free

interest rates. This is not surprising since a taxpayer in the highest

tax bracket would receive an effective yield of 26 percent per year from

a POSB fixed account. This phenomenon has alowed the POSB to increase

the asset value of its portfolio by an annual average rate of 22 percent

since 1980 (Table-I-l).

Recent increases in the tax-free deposit rates offered by the POSB

from 7.5 percent to 8.5 percent for savings deposits, and from 8.5

percent to 10.0 percent for fixed deposits (Table 1-3) together with an

increase in ceilings on deposits from Z$20,000 to Z$45,000 for companies

and from Z$50,000 to Z$1OO,O00 for individuals should ensure that POSB

deposits will continue to rise bouyantly. Such a probability will

continue to adversely affect the buliding societies' supply of finance.

7. Building Societies

The strongest challenge to the building society movement has

come from the GOZ-operated POSB. During the 1980-84 period, POSB

deposits increased by nearly 90 percent while those of the building

societies increased by only 7 percent during the same period (Table I

 TABLE 1-4

Savings and Fixed Accounts of the Post Office Savings Bank

(Current Z$ Thousands; End of December 1984)

Savings Accounts
Fixed Accounts

Principal Number of Principal Principal

Number of
Principal

Less Than Accounts Value Less Than

Accounts
Value

Z$ 5 164,717 427.3 Z$ 200

72
845.2

20 301,121 2,905.0 1,000

1,823
8,158.9

100 182,636 8,438.2 5,000

3,435
14,097.4

500 118,533 26,273.6 10,000

2,096
31,474.7

1,000 27,318 19,053.8 15,000

2,906
16,680.2

5,000 33,508 72,958.2 20,000

1,018
23,611.8

10,000 6,704 46,607.6 25,000

1,129
12,286.5

15,000 3,064 36,637.1 30,000

466
30,120.3

20,000 1,526 25,971.6 40,000

937
13,217.6

30,000 1,471 35,458.5 50,000

309
26,328.4

40,000 661 22,391.3 60,000

516
10,948.4

50,000 423 18,789.5 70,000

175
7,937.5

100,000 693 47,421.6 80,000

109
9,322.7

100,000
169
5,622.9

Total 842,375 1/ 363,333.3 2-- 15,160 3/ 210,652.5 4/

1/ 1,035 company accounts

2/ Value of company accounts: Z$13.7 million

3/ 598 company accounts

W/ Value of company accounts: Z$10.4 million

Source: Post Office Savings Bank internal documents

 - 18 ­

-5). Likewise, the POSB's total assets rose by 111 percent during this

five-year period while those of the building societies rose by less than

9 percent (Table I-1). This phenomenon was no doubt induced by the

POSB's more attractive tax-free interest rate.

Besides unattractive deposit rates, other factors, primarily

regulatory in nature, have adversely impacted upon the building societies

in recent years, draining their resources and increasing their operating

costs.

The 1981 increase in both deposit and lending rates reduced the

operating margins of the building societies since the additional cost of

interest paid on deposits and shares (24+ month fixed deposits) exceeded

the returns from the societies' collective assets. Due to the fact that

approved assets constituted approximately 32 percent of the societies'

collective portfolio (12 percent in excess of the statutory requirement)

at the time of the rate increases, the market value of these assets

declined significantly thus affecting the revenue derived from them and

forcing a marked decline in the societies' level of required liquidity.

The net short-run result of these rate changes was to reduce lending

activity with a resulting negative impact upon net income.

The 1981 mortgage rate increases (the overall increase to 13.25

percent was accomplished in three stages during the year) generated a

loan arrears problem which until only recently has become more

manageable. Arrears increased from 2.2 percent of total mortgage bonds

held in 1980 (686 of 31,571) to 7.4 percent in 1984 (2,225 of 29,946).

As a result of the GOZ's guarantee of mortgage bonds, this sharp rise in

the arrearage ratio has not led to a corresponding increase in losses due

to foreclosure. Nevertheless, the rise in the arrearage ratio has led to

increases in collection and legal costs.

The Building Society Act requires the group to transfer 10 percent of

their annual surplus (net income) to their statutory reserve prior to the

payment of interest on share capital. Due to reduced margins, a high

level of overhead costs and other factors which will be discussed below,

surpluses have declined in recent years and the* societies have been

compelled to draw down their general reserves to comply with GOZ

regulations. The level of statutory reserves stood at Z$24.4 million at

the end of 1983 in addition to Z$9.9 million in general reserves. It can

be argued that building society assets are relatively less risky than the
assets of other financial institutions since the risk of holding
mortgages is reduced by the statutory variable interest rate, thereby
placing the building societies in a position to require less reserves

than other financial institutions.

Prior to March 1984, the building societies held over Z$55 million in

blocked funds of individuals who had emigrated from Zimbabwe. In March,

these assets were required to be tranferred to the RBZ for the purchase

 TABLE 1-5

Zimbabwe: Savings with Financial Institutions 1980 - 1984 2_/

(Current Z$ Millions; End of Period)

Percentage Change

Institution 1980 1981

1982 1983 19842/ 1980/81 1981/82 1982/83 1983/84 1980/84

Comnmercial Brciks 441.1 600.3 800.0 831.3 884.4 36.1 33.3 3.9 6.4 100.5
Merchant Banks 213.0 191.3 227.2 198.4
225.5 -10.2 18.8 -12.7 13.7 5.9

Finace Houses 109.8 155.7 146.4 170.6 179.0

4.8 -6.0 16.5 4.9 63.0

Building Societies 556.1 559.0 587.6 591.4 595.0 0.6 5.1 0.6 0.6 7.0
Post Office Savings Bank 248.5 295.6 367.1
417.5 469.2 19.0
24.2 13.7 12.4 88.8 k

Total 1,568.5 1,801.9 2,128.3 2,209.2 2,353.1 14.9 18.1 3.3 6.5 50.0

Source: Reserve Bank of Zimbabwe, Quarterly Economic and Statistical Review

1/ Savings broadly defined as all deposits with financial institutions other than demand deposits

2/ End of June

 - 20 ­

of GOZ external bonds resulting in a drain on the societies' resources.

Although the RBZ has been -ecycling a portion of these funds back to the

building societies in the form of 24-month fixed deposits, these funds

represent a forward commitment and cannot be used for mortgage purposes.

In a related action, the monetary authorities now require all

individuals applying for emigrant status to liquidate their assets and

invest the proceeds in GOZ 12 year, 4 percent interest external bonds.

The rather serious implication of this new regulation is that building

society members who in the future decide to emigrate will be forced to

liquidate their accounts causing a further drain on the societies'

resources.

Further pressure on the building societies came under the aegis of

the Registrars of Insurance Companies and Pension and Provident Fund

ruling that 60 percent of insurance company and pension fund assets be

placed in public sector investments. To meet the higher statutory

requirement, insurance companies and pension funds were forced to reduce

or, in some instances, remove assets deposited with the building

societies. This action had the doubly negative impact of taking away the

insurance companies' and pension funds' investment making powers and

excluding the societies from a sizeable sum of potential deposits.

Fortunately, the building societies' statutory liquid asset ratio was

lowered from 20 percent to 15 percent in March 1984 thus alleviating some

of the liquidity squeeze caused by these actions.

The current difficulties facing the building societies are primarily

the result of GOZ financial po'icy. Regulated ceilings on taxable

interest rates paid on deposits iz the major bottleneck in attracting

deposits, especially in light of the tax free competition from the POSB.

Without a higher level of deposits, the amount of mortgage credit that

can be provided through the use of recycled capital is extremely limited.

 - 21 ­

8. Insurance Companies
The serious implications of the monetary authorities' two
decisions to raise the insurance companies' holdings of public sector
securities is that these actions are restraints on investment decisions

and restraints on maximizing returns.

The insurance industry is essentially a long-term investor and apart

from statutory investment in public sector securities, the industry's

portfolio consists of property, equity, corporate debentures, money

market funds and some direct industrial term loans. As a long-term

investor concerned about these non-public assets' performance, the

insurance industry is sensitive to underlying trends in the economy which

affect their investments and investment decisions. Decisions by the

monetary authorities to raise the insurance companies' holdings of public

sector securities thereby promoting GOZ financing outside the banking

system have distorted the investment allocation process. The long-run

viability of the industry itself is affected by the inflationary pressure

brought to bear on the economy by private sector financing of the GOZ

deficit and the subsequent growth of the money supply. The risk here is

that the negative investment returns due to inflation will erode the

industry's assets over time. Even with higher yields on public sector

stock (yields were increased by up to 0.9 percent in September 1983)

returns are presently negative due to the high rate of inflation present

in the economy.

Despite reports of an imminent softening in the demand for commercial

property (especially large office buildings) which could free up a

portion of the industry's revenue earmarked for non-public assets, the

industry will still need a strong regeneration of productive investment,

a return of private sector confidence and control over the current causes

of inflation (including the GOZ deficit and wage policy) to ensure

longrun investment security. Of course, economic growth and stability

are equally essential for such security.

9. Pension, Provident and Retirement Annuity Funds

Much of what was discussed above in regard to the insurance

industry equally pertains to the pension, provident and retirement
annuity funds. The funds are essentially long-term investors whose
long-run viability depends on the ability of the funas to protect the
financial interests of their contributors. The monetary authorities'
decision to raise the statutory ratio of public securities held by the
funds is a potential threat to the funds' viability insomuch as these two

increases constrain investment choice and return maximization.

 - 22 -

II. The Housing Finance Market

A. Introduction

Housing finance in Zimbabwe is characterized by a number of

features that are distinct among African nations. On the private side,
financing is represented by three building societies, whose degree of
competence and level of expertise are equal to similar housing finance
institutions in developed countries. These societies, however, are the

only source of finance provided by the formal sector, with competition

for providing credit occuring among the societies, not from other

financial institutions.

The private hcusing finance sector is also characterized by strong

Government of Zimbabwe (GOZ) controls and regulations, which inhibit its

growth. As a result, the ability of the housing finance sector to meet

the need and demand for housing is severely constrained. The growing

role of the GOZ, with its concurrent need to finance its budget deficit,

mostly from domestic savings, has had a major impact on the availability
of housing finance. The percentage of GDP channeled to the construction
of new housing through the formal sector was 0.67 percent in 1984, or
two-trds of one percent. Ks a percentage of total government

expenditures, investment in new housing was slightly higher, 1.8 percent,

or slightly less than two pr-cent. If informal housing finance, which

cannot be quantified, and building society financing of existing 0ousing,

were included, the above percentages would be higher.

On the positive side, GOZ policy has encouraged home ownership

through the sale of rental housing owned by central and local governments

and the private sector to the occupants of these homes. This policy is

furthered by the active implementation of a Housing Guarantee scheme

which greatly facilitates the purchase of housing for the growing urban

middle income group. For the last five years, however, new home

construction has been quite low, indicating that the housing stock has

deteriorated, not improved.

B. Overview of the Primary Housing Market

The primary housing market can generally be segmented into two

distinct groups, at least with respect to the urban areas. Middleand

upper-income farilies generally locate in what are termed low-density

areas, and they live in single family detached housing. Funds to

purchase housing at this level are obtainable from the building

societies. Lower income families live in the nigh density areas which

often consist of substandard housing and/or facilities. Access to

housing finance for this group has been principally through government

channels. In the past, such government financing was by way of direct

funding derived from local authority revenues and borrowings, while

today, resources flow only from the central government, with

implementation carried out by the local authorities.

 - 23 -

Financial resources for the primary market have been severely

strained since independence. In the last five years, the GOZ has

provided Z$152 million in below market rate loans to local authorities

for the construction of low-income housing. This permitted the

construction of approximately 39,700 units, many of which (about 12,500)

consisted of serviced stands (sites), and which obligated the purchaser

to obtain financing for the construction of a dwelling from other

sources. Funds raised internally by local authorities, which provided

additional lowincome housing before independence, have virtually dried up

as a source of housing finance.

Private sector financing for the primary market has been relatively
stagnant in the past five years. The three building societies have not
been able to capture additional domestic saving which would permit them
to increase the flow of private capital to the housing market. The

societies have been providing mortgage loans mainly from reflows from its

existing loan portfolio. Lack of new housing construction for middle-and

upper-income families has confined the societies to financing purchases

of homes from the existing housing stock. This is primarly due to the

emigration of middle- and upper-income groups since independence, at

least with respect to the provision of housing credit.

Since independence, there has been some shifting in market

segmentation. Whereas previously the building societies financed housing

mainly for the white community, today the vast majority of the societies'

borrowers are blacks. Moreover, the societies are serving a lower income

group albeit mostly middle income than before independence, at least with

respect to the provision of housing credit.

TABLE II-1

Total Housing Investment

(Current Z$ Millions)

1982/83 l_/ 1983/84 1984/5

Public Sector: 2/ 37.9 39.8 37.9
Private Sector 3/ 91.5 72.1 -

Total 129.4 111.9

1/ Calendar year for the private sector.

2/ Consists of budgetary allocation to the Ministry of Construction and

NTational Housing to implement GOZ housing program.

3/ Building Societies only. Data on housing provided or financed by

private companies for employees is not available.

Source: Ministry of Construction and National Housing and Building

Societies.

 - 24 -

C. Private Sector Finance Activities

1. The Building Societies

Private sector home financing from a institutional standpoint is

the exclusive domain of the building societies.!/ The societies do not

have any competition for the provision of housing credit from any other

private sector financial institutions. However, competition for

financial resources to supply housing credit is strong and it has a major

impact on the capability of the societies to mobilize funds, as will be

discussed later.

Building societies in Zimbabwe were modelled on the British concept.

Under this concept, the features of a mutual society, where depositors

hold voting rights, and a stock society, which ownership is vested in

non-savings depositors, are merged. Building society savings are divided

into two categories- savings deposits and share capital. A savings

deposit (pass book savings), either fixed or at sight, does not give the

depositor voting rights, although interest is earned on savings.

Depositors in up to 4-year fixed certificates, called share capital, hold

voting rights and receive a fixe , interest rate, or dividend, on shares

or certificates. In theory, the certificates may not be redeemed on less

than six months notice, although to encourage the inflow of capital to

the societies, this rule is flexibly applied. The societies are governed

by Boards of Directors who are elected for staggered periods of time by

holders of share capital.

As illustrated below, the three building societies in Zimbabwe

maintain 79 branches, mostly in urban areas, although many population

centers not defined as urban are also served. While the figure

fluctuate, the three societies estimate that the number of savings

accounts approaches 550,000.

Building # of Savings
Society accounts # of branches
Central Africa
Building Society 369,800 (as of 1/31/85) 48
Beverley 120,000 (appx) (as of 3/31/85) 15
Founders 58,000 (appx) (as of 1/31/85) 16
Total 547,800 79

Source: Building Societies

l/ Merchant Banks provide one or two loans a year of upper income

residences, while some sales of housing are financed by the sellers

giving a purchase money mortgage.

 - 25 -

By the end of the last operating year, (books close on June 30 each

year), total assets of the three societies stood at Z$649.9 million,

while savings and fixed deposits and share capital reached Z$593.1

million (Table 11-2). The murtgage loan portfolio totaled Z$416.0

million or 64 percent of total assets (Table 11-3). GOZ regulations

require that building societies place 15 percent of assets in approved
liquid investments (up to a 6 year term) which is reflected in the fact
that assets in liquid investments totaled Z$113.3 million or 17.4 percent
of assets. The regulations also require the societies to place 10
percent of net income before payment of dividends on share capital into
the statutory reserves. The lack of growth in the system as well as low
surplus margins, is forcing the societies to transfer funds from the
general reserve account to statutory reserves in order to meet this
requirement. The impact of this regulation on the societies ability to
continue to attract share capital is potentially damaging.

In their last operating year, all the societies operated in the

black, although margins weve narrow. Collectively, the societies had

revenues of Z$77.5 million and expenses and interest payments (dividends)

on share capital of Z$76,6 million, leaving profits before reserves of

Z$868,000 (Table 11-4). Since this amount was insufficient to meet

statutory reserve requirements of Z$3,292,000, funds from general

reserves had to be drawn down.

 - 26 -

TABLE 11-2

Building Societies FY 1984 Balance Sheets

(Current Z$ Thousands)

ASSETS CABS Ceverley Founders Total

Loans:

Mortgage Loans (Advances) 241,867 93,083 81,029 415,979

Other Loans 34,120 17,705 13,050 64,875

Residential Properties 773 193 230 1,196

Fixed Assets 16,218 9,334 6,298 31,850

Sundry Debts 920 328 193 1,441

Investments 79,334 12,578 21,394 113,306

Cash/Short term deposits 7,134 10,502 3,604 21,240

Total Assets 380,366 143,723 125,798 649,887

LIABILITIES

Share Capital 176,318 59,907 56,631 292,856

Deposits:

Fixed Deposits 20,831 8,056 8,579 37,466

Savings Deposits 151,031 61,883 49,818 262,732

Accrued Interest 3,602 1,537 1,732 6,871

Creditors & Provisions 8,017 4,183 771 12,971

Reserves:

Statutory Reserve 16,805 5,621 5,250 27,676

General Reserve 3,411 1,500 2,962 l! 7,873

Unappropriated Surplus 351 26 55 432

Total Liabilities 380,366 143,723 125,798 649,887

l/ Includes Z$2,512,000 of capital reserve resulting from revaluation of

property.

Source: Building Societies' 1984 Annual Reports

 TABLE 11-3

Building Societies' Loan Portfolio

(Current Z$ Thousands; End of June 1984)

Beverley
Founders
Building Society
CABS
Building Society Total

Loans less than Z$12,000

Number
2,850
7,881
3,593 14,324
Loan Balance
21,938
64,322
26,133 112,393
Proportion of Total
23.6
26.6
32.6 27.5

Loans between Z$12,001 and Z$20,000

Number
2,198
6,110
2,066 10,365
Loan Balance
33,614
93,680
32,106 159,400
Proportion of Total
36.1
38.8
39.6 38.1

Loans between Z$20,001 and Z$40,000

Number
1,010
2,580
782 4,372
Loan Balance
26,134
66,503
20,550 113,187
Proportion of Total
28.1
27.5
25.4 27.0

Loans over Z$40,000

Number
150
243
42 435
Loan Balance
11,397
17,362
2,240 30,999
Proportion of Total
12.2
7.1
2.8 7.4
Total Loans
6,199
16,814
6,483 29,496

Total Loan Balance

93,083
241,867
81,029 415,979

Source: Building Societies

 - 28 -

TABLE 11-4

Building Societies FY 1984 Income Statements

(Current Z$ Thousands)

Income
CABS Beverley Founders Total
Interest on Loans
36,386 17,066 12,329 65,781
Other Income
8,912 485 2,355 11,752

Total Income
75,298 17,551 14,684 77,533

Expenses and Capital

Interest on Deposits
13,650 6,013 4,792 24,455
Management Expenses
10,594 4,600 3,574 18,768
Depreciation
956 327 134 1,417

Sub-total Expenses
25,200 10,940 8,500 44,60
Dividend on Share Capital
19,292 6,517 6,216 32,025
Transfer to(from) Reserves:

Statutory
2,010 662 620 3,292
General
(1,204) (300) (544) (2,048)
Unappropriated Surplus
806 26 55 (376)

Total Expenses and Capital

45,298 17,551 14,684 Z$77,533

Source: Building Societies' 1984 Annual Reports

As illustrated in Table 11-3, the loan portfolio of the three

societies consisted of 29,496 mortgages with a value of Z$415,979,000.

The average loan balance was $14,100. Approximately 27.5 percent of the

loan portfolio consisted of loan balances of less than Z$12,000, while

7.4 percent of the loan were in excess of $40,000.

 - 29 -

Table 11-5 indicates that over the past 5 years, the building

societies have originated 24,539 loans, virtually all of which, as stated

earlier, were used for the purchase of existing homes, not for the

construction of new dwellings although a portion was used for home

improvement. The total loan amount was Z$350 million, of which 72

million for 4,921 loans were originated in 1983/4 alone. The average

loan size over that entire period remained in the Z$14,000 range,

virtually stagnant. The Consumer Price Index increased by 79.2 percent

during that same period, indicating that the building societies are
definitely reaching a lower income group today than on the eve of
independence.

Cost of Funds vs. Return on Assets

Prior to independence, the economy of Zimbabwe was to a large

degree sheltered from outside financial influences. Interest rates on

deposits and on loans were much lower than rates in other countries, in

spite of the fact that Zimbabwe functioned as a market economy. For

example, in 1980, building societies paid only 3.5 percent on savings

deposits (compared to 5.25 percent in U.S. savings and loan

associations), although this was competitive with rates offered by other

financial institutions in the country. The mortgage lending rate offered

by the societies varied from 7.25 percent to 8.5 percent depending on the

size of the loan and the type of property mortgaged. The spread of 3.75

percent to 5.0 percent at that time was more than adequate, particularly

given the structured nature of the system. After independence,

Zimbabwe's economy opened up, and all interest rates were adjusted upward

to reflect worldwide economic competition. In 1981, rates on savings

deposits jumped to 7 percent, then increased once again to 7.75 percent,

today's rate. Interest rates on mortgage loans increased in 1981 to a

range between 12.5 percent to 14.75 percent, where they have remained.

With such an increase in mortgage interest rates, it would be assumed

that the societies would have been stuck with a portfolio of low-yielding

mortgages. Instead, the GOZ has permitted the societies to increase the

interest rate on existing loans to the permitted ceiling. This has

prevented the asset/liability mismatch that, for example, has caused such

severe hardships for the U.S. thrift industry. The adjustment on rates

for existing mortgages was followed 3 months later by the increase in

savings rates, causing some losses to the societies, however, the

societies were ablE to weather the changes.

Today, the cost of money to the societies averages about 9.45

percent, reflecting the range of interest rates from the lowest 7.75

percent rate paid to savings depositors to the 11.25 percent rate paid on

share capital. With mortgage loans varying between 12.5 percent (for

residential loans under Z$12,000) to 14.75 percent (for commercial

loans), the average return on investments is 13.60 percent. This has

permitted a spread of between 4.04 and 4.25 points, depending on the

society.!/

1/ For comparative purposes, the parastatal Agricultural Finance

Corporation had a spread of 4.32 in the year ending June 30, 1984.

 - 30 -

TABLE 11-5

Building Society Mortgage Loans 1980 - 1984

(Current Z$ Thousands)

No. of Average Increase

Building New Total
Loan in Average Increase
Year l_ Society Loans Loaned
Size Loan Size in CPI

1980 CABS 2,671 31,218

11,690
Beverley 931 14,100
15,145
Founders 714 12,982
18,180
Total 4 60

1981 CABS 2,728 34,879

12,785
Beverley 1,157 18,800
16,250
Founders 1,162 16,784
14,445

1982 CABS 2,416

34,631
14,335
Beverley 426
5,100
11,970
Founders 1,084
17,269
-
Total U,5
T45T

1983 CABS 4,204

63,584
15,125
Beverley 1,182
13,900
11,760
Founders 930
14,058
15,116
Total T9154
14,

1984 CABS 2,741 45,418

16,570
Beverley 1,208 12,100
10,015
Founders 985 14,625
14,850
Total T,79 7Z,_43
_4,62(_

1980/84 Total 24,.539

349,448
X41O40

1/ Year ending June 30

Source: Building societies

 - 31 -

In most financial institutions, this spread would provide a sizable

profit margin, however, as reflected in the 1984 operating statements,
profits before reserves totalled Z$868,000 for all three societies which
was only .13 percent of assets. The high administrative and operational
costs of the societies consumed this supposedly wide spread. The reason
why profits before reserves were low can be attributed principally to the
costs of maintaining so many small savings accounts. The analysis of
Central Africa Building Societies' (CABS) savings accounts in Table 11-6
indicates that 81.3 percent of all accounts as of March 31, 1984,
totalled less than Z$300, including 64.2 percent under Z$100._2 /

While CABS's savings accounts under Z$300 constitute 81.3 percent of

all accounts, they represent only 12.9 percent of the total amount in
savings. Yet savers in this category also represent 79.1 percent of
withdrawals, which, while in line with their representation in the
society as a whole, indicates the high cost of servicing an account under
Z$300. At an average estimated cost of Z$1.13 per transaction, it is
impossible for CABS to even break even in savings operations, in spite of
the fact that it probably earns a small margin on accounts over Z$300.
The magnitude of the small savings accounts poses a high cost on the
societies operatiors.

The reason for this problem is the fact that many savers use the
Building society as a current account. Commercial banks generally charge

a minimum of Z$100 per year to maintain a checking account, which is

prohibitive for low-income families. Moreover, commer;ial banks do not

pay interest on checking accounts. While an interest rate of 7.75

percent on a Z$300 savings account does not add up to much over a year's
time, it is an added inducement to bank at a building society. This is

not necessarily a call for reform of this situation so as to permit

building societies to improve savings operations earnings, rather it is a

reflection of the benefits that the building societies provide to the

nation, particularly to low-income families. Nevertheless, it is clear

that the subsidization of low-income savers must be counterbalanced by

increased earnings in other operations, probably the lending side. The

spread between the cost of money to the societies and the return on its
mortgage portfolio provides this compensation. Neverthless, the
compensation is small, as reflected in the overall small surplus in 1984,
as well as for previous years.

2/ Again for comparative purposes, the return on assets for all U.S.
savings and loans in 1984 was an estimated .15 percent, which is
considered a very poor return.
 - 32 -

TABLE 11-6

Analysis of Savings Accounts

Central Africa Building Society - As of 3/31/84

Size of Principal

Less than Z$100 Z$100 - 300 Over Z$300

Number of Accounts 237,468 63,405 68,895

Percentage of Account 64.2 16.7 19.1
Average Yearly Balance Z$7,373,000 Z$11,145,000 Z$125,849,599

Percentage of Balance 5.1 7.8 87.1

Number of Withdrawals 195,002 45,121 63,654

Percentage of Withdrawals 64.2 14.9 20.9

Source: Central Africa Building Society

 - 33 -

Tax Considerations

Two provisions in the tax code have a significant impact on

building societies. The first is positive in that profits, if any, are

not subject to corporate income taxes, and therefore any surplus income

is ploughed back into the societies to further their growth and

development. However over the past few years, profits on net income

after dividends have been insufficient to meet statutory reserve

requirements, so the tax-free benefits on surplus have not been enjoyed.

The second tax provision has a negative impact on the societies.

Interest paid on savings deposits and share capital are taxable, with the

amount of individual tax paid contingent on the recipients income tax

bracket. There is nothing untoward about this arrangement except that

the principal competitor to the building societies is the Post Office

Savings Bank (described in the previous section) which offers a tax free

interest paid on savi~igs deposits. This puts the building societies in a

much inferior position to attract pure savers. For a saver in the

highest income bracket (63 percent), a tax free interest rate of 10
percent at the POSB is equivalent to a 26 percent return on investment
(deposit). Accordingly, it is quite clear why the growth in deposits and

shares in building societies has been relatively stagnant over the past

few years.

Trends and Prospects

The relatively comfortable and cozy environment in which the

building societies operated prior to independence was converted rapidly

to one of acute competition and change in the post independence years.

On the whole, the societies have been able to cope and they have
continued to operate in the black. But unless there are some sigrificant
changes in the regulatory and control areas, the trends will be less and
less favorable. An analysis of the societies' consolidated balance
sheets in Table 11-7 will help to explain what has happened and what may
continue to happen. On the asset side of the balance sheet, mortgage
loans grew from Z$359 million at the end of 1980 to $408 million in 1983,

a Z$49 million increase, indicating that the growth rate in mortgages

over that three year period was only 13.6 percent, or an annual growth

rate of slightly over 4 percent. in the first six months of 1984,

mortgage loans increased to Z$416 million or Z$8 million, which

translates into an annual rate of less than 4 percent. When compared

with the annual rate of inflation of almost 20 percent over that same
period, it is clear that the societies are not even matching the

inflation rate. In short, the societies are regressing. Total assets

over that same six month period grew by 9.4 percent, which indicates that

the societies are somewhat reducing their proportional holdings of other

assets in order to provide more funds for mortgage loans.

 - 34 -

TABLE 11-7
Building Societies' Consolidated Balance Sheet
(Current Z$ Thousands)

1975 1/ 1978 1980 1981 1982 1983

Assets

Loans:
Mortgage Loans 265,847 316,087 359,172 371,637 375,882 4,077,922
Other Loans 4,286 3,899 5,254 4,871 4,994 5,840
Residential
Properties 67 1,114 1,754 1,454 1,346 1,334
Fixed Assets 10,225 11,071 13,952 17,628 21,503 30,040
Sundry Debts 148 211 872 635 952 845
Investments 48,6r0 104,292 191,992 165,947 16,445 144,659
Cash/Deposits 25,130 31,192 23,991 43,609 82,260 61,530
Total Assets 354,363 467,866 596,287 605,781 643,382 652,040
Liabilities
Share Capital 179,143 194,176 224,808 258,627 271,273 285,683
Deposits:
Term 38,302 78,624 110,010 68,104 53,481 43,686
Passbook 108,887 162,832 221,265 232,302 262,872 262,072
Accrued Int. 4,620 6,189 8,506 13,111 18,445 19,449
Creditors & Prov. 830 2,533 2,837 4,312 6,258 5,240
Reserves:
Statutory 9,719 13,748 16,832 18,495 21,143 24,384
General 5,997 7,790 10,019 10,672 8,757 9,922
Unap. Surplus 1,263 2,533 2,837 4,312 6,258 5,240
Total Liabilities 354,363 467,866 596,287 605,781 643,382 652,040

1/ Year ending December 31

Source: Report of the Registrar of Building Societies, December 31, 1983

 - 35 -

An analysis of the liability side of the balance sheet indicates why

the amount of mortgage loans has not grown. Deposits and share capital

growth have been minimal. Fixed and deposit satings actually decreased

from Z$331 million at the end of 1980 to Z$306 million at the end of

1983. This was offset by the growth in share capital from Z$225 million

in 1980 to Z$286 million in 1983. Overall housing finance resources

(deposits and share capital) grew by only Z$36 million or 6.5 percent

over the three yedrs, while the increase in housing finance resources

actually was less than the increase in mortgage loans. Inflation and the

low rate of growth in the building societies with respect to other

institutions has brought about disintermediation. And while it cannot be

proved, both the GOZ and the private sector attribute the stagnation of

savings in the societies principally to the tax advantage available to

savers in the Post Office Savings Bank.

Other factors support the downward trend in their fortunes. The

regulation that requires the societies to contribute to statutory

reserves prior to distributing dividends will, if not corrected, force

one or more of the societies to fail to meet the full dividend payment on

share capital. If that occurs, a run on that society or all societies

could not be ruled out. Failure to rectify this situation would

eventually lead to dissolution of the system. Also margins are very

thin, and interest rates, both for savers and borrowers may have to be

adjusted, or preferably, permitted a greater degree of flexibility to

prevent margins from disappearing altogether. While it is important to

keep interest rates on loans as low as possible, the building societies

must be allowed to compete in crd, to attract funds.

Prospects for the building societies to provide more housing finance

is contingent on the GOZ. If no changes are forthcoming, then the

building society movement will increasingly become a lesser player in the

housing finance market. On the other hand, if the government permits the

societies to compete fairly with other financial institutions and to earn

a fair return on investments, then the societies will once again become a

major supplier of housing. One trend which should enhance the prospects

of the societies is the willingness, albeit tentative, of the societies

to serve lower income families. Clearly, greater efforts on the part of

the societies to reach low-income families would be the quid pro quo for

concessions from the GOZ on the matters of fair competition and improving

earnings.

On the other hand, the societies are exploring new ways to increase

their services as well as generate additional sources of revenue. These

potential innovations, which may or may not be implemented, include:

- Offering free checking privileges on savings accounts, in return

for a lower interest rate and a minimum balance.

- Selling a portion of the loan portfolio to generate additional

funds for new mortgage loans.
 - 36 -

Taking on a developmental role in the provision of new housing

solutions up to the recently approved guarantee limit of

Z$24,000 for new houses.

Collaborating with local authorities in the collecting of fees

and payments, including mortgage payments, so as to reduce the

cost of collections to the societies.

Increasing the use of computers to reduce operating costs

and

provide for greater effeciencies, particularly, if and when, the

societies begin to increase levels of operations.

2. Other Private Sector Inputs

The building societies so dominate private sector housing

finance activities that it is hardly worthwhile even mentioning the other

minor players. However, one other unorganized group does play a role,

although this role is exceedingly difficult to quantify. This pertains

to the provision of employee housing by commerLial, industrial and

agricultural establishments. Housing finance assistance by em'loyers

generally takes one or more of the following forms:

-
Company housing, either rent free or at a subsidized rental rate.

- Company loans to either buy a house or to finance the down

payment or deposit.
A company guarantee, usually in the form of a company co-sign,
to assist the employee to obtain a building society loan.

- A monthly housing allowance, in lieu of company housing, to

permit an employee to buy or rent a dwelling.

No statistics exist which provide information regarding either the

number of workers who live in housing financed in part or whole by

employers, or the amount invested to date or investments on an annual

basis. It is probable, however, that reliance on employer assistance is

less likely today than prior to independence. Present GOZ policy in many

cases prevents a company from -vircing an employee if that employee

leaves the employment of the company. Therefore, there is no incentive

for an employer to continue to provide company housing as a fringe

benefit if prospects are likely that the housing may eventually be

occupied by ex-employees. Moreover, in some areas, GOZ building

standar& increase construction costs to the point where company housing

is not an economical alternative solution. Finally, there is increasing

pressure on companies to freeze or lower rents in cases where employees

are provided company housing resulting in rising subsidies. Naturally,

this is a major disincentive to employers to provide more housing or even

improve existing housing.

 - 37 -

Probably the single largest supplier of company housing is the mining

industry. Due to the often remote location of the mines, or to the fact

that mines are not located in or near established communities, mining

companies are obliged to provide housing for its workers, which is now
obligatory by statute. Whereas this once took the form of housing for
single males, increasingly families have begun living together at mine
sites, and that is the norm today. At present, some 55,000 miners

working in registered mines are provided company housing, often at

rentals substantially lower than comparable housing in the closest

communities. Since the number of persons employed in the mining sector

is not increasing, the stock of mining company housing has remained

stagnant, although improvements in dwelling conditions are continuing to

be made. The Chamber of Mines estimates that mining companies have

invested Z$44 million in housing over the years although no data is

available on a yearly basis. While mining companies would prefer to sell

company dwellings to their workers in conformity with GOZ policy to

encourage ownership, the dilemma is that the land where the mining

concessions are held cannot be transferred in the same way land held on a

free hold basis can be transferred. This effectively prevents the sale

of the dwellings to the workers.

In the past, other financial institutions, such as insurance

companies and pension funds made direct loans to municipalities for the

financing of housing. Although no data on the magnitude of this past

activity are available, loan balances on various institutions' balance

sheets indicates that the number of loans and the amount involved was

relatively small. Official statistics show that outstanding balance on

loans to local authorities from private domestic sources for all purposes

totaled ZO63 million as of June 1984. At the same time, the GOZ has not

approved any new loans to the local authorities for housing purposes

since Independence. The general impression is that private sector

financial institutions are not planning a role in the provision of

housing finance, unless of course, government policy is either reversed

or the returns on loans to municipalities are enhanced. The one

exception, which many hope will become common, is the expected granting

of building society loans to low income families under the IBRD/CDC/GOZ

project.

In many countries, credit unions play a role in housing finance,

generally through the provision of loans to a cooperative member to

complete the down payment or to buy building materials. However, in

Zimbabwe credit unions do not exist. The Zimbabwean alternative to

credit unions is the saving club, which as yet does not offer loans to

savers.

D. Government Housing Finance Activities

1. Role of Government Ministries and Authorities

A number of GOZ agencies intervene directly or indirectly in the

provision of finance to the housing sector. Primary is the Ministry of

Construction and National Housing (MCNH), which, along with its expected

 - 38 ­

ministerial role as the nation's rector agency for housing, manages

several GOZ programs which channel funds to the housing sector. The two

major programs, which will be discussed in detail below, are the National

Housing Fund (NHF), which channels funds to Local Authorities (LAs) for

the development of housing schemes, and the Housing and Guarantee Fund,

which administers the guarantee scheme for the purchase of housing and

manages the stock of rental housing in its portfolio.

Through its budgetary power, the Ministry of Finance, Economic

Planning and Development (MFEPD) allocates GOZ funds both to cover the

MCNH's administrative expenses as well as to provide loans to LAs through

the National Housing Fund. The MFEPD also must approve private sector

loans, if any, to local authorities. The Ministry of Local Government

and Town Planning must approve the LAs' plans and finance requests for
government assistance through the NHF. Finally, LAs, which include urban

and rural councils, finance housing schemes with funds from GOZ loans,
from tax revenues and business ventures, and, previously, from private

sector loans.

2. The National Housing Fund

The NHF was established in January, 1982, by the amalgamation of

two separate housing funds the Local Government Areas Building Fund and
the Provincial Building Fund. All assets and liabilities of those two

funds were taken over by the NHF. The principal purpose of the NHF is to

function as a financial intermediary for GOZ loans to LAs for the

development and sale of low-income housing solutions. These GOZ loans

are provided annually from central government budget allocations which

are derived in part from external loans.

To take a sbep backward, the GOZ, in its 1982/85 Transitional Plan,

targeted a relatively large amount of money for housing which was a
reflection of its awareness of the urgent need to increase and improve
the nation's housing stock. Over that three year period (July 1982 to

June 1985), GOZ planners estimated that Z$469 million in GOZ funds was

required for investment in urban and rural housing. Table 11-8

illustrates that actual budget allocations over that three year period,

as reflected in the Estimates of Expenditures, was significantly less

only Z$138.2 million. Due to budget constraints, allocations were

further decreased and in fact, actual disbursements over that three year
period, including estimates for the current fiscal year, total only
Z$115.6 million, or 24. t percent of the funds that were originally
intended by the Transitional Plan to be invested in housing schemes.

In spite of lower than desired levels of GOZ loans to the NHF, the
figures are in excess of levels in those years previous to FY 1983. In

1981 and 1982, Z$17.4 million and Z$19.0 million, respectively, were
disbursed in housing loans from the NHF.

 - 39 -

TABLE 11-8

National Housing Fund Investments 1980/81 - 1984/85

(Current Z$ Millions)

Disbursements

Transitional Budgetary Actual as a % of

Year Plan 1982/85 Allocations Disbursements 1982/85 Plan

82/83 108.0 59.5 _2/ 37.93__/ 35.1

83/84 149.6 31.7 39.8

26.6

84/85 1/ 211.4 47.0 37.9 17.9

Total 469.0 138.2 115.6 24.6

Source: Ministry of Construction and National Housing

1/ Estimate

2/ Budget reduced during year by Z$25 million by MFEPD

3/ Data from the GOZ's Estimate of Expenditures vary slightly from these

Tigures due to subsequent yearly revisions prepared annually by the MCNH.

The data in Table 11-9 indicate that although GOZ disbursements to

the NHF for LA housing schemes was decidedly less in 1981 and 1982 with

respect to subsequent years, a significantly larger number of solutions

were provided. The general explanation for this situation is that LAs

were previously developing very minimal solutions at a low cost, which

permitted the available funds to be spread among more families.

Inflation of costs accounts for only a part of this difference.

 - 40 -

TABLE 11-9

GOZ Housing Investments - 1980/81 - 1984/85

No. of Average Cost

Disbursements No. of of Solution

Year (Current Z$ Millions) Solutions (Current Z$ Millions)
lWB781 17.4 T2,77 1,440
1981/82 19.0 14,143 1,345

1982/83 37.9 5,460 6,940

1983/84 38.9 3,054 12,740

1984/85 37.9 5,000 _/ 7,580 I/

Total 152.0 39,732 3,825

l/ Estimate

Source: Ministry of Construction and National Housing

The only source of funds at this time for the NHF is GOZ loans.
These loans are made at an interest rate of 9.75 percent annually to be

amortized over a 30 year period. Table II-10 illustrates that at the end

of June 1984, total loans outstanding to NHF lenders was Z$195 million,

to which will be added an estimated Z$38 million in new loans in 1984/85

less approximately Z$5 million 'inloan repayments. Of the NHF's Z$195

million outstanding balance, Z$134 million was owed to the Zimbabwe

Government, with the remainder owed to private sector financial

institutions and the City of Harare.

TABLE II-10

Outstandinu Balance, Capital Loans

National Housing Fund

(Current Z$ Thousands; End of June 1984

Lender Balance

GOZ 133,886

Building Societies 36,756

Insurance Companies 11,492

City of Harare 10,718

Finance Houses 2,730

Total 195,582

Source: Ministry of Construction and National Housing

 - 41 -

While, non-central government loans comprise approximately one-third

of the NHF's Capital Account, no loans have derived from those sources

over the past few years. As a result, the proportion of capital

attributable to GOZ lending has risen accordingly. In FY 1984, total NHF

liabilities, nearly all of which consist of capital loans, increased by

Z$25.8 million over the previous year, due to GOZ loan contributions

(Table II-11).

As mentioned earlier, NHF uses GOZ loans to on-lend to Local

Authorities for housing schemes. As depicted in Table II-11, loans to

Local Authorities in FY 1984 showed an increase of Z$14.7 million over FY

1983, while work in progress on new solutions showed a rise of Z$9.5

million. This total increase of Z$24.2 almost equaled the Z$25.8 million

in GOZ loans for the same period, which demonstrates the pass-through

nature of the NHF as a financial intermediary.

TABLE II-11

National Housing Fund Balance Sheets

(Current Z$ Thousands; End of June)

1984 1983 Change

Assets

Cash and Deposits 3,206 7,705 (4,499)

Other Current Assets 9,659 5,042 4,617

Loans to local authorities 158,863 144,146 14,717

Other Loans 4,569 4,120 449

Work in Progress 18,024 8,488 9,536

Other Assets 2,776 1,761 1,015

197,097 171,262 25,835

Liabilities

Capital Loans 195,023 169,391 25,632

Other Liaibilities 2,074 1,871 203

197,097 171,262 25,835

Source: Ministry of Construction and National Housing.

The NHF has a GOZ mandate to operate on a self-sufficiency basis, and

to a large degree, the NHF has approached that objective. However, as

Table 11-12 indicates, the NHF's total income was inadequate in both FY

1983 and FY 1984 to cover expenses.

 - 42 -

TABLE 11-12

National Housing Fund Income Statement

(Current Z$ Thousands; End of June)

1984 1983

Income

nterest on Loans to L.A.'s 13,456 -

Other Interest Income 2,230

Other Income
71

Total T =1
Expenditures

Tnterest Paid 17,196

Property Maintenance 7

Other Expenses

Total
T7, T37-M
Deficit (1,446)
(284)

Source: Ministry of Construction and National Housing.

 - 43 -

It is clear that the cost of funds to the NHF is greater than the

return on assets or loans to borrowers. One explanation is that interest

rates on earlier loans to the local authorities have not been adjusted

upward to reflect increases in the cost of capital to the NHF, as, for

example, were interest rates on building society loans. An increasing

portion of NHF's capital account consists of GOZ loans at 9.75 percent,

while many loans to the LAs are carried at much lower rates. Government

is aware of this problem, and in fact made a grant to NHF in FY 1983 of

Z$777,000 to help reduce the deficit. This accounts for the fact that

the deficit as reflected on the income statement was significantly lower

in FY 1983 than in FY 1984. Had the GOZ not made that contribution, the

deficit that year would have totaled Z$1.06 million, rather than

Z$280,000. Regardless, continuation of this deficit situation is

jeopardizing the success of the NHF. Whether interest rates to LAs on

existing loans can be raised, particularly given the precarious financial

situation of many authorities (as will be discussed later) is

speculative. GOZ may have to continue providing an annual contribution

to NHF to cover the deficit.

Another qualificu..ion to the self-sufficiency situation is that the

NHF'. administrative expenses are covered by the GOZ's housing vote or

budgetary allocation to the MCNH for administrative expenses.' In 1984,

administrative costs allocated to the NHF by the MCNH were Z$77,471,

almost exclusively for salaries and wages of full and part-time MCNH

employees. If those expenses, plus other overhead expenses not

calculated, were added to the operational costs of the NHF, the deficit

would have been higher.

Arrears from some LAs are causing concern among NHF staff. Table

11-13 illustrates that as of December 31, 1984, LAs were in arrears to

the NHF by Z$10,577,000, with Z$7,689,000 more than 90 days in arrears.

Of this 90-day arrearment, Z$6,194,000 was attributable to the

Chitungwiza Town Council, as a result of a dispute between the GOZ and

the Town Council over damages to a number of NHF financed houses. The

remaining Z$1,495,000 in 90 day arrears was distributed between Urban

Councils (Z$454,000) and Rural Councils (Z$1,041,O00). As a percent of

NHF's loan portfolio, LAs' bad debt (less Chitungwiza) is less than 1/2

of one percent. Some of this debt is being rescheduled and capitalized

and is therefore not yet reflected on the NHF's financial statements.

None of this debt has been written off, nor are there any plans to do so.

Nevertheless, if this problem persists, and the LAs' weak financial

position suggests that not only will it persist, but grow, then it could

pose serious problems for the NHF and the GOZ.

 - 44 -

TABLE 11-13

Local Authorities Loan Arrears to National Housing Fund

(Current Z$ Thousands; End of December 1984)

90 Days 60 Days 30 Days Total

Municipal ities/

Town Councils, 6,648 1,560 990 9,198

of which:

Chitungwiza (6,194) (1,159) (631) (7,984)

Rural Councils/

Local Boards 1,041 174 164 1,379

Total 7,689 1,734 1,154 10,577

Source: Ministry of Construction and National Housing

In summary, the National Housing Fund has been limited in carrying

out its functions as the major supplier of finance for low-income

housing. Its dependence on the GOZ, and in turn on the GOZ's dependence

on external loans for housing, has prevented the NHF from making more

than a meager impact on the housing deficit. Until the NHF is able to

generate additional resources for housing finance, its effectiveness as

the primary supplier of low-cost housing funds will be restricted.

The NHF will continue to have to turn to the GOZ to cover its
operational deficits, unless interest rates to borrowers are adjusted.
Moreover, to truly reflect the financial condition of the NHF, all
aO - "
'3tration and operations should be included in the cost of
administering the fund. Until that charge occurs, it is incorrect to
refer to the NHF as a self-sufficient operation.
The problem of arrears must be addressed, either by insisting that

LAs make timely payments or by recognizing that some LAs are not in a

position to pay, and therefore having the GOZ make up the shortfall

between what the authorities can pay and what is owed to the NHF.

Assuming the GOZ's intention is that NHF, or any such successor

operation, play a role in the housing finance system, it would behoove

the GOZ to rectify this situation. It is doubtful that the NHF would be

permitted to attach any assets of delinquent local authorities to cover

non-payment of loans.

3. The Housing and Guarantee Fund

The Housing and Guarantee Fund (HGF), not to be confused with

the National Housing Fund, is the lesser known of the two funds, even

though its guarantee functions have aided thousands of Zimbabweans to

 - 45 ­

obtain housing and it is certainly better known to the public at large

for that very purpose. The HGF actually operates two separate yet

interrelated programs: 1) a guarantee scheme whereby a portion of a

mortgage loan obtained from a private financial institution is guaranteed

for repayment, and 2) a rental housing ownership and management scheme.

Since the housing operation resulted from the implementation of the

guarantee scheme, it would be more appropriate to begin this discussion

by focusing on the latter.

The Guarantee Scheme

This scheme was established as far back as 1953, although the

bulk of its activities have evolved over the past ten years, with

considerable activity since Independence. In U.S. housing parlance, it

is more akin to the Veterans Administration Guaranty Loan Program than

the Federal Housing Administration's Insurance Program. Essentially, the

GOZ, acting through the Ministry of Construction and National Housing,

guarantees a top portion of a loan obtained under specified criteria from

a financial institution, usually a building society. Under the present

set-up, two types of loans are guaranteed. For civil servants, the fund

will guarantee the first 30 percent of the loan, with the building

society assuring repayment for the remaining 70 percent. This is called

the 100 percent Scheme. With this guarantee, a public servant is able to

obtain a loan equal to the purchasse price of the dwelling unit. At

present, loans up to Z$50,000 for certain civil servants may be secured,

although for Ministers, Deputy Ministers and certain parliamentary

officials, the ceiling is Z$70,000, under certain conditions. In return

for this guarantee, the public servant signs an agreement giving the GOZ

a first lien on his/her pension in the event of default. Moreover, the

GOZ deducts monthly payments directly from the guarantor's paycheck to be

forwarded to the lender.

The other loan program, which is for the general public, is somewhat

more restrictive. It is referred to as the 90 percent Scheme, in that

non public servants may obtain a loan guarantee if they are able to make

a down payment or deposit equal to 10 percent of the purchase price. The

GOZ then guarantees the top 20 percent of the loan, with the building

society, as in the case of the 100 percent Scheme, taking the remaining

70 percent risk. Under this 90 percent Scheme, the maximum purchasing

price is Z$17,000, with a maximum loan of Z$15,300 (90 percent). Monthly

payments may not exceed 22.5 percent of the purchaser's salary, or in the

event of joint purchasers, two or more salaries.

In all cases, it is the responsibility of the borrower to obtain the

mortgage loan. The building society's analysis of the borrower's credit

worthiness and ability to repay the loan, if approved, is accepted at

face value by the HGF. The HGF does not conduct an independent analysis

of the borrower, nor do they appraise the property. In turn, the

borrower must pay all up-front costs associated with purchase of a home,

i.e., taxes, stamps, recording, etc., as well as pay a commission to the

HGF for issuing the guarantee, which is 1/2 of 1 percent of the amount of

the loan or 3 percent of thE maximum liability of the HGF whichever is

less. For a Z$15,300 loan, the commission is Z$76.50.

 - 46 -

The Minister of Construction and National Housing has considerable

leeway to vary the percentage of the loan guaranteed by the government.

Recently, up to 100 percent of some loans has been guaranteed. This

generally occurs when low income families need additional help to

purchase homes they occupy as renters. Usually these loans are in

amounts less than $2,000.

Table 11-14 illustrates that during the 1980 1984 period, the number

of building society loans guaranteed under this program totaled 10,712,

of which 48 percent were given to public servants and the remaining 52

percent to the general public. A total of Z$142.6 million in loans were

covered under this program, with the HGF committed to guarantee Z$38.4

million of that amount. It should be pointed out that the government's

liability for a guarantee is withdrawn when the amount of principal

reaches the 70 percent mark. For example, on a Z$10,000 loan, the

guarantee is withdrawn when the outstanding balance of the loan drops to

Z$7,000. This action also reduces the GOZ's continguent liability. As

of June, 1984, the contingent liability of the NHF stood at Z$31.5

million, which was not funded.

TABLE 11-14

Housing and Guarantee Fund Loan Guarantees

(Current Z$)

90 Percent Guarantees

Year No. of Guarantees Loan Amount Amount Guaranteed

1980 1306 12,549,787 2,788,563

1981 902 8,775,675 1,949,955

1982 684 6,640,979 1,475,626

1983 1497 17,154,302 3,811,686

1984 1168 11,163,713 2,480,577

Subtotal 5,557 56,284,456 12,506,407

100 Percent Guarantees

1980 1432 $19,864,879 $5,959,947

1981 921 17,038,310 5,111,493

1982 795 13,091,036 3,927,311

1983 1042 18,267,814 5,480,345

1984 965 18,049,272 5,414,782

Subtotal 5,155 86,311,311 25,893,878

TOTAL 10,712 142,595,767 38,400,285

Source: Ministry of Construction and National Housing

 - 47 -

Foreclosures on guaranteed loans totaled 66 between 1979 and 1984

(Table 11-15). The price the HGF paid to the building societies for

these units more or less equaled the appraised value of the properties,

indicating that no losses, at least on paper, occurred from

foreclosures. Sale of these units at a future date may even bring about

a profit to the fund.

TABLE 11-15

Housing and Guarantee Fund Loan Foreclosures

(Current Z$)

Year No. of Properties Purchase Price Appraised Value

ID30 10 q9,201 105,350

1981 2 21,784 21,000
1982 13 135,254 134,150
1983 17 203,982 204,150
1984 24 262,001 264,320
Tctals: 66 722,222 728,970
Source: Ministry of Construction and National Housing

As depicted in Table 11-16, the only income accruing to the Guarantee

Scheme is derived from the payment of connissions, which in FY 1984

totaled Z$65,523, up about Z$5,000 from FY 1983. For those same two

years, expenditures for bad and doubtful debts the only expenditure were

less than income from commissions, leaving a net surplus. However, that

surplus is being applied to losses from earlier years, which left the

Guarantee Account in a deficit position of Z$56,500 at the end of FY 1984.

 - 48 -

TABLE 11-16

Housing and Guarantee Fund Income Statement

(Current Z$; End of June)

Guarantee Account 1984 1983

Income
Coission 65,523 60,531
Less:
Expenditures
Provision of bad debts 41,028 27,913
Net income 24,495 32,618

Less:
Defic't carried forward from
previous year (81,046) (113,664)
Balance (56,551) (81,046)
Source: Ministry of Construction and National Housing

The value of the Guarantee Scheme to Zimbabwe and Zimbabweans has

been immeasurable. Since building society policy does not permit the

granting of loans at more than 75 percent of the purchase price, for

non-guaranteed loans, thousands of families would not have been able

to

afford homeownership. Moreover, since many building society residential

loans today have a GOZ guarantee, this has helped assure the flow of

building society assets to the housing market, something that would not

have occured since independence due to the softness of the market in the

higher income brackets, the traditional building society market.

One sour note will be sounded here. The provision of 100 percent

loan to value guarantees and to a lesser degree 90 percent guarantees, do

not encourage savings, and without appreciable savings, a housing finance

system cannot meet the demand for housing loans.

The Housing Scheme

During the life of the HGF, the fund has accumulated a number of

real properties, many of which were the result of foreclosures on

guaranteed loans. When the HGF takes title to a piece of property, that

property is repaired, if necessary, and rented to GOZ employees.

Infrequently, a property is sold, generally to a GOZ employee. At the

end of June 1984, the value of the Funds residential properties has

reached Z$7.2 million.

 - 49 -

Table 11-17 illustrates that operation of the housing section of the

HGF has been a surplus generating operation for the GOZ. Rentals from

these properties generated Z$629,000 before expenses in 1984. Based on

the book value of the properties, the return to the fund before expenses

was 8.7 percent. Overall, the housing accounts earned Z$446,775 in 1984,

an increase of almost Z$100,O00 over the previous year. While no

breakdown is available, the MCNH estimates that the cost of administering

the fund's housing account amounted to Z$402,709, which was covered by

operational income.

The Housing and Guarantee Fund represents a positive government

activity. The financial condition of the fund itself is good, and as
long as rents are collected, the net income for the housing account
should offset any losses in the guarantee account. Both accounts

operated in the black in 1984, although lack of information on the

administrative costs of the HGF prevents one from determining if the FY
1984 surplus of Z$24,495 was sufficient to cover those costs.

TABLE 11-17

Housing and Guarantee Fund Income Statement

(Current Z$; End of June)

Housing Account 1984 1983

Income:

Rentals 628,818 602,762

Interest on loans and investments 261,741 217,238

Other income 41,947 40,762

Total income 932,506 860,355

Expenditures:
Interest paid 167,782 169,710
Property maintenance 179,750 87,716
Other expenses 99,243 92,193
Profits on disposal of properties - 72,619
Total expenditures 446,775 349,762

Net income 485,730 510,593

Plus:

Surplus carried forward from

previous year 4,289,302 3,706,090

Accumulated Income 4,775,032 4,289,302

Source: Ministry of Construction and National Housing

 - 50 ­

4. Ministry of Construction and National Housing Administration

The GOZ makes an annual appropriation to the MCNH to carry out

its assigned functions, including the administration of the two funds.

This allocation is in addition to the funds loaned to the NHF for housing

schemes in conjunction with local authorities. Administrative expenses

of the MCNH have been increasing over the past three years, all of which

is attributed to salaries. Table 11-18 indicates that the total increase

between the end of FY 1983 and the end of FY 1984 was 29 percent, but due

to inflation, the net increase was only 10 percent. It is difficult to

say if this rise, resulting from additional staff, is warranted without

carrying out a management audit. The general feeling among MCNH staff is

that the ministry is understaffed.

TABLE 11-18

MCNH Administrative Expenses (Housings Administration Only)

(Current Z$ TI'ousands; End of June)

Item 1983 1984

Salaries and Wages $872.9 1,225.2
Subsistence and Transport 137.7 224.8
Incidental Expenses 267.9 231.1
Furniture and Equipment 31.4 12.7

Total 1,309.9 1,693.8

Source: Ministry of Construction and National Housing

Nevertheless, income from the two funds helps to defray some salary

expenses. Analysis of government contributions plus net income from the

Housing and Guaranty Fund for FY 1984 alone indicate that the total

nonreimbursable costs to the GOZ for its housing programs was slightly

over Z$3 million (Table 11-19). Reduction in the NHF deficit, which

accounted for roughly half this expense, would have a major impact on the

Ministry's administrative expenses and costs.

 - 51 -

TABLE 11-19

MCNH FY 1984 Total Administrative Costs

(Current Z$)

Government Allocation 1,693,800

Plus: NHF deficit 1,446,000

Sub-total 3,139,800

Less: HGF surplus of which:

Guaranty account 25,495

Housing account 44,066 (69,561)

Net Cost 3,070,23

Source: Ministry of Construction and National Housing

5. Local Authorities

Within the housing context, the principle role and

responsibility of the local authorities (LAs) consist of the development

and administration of low-income housing in their political

jurisdictions. This role includes the allocation and management of LA

owned rental housing, and more recently, the administratic of formerly

owned rental housing which had been sold to its owner-occupants.

Currently, the LAs are almost exclusively developing new low-income

housing for sale only.

Financing these housing schemes has always been, and continues to be,

the main bottleneck in the supply of sufficient numbers of dwelling units

to meet the demand. Funds have traditionally been raised from three

principal sources:

- loans from the GOZ, appropriated from the annual budget;

- loans from private sector financial institutions such as

building societies, insurance companies, pension funds, etc.;
and,
- locally generated revenues from taxes and/or LA business
ventures.
Loans from the central government have consistently formed the bulk

of financial assistance to local authorities. This was true in the

preindependence days as well as today. As discussed in the section on

the National Housing Fund, the loan balance from this source now totals

Z$195 million (end of June 1984). Loans made by the GOZ are for a period

 - 52 ­

of 30 years, and currently carry an interest rate of 9.75 percent,

although earlier interest rates reflected the lower rates prevailing at

the time the loans were granted. This is clearly a below-market interest

rate, given that mortgage loans from the private secto;r (i.e., the

building societies) are offered at a minimum of 12.5 percent, which is

the market cost of money, albeit government set, for this economic

activity. The Treasury provides the money to the National Housing Fund
at 9.75 percent, which in turn passes the money pari passu to the LAs.
The LAs loan the money to 'iome-buyers at the same rate, although in some

cases, a fee is added to the monthly loan payment to cover administrative

costs. The Harare Municipal Government charges a flat Z$3.85 per month
per loan to help defray loan administration costs.

Over the past three years, the GOZ has allocated an average of Z$38
million annually to LAs to provide new low-income housing. While this

figure is greater tan previous years, the amount of housing built is

actually smaller (see Section 11-2).

Loans from private sector financial institutions directly to LAs

(actually, only Harare and Bulawayo Urban Councils had access to this

source) have ceased since independence. When this activity was

permitted, these two cities not only borrowed from financial institutions

with central gover.ment approval, of course they were also able to raise

funds by issuing local stock (municipal bonds). No plans are afoot to

permit Harare and Bulawayo to once again tap the private finance market
for housing purposes.

Prior to independence, LAs raised funds locally for housing primarily

from two sources. The first source was a services levy on certain
employees that was directed to the construction of low-income housing and
community services. This levy was repealed at the end of 1979. The
second source was the African Beer Fund. Under this program, LAs
produced and sold indigenous beer, and allocated up to 50 percent of
profits to a revolving fund for the development of low-income housing.
Since independence, the central government has levied excise taxes on
this beer, which means that roughly 80 percent of the profits end up in
the GOZ's central tax coffers, rather than remaining with LAs to develop

more housing. Accordingly, revenues from indigenous beer have greatly

diminished. The revolving funds established with the Beer receipts

continue to provide some roll over monies to fund new housing. In

Harare, about Z$l million annually is generated for new housing in this
way, and in all other urban councils, probably another Z$1 million at
most is generated. However, the flow of new money from beer profits

(after taxes) is severely limited. Also, the interest rate being charged

is below the rate of inflation, which indicates that the fund is being

decapitilized. With each passing year, revenues from LA sources, both

with respect to new flows and reflows, will diminish further to the point

where local funds are a negligible source of housing finance. Only if

LAs are authorized new and/or increased taxing, or other revenue

generating powers, will this situation be reversed.

 - 53 -

One new source of housing finance will soon be available to LAs,

albeit indirectly. The building societies, and one in particular, have

agreed to make mortgage loans directly to beneficiaries of low-income

stands under a World Bank-sponsored project in four urban councils.

These four council areas will be able to use financing contributed by the

GOZ as a construction account to finance and develop stands. Once the

building society provides the take-out or longterm mortgage financing,

the councils will be reimbursed for the cost of developing the stands,

and these funds can be rolled over to develop new stands. The potential

for this activity is appreciable, assuming the building societies have

both sufficient funds and the willingness to make this plan work.

III. Resource Mobilization

Mobilizing domestic resources which, in turn, can be channeled

to housing credit, is the key to a viable housing development program.

Section I of this report covered in full the financial situation in

Zimbabwe today and the trends and prospects for increasing the level of

current saving, while Section II discussed the housing finance sector in

general. This section attempts to address the issue of sources of

savings for housing finance, both internally and externally, and it will

include a number of ideas on how savings for housing purposes can be

enhanced as well as the prospects for tapping these sources.

A. Sources of Housing Finance: Actual and Potential

1. Domestic Savings Generation

As a source of housing finance, domestic savings in Zimbabwe can

be additionally tapped only if GOZ makes some policy changes. It is not

that savings is so low or that they are virtually non-existant, but
rather that the GOZ has instituted policies that inhibit the flow of
savings to housing institutions and the various funds, which would make
this money available in the form of housing credit. These changes could
include, for example, permitting the building societies to compete fairly
with the Post Office Savings Bank in attracting savings deposits. If
this change is permitted, then some of the savings that has flowed in to
the POSB would be withdrawn and placed in the building societies. As
will be discussed in Section IV-A of this report, the loss of revenue to
the GOZ from the POSB purchase of stock would be offset by the gain in
the revenues, although in this case, the taxpayer would lose. A second
GOZ policy change might call for increasing the deposit or down payment
for GOZ guaranteed loans. For example, a five percent increase in both
the 100 percent and 90 percent schemes would have generated an additional
Z$1.5 million in 1984. While this would not appear to be significant, it
would have permitted the building societies to make about 70 additional
loans in 1984.

 - 54 -

In addition to these two policy considerations, the GOZ should want

to encourage the development of savings clubs. Instilling in low-income
families with the savings habit, particularly rural families, would go

far toward making the nation more self-sufficient and prosperous. Once
incomes rise, in part through maximizing use of the savings clubs, other

institutions, perhaps credit unions could be formed which would be able

to provide some housing finance.

2. Government Budgetary Contributions

By lending government funds for housing finance to low-income

families, rather than making grants, the GOZ is maximizing the use if its
scarce funds (scarce in the sense that there are other GOZ mandated
priorities that affect budget allocations for housing). Increasing the

interest rate, now 9.75 percent, to a figure closer to the "market rate",
even though rates are set by GOZ decree, would help prevent distortions
in the market. Providing housing loans not at a 30 year term, but in
perpetuity, on the condition that these loan funds, now channeled through

the National Housing Fund, would remain in the fund and thereby ensure a
steady flow of resources for' low-income housing. This, in effect, would

 - 55 ­

become a revolving fund, whereby the principal would be constantly rolled

over for new houses and only interest repaid to the GOZ. Only in the

case of external loans to the GOZ for housing would adjustments have to

be made for repayment. In this way, funds loaned by the GOZ for housing

purposes, would remain in the housing sector. One caveat here: a 9.75

percent interest rate confronted with a rate of inflation at today's

level would slowly decapitalize any revolving fund, even though new funds

are flowing into the fund through annual government loan contributions.

This is due to the fact that inflation cuts into purchasing power. For

example, at an annual inflation rate of 15 percent, Z$1.O0 today is

worth less than Z$0.50 five years hence, meaning that only half as many

houses can be built 5 years from now as today. This is a good reason to

fix interest rates at levels equal to or in excess of the rate of

inflation in order for the fund to maintain its value.

3. Redirecting Funds from Other Financial Institutions

Some thought has been given to the establishment of a National

Provident Fund whose assets would be invested in low cost housing. In

fact, this has been tried in a number of developing countries, and in

general, it can be effective in generating funds for housing. Normally,

it has been more logical to establish such a fund in countries where most

workers are not covered by a provident or pension fund and/or where

private sector housing finance involvement is minimal, which is certainly

not the case in Zimbabwe. Where it is not an effective solution, fund

mismanagement is common, and benefits in- the form of housing loans

generally accrue to only a small number, usually the most affluent, of
the contributors. This is not the place to discuss the feasibility of
establishing a National Provident Fund, or even another fund to cover
those workers who do not have coverage. Instead, it can be argued that
the present system should be used better to provide housing opportunities

for low-income families.

As discussed in Section I, life insurance companies and

pension/provident funds must invest 60 percent of their assets in

approved government and quasi-government securities. In the first half

of 1984 alone, an additional Z$124 million from those two sources were

placed with the GOZ, and indications are that that amount will grow

steadily over the years, probably exceeding the rate of inflation. If,

for example, only 10 percent of those investments were redirected to the

housing finance market, then an additional Z$12.4 million would flow into

housing. It is acknowledged that taking such a step would imply a major

policy decision by the GOZ, and that the macroeconomic implications are

considerable. Nevetheless, this would not only generate an immediate

flow of funds to the housing market, but it would also constitute a

steady and reliable source, particuarly from pension funds.

 - 56 ­

4. External Sources

In the past few years, the GOZ has begun to rely on external

loans (and a few small grants) for housing development, something that

was not previously done. These external funds have flowed from two main

sources: USAID's Housing Guaranty Program and the World Bank (IBRD), in

conjunction with the Commonwealth Development Corporation (CDC). When

currently approved loan programs from those two institutions are

completed, US$116.6 million (Z$185 million) in external loans will have

flowed into the Zimbabwean housing market (US$64 million from USAID,

US$43 million from IBRD, and US$9.6 million from CDC). If schedules are

kept, these monies will have been disbursed by 1989, having started, with

the first USAID loan, in 1983. Disbursements have not been, nor will

they be constant over that period, but for arguments sake, the average

disbursement over the six years can be considered to have been US$20

million annually. It would appear therefore, that if GOZ allocations

remain at the current levels, well over 50 percent of all GOZ financing

will have been derived from external assistance during this 6 year

period, which is a very high proportion, when compared with other

developing countries.

The IBRD and USAID probably provide 90 percent of all external low

cost housing assistance to developing countries. In that respect, the

policies of those two institutions are crucial in determining the

prospects for continued housing assistance from external sources in

general. Without going into details, those two institutions have made it

clear that they do not see it within their mandate to finance all the

housing requirements of any developing country. Their policies are to

assist governments in developing their housing sector through the use of

external assistance. The World Bank and USAID, while desiring to help
developing countries to improve housing conditions, do not provide
unlimited funds.
In addition, there are other considerations. Even at a US$20
million annual rate, that is only a fraction of the amount of money
needed to make a dent in the housing deficit. There are also external
debt considerations which may cause the Treasury to delay or stop the
flow of funds from external sources. Regardless, external loans should

be considered merely a supplemental housing resource, not as a primary

resource.

5. Municipal Finances

In general, the 17 urban councils in Zimbabwe are expanding

their range and level of municipal services, yet their revenue resource

base has not been expanding at the same rate. Also, with the previous

principal source of local funds, the African Beer Fund, drying up, local

funds for housing are becoming scarcer. It is unlikely that the LAs are

going to be able to dedicate any additional local funds for housing

unless they are given additional revenue generating powers.

 - 57 ­

6. Secondary Mortgage Sources

In a manner of speaking, the idea that life insurance companies

and pension funds invest a percentage of their required reserves in

financial instruments that in turn will be channeled to the housing
finance market, is an application of the secondary mortgage concept. In
fact, if this occurs, the insurance companies and pension funds would be

functioning as second-tier mortgage market institutions. If the

mortgages held by those institutions, or alternatively, the paper that is

backed by those mortgages, are sold to another party, then, in fact, a

secondary mortgage market will be initiated. The key to the

establishment of a true secondary mortgage market is the availability of

liquidity, that an institution or institutions are maintaining a market

for the mortgage or mortgage backed instrument.

Is this necessary, or even possible, in Zimbabwe? The potential for

raising new funds for housing through the sale and purchase of existing

mortgages is limited only by the demand for housing finance. The three

building societies, which are today the only primary mortgage loan

originators, hold approximately Z$416 million (as of June 30, 1984) in

mortgages. In theory, the societies could sell their entire portfolio of

mortgages if a secondary source to purchase those mortgages existed.

With the funds raised from the sale of their mortgage portfolios new

loans could be made, and the sale could be repeated over and over, until

housing demand was satiated.

If the building societies were in a position to sell their

portfolios, who would be the purchasers? Assuming the price was right,

life insurance companies and pension funds would by far be the principal

buyers, whether the funds were redirected from required reserves or other
assets. Of the approximately 1,220 pension funds, provident funds and
retirement funds, almost 100 are self administered, while the remaining
are administered by insurance companies of which there are 48.
Altogether, there are 150 potential major purchasers from among the above
institutions. Perhaps there are a few other potential buyers, depending
on how a secondary mortgage operation was structured. With three
sellers, the building societies, and over 150 buyers, the market would
appear to be large enough to warrant the establishment of an
institutional framework. On the other hand, if sale of mortgages in one
form or another was permitted, it might suffice for a building society to
merely place an advertisement in the Financial Gazette in order to
attract buyers.
Regardless, an institutional framework does exist in Zimbabwe which
possibly could be adapted to cover a secondary mortgage operation.
Presently, there are two local discount houses that maintain a market in

GOZ financial investments, and commercial paper and bankers acceptances,

and in theory a secondary mortgage market operation be established under

the auspices of the discount houses.

 - 58 -

It would appear that more questions are being raised than answers,

but the fact is that there are several possible scenarios. More simply,

legislation could be enacted that would permit the building societies to

sell a mortgage or a group of mortgages to an interested buyer, whoever
that may be. Alternatively, the building societies could issue mortgage

participations backed by a part of all of their mortgage portfolio. This

latter alternative would have the advantage of permitting the sale of

mortgages either in smaller amounts and/or round figures. Additionally,
a third party or institution, perhaps the discount houses, could step in

to maintain a liquid market, which would, in fact, be the apex of a

secondary mortgage market.

B. GOZ Constraints on Resource Mobilization

1. Taxation

During the 1979/80-1983/84 period, total revenue!I/ accruing to

the central g)vernment increased at an average rate of just over 30

percent per year compared to an average annual rate of growth of

Zimbabwe's Gross Domestic Product (GDP) of 16 percent. This margin of

growth of revenue over GDP is primarily the result of several tax

measures introduced by the GOZ during the period and from the growth of

various tax bases. During the 1982/3 fiscal year the proportion of total

tax revenue collected by direct taxes amounted to 50.7 percent while

those collected indirectly totalled 49.3 percent.

The major taxes affecting resource mobilization in the private sector

and hence the availability of resources for housing finance, are the

taxes on income and profits of individuals and companies. This single

category grew at an annual rate of 27 percent between 1980/81 and 1983/84

and accounted for 46 percent of total tax revenue and 41 percent of total

revenue in 1983/4.

The maximum tax abatement (deduction) for single persons is Z$3,600

while that for married taxpayers filing jointly is Z$6,000. For single
taxpayers individual income tax is charged at rates ranging from 14
percent for the first Z$1,000 of taxable income to 45 percent for the
balance of taxable income above Z$16,000. For married taxpayers filing

jointly, income tax is charged at rates ranging from 10 percent for the

first $1,000 of taxable income to 45 percent on the balance of taxable

income above Z$17,000.

l/ Includes taxes on "ncome and profits, tax on property, taxes on goods

and services, tax on international trade, and other taxes, revenue from
investment and property, departmental fees and charges and other non-tax
revenue.

 - 59 -

The effective marginal tax rate of each tax bracket is increased by a

surcharge applied to the tax payable. The rate of surcharge for tax
years (April through March) 1980 and 1981 was 10 percent, resulting in a
maximum effective mnarginal tax rate of 49.5 percent. The surcharge for
the 1982 tax year was raised to 15 percent with a correponding maximum
effective tax rate of 51.75 percent. A variable rate of surcharge was
introduced for the 1983 tax year ranging from 15-33.5 percent with a

corresponding maximum effective marginal tax rate of 60 percent. The

range for the surcharge was increased for the 1984 tax year to 20-40
percent resulting in a 63 percent maximum tax rate. However, due to

relatively low wages, it can be assumed that the majority of taxpayers

would be assessed at the lower end of the surcharge.

While individual income tax is an important source of revenue for the

GOZ, contributing over 26 percent to total tax revenue in 1983/84, it

would appear that it is paid by a relatively small proportion of all wage

earners due to the high level of allowable deductions which determine the

level of taxable income. In order to broaden the tax base a Lower Level

Employee's Tax (LLET) was introduced in April of 1984 and applies to the

remuneration of employees other than agricultural and domestic workers

earning more than Z$100 per month not previously affected by tax

legislation. The system of collection is similar to the Pay As You Earn

(PAYE) system (where tax must be paid to the GOZ within 15 days after the

end of the month during which the tax was withheld) except that a 2

percent flat rate applies to total earnings and no deductions are

allowed. This new tax, estimated to cover more than half the employees

in the country, is expected to yield approximately Z$20 million in the

1984/85 tax year.
Although companies are taxed at a basic rate of 45 percent,

surcharges can raise the effective marginal tax rate to 56.25 percent. A
branch profits tax of an additional 8 percent is levied on local branches
of foreign companies. Company tax revenue, which accounted for over 18
percent of the GOZ's total tax revenue in 1983/4, has declined in recent
years as a result of declining corporate profitability. Increased rates
of company taxatior have been offset by this decline in corporate income.
Other income taxes include the resident shareholders' tax (20 percent

of dividend value), the nonresident shareholders' tax (20 percent of

dividend value) nonresidents' tax on interest (10 percent of interest

value) and the capital gains tax (30 percent of the capital gain value).
These taxes accounted for nearly 2 percent of the GOZ's 1983/84 tax

revenue.

Accruals and interest received by the building societies stemming

from mortgage loans and other investments are exempt from taxes.

Likewise, accruals and interest from investments made by pension funds on

behalf of their members are also exempt from taxation. However,

insurance companies are taxed on a formula basis. For non-life insurance

companies, income derived from other than the insurance business itself,

e.g. income derived from the investment of surplus funds, is taxable

under the normal provisions of corporate taxation. Non-life insurance
companies are also subject to capital gains tax in the normal way. Life
insurance companies, on the other hand, are taxed under a formula which
 - 60 ­

uses as a base the actuarial liabilities of locally issued life

policies. Deductions are allowed for income earned on local investments

(both public and private) and these companies are exempt from capital

gains tax on investments allowed by the formula.

The net effect of the changes in tax regulations since 1980 has been

to substantially increase the tax burden on individuals. During the

1979/80 1983/84 period, the ratio of wages paid in taxes increased by 47

percent and presently the average taxpayer is paying the GOZ 44 cents of

every dollar earned. Such a heavy tax burden has had two effects upon

savings in Zimbabwe. First, aggregate discretionary income has been

significantly reduced during the past five years with the net effect that
growth of savings is far below the rate of growth of output, thereby
resulting in a rather low average marginal propensity to save. Second,

the high rate of taxation has enabled upper income groups to mobilize a

rather substantial nool of savings with the POSB where their interest
income is free frop, taxation. However, this pool of resources cannot be

tapped for private sector investment since the POSB is required to invest

its deposits in public sector securities. As such, the building

societies loose out on both accounts the average wage earner has little,

if any, discretionary income to save and those with ample discretionary

income shelter it under the aegis of the POSB.

2. The Budget Deficit and its Effect on Domestic Savings

Although GOZ revenues increased rapidly during the 1979/80

1983/84 period and outpaced the rate of GDP growth, the GOZ's net

budgetary deficit has also been on the rise (Table Ill-l). For the

fiscal year ending June 30, 1984, the country's net budgetary deficit was

Z$630 million on total central government expenditure of Z$2,628 million

representing 11 percent of GDP. As depicted in Table Ill-1, the

deficit's proportion of GDP had averaged about 9 percent for the

1979/80-1982/83 period.

While a deficit of this magnitude can only imply negative long-term

ramifications for the economy including an increasing debt-service burden
and inflationary pressures as a result of money supply growth, the most
disturbing aspect of the deficit is the GOZ's need to borrow to fund
recurrent expenditures. Recurrent expenditures amounted to Z$2,233
million for the 1983/84 fiscal year against revenue of Z$1,997 million

leaving a recurrent deficit of Z$236 million. Expressed as a share of

total central government expenditures in 1983/84, recurrent expenditures

accounted for 85 percent, capital expenditures for 6 percent and net

lending 7 percent.

Rap expansion of the GOZ's social services programs with high

recurrent cost components has yielded an imbalance in the ratio of

consumption to investment. To fund the resulting budget deficits, the

GOZ has had to resort to both domestic and foreign borrowing. Domestic

borrowing for this purpose during 1983/84 took the form of bank borrowing

(31 percent) and nonbank borrowing (61 percent). Foreign borrowing

provided the remaining 8 percent.

 TABLE III-1

Zimbabwe: Savings and Budget Deficit Ratios

(Selected Years; Current Z$ Millions)

Gross Fixed Current Ratio of Ratio of

Capital Acccunt Net Savings to GDP Budget Deficit to GDP

Year Formation Deficit Savings GDP (Percent) Deficit (Percent)

1973 330 15 315 1,450 21.7 NA NA

1976 409 +5 414 2,064 20.1 95 4.6

1980 525 157 368 3,206 11.5 375 11.7

1981 800 440 360 3,995 9.0 286 7.2

1982 950 533 417 4,465 9.3 340 7.6

1983 850 1/ 450 400 4,871 8.2 447 9.2

Sources: Central Statistical Office, Quarterly Digest of Statistics

Reserve Bank of Zimbabwe, Quarterly Economic and Statistical Review

1/ Estimate

 - 62 ­

'Vhe effect of domestic bank borrowing to fund the deficit has had the

direct result of increasing the money supply of M2 (notes and coins in

circulation, dema;,d deposits and commercial and fixed deposits with less
than 30 day maturities) thereby fueling inflation. Reserve Bank of
Zimbabwe dat, illustrate that since the beginning of 1980, the M2 money
supply has grown at an average annual rate of over 14 percent, much
faster that the GDP growth rate in real terms. Domestic bank borrowing
(and subsequent increases in the money supply) would have been of an even

larger magnitude had the GOZ not raised the statutory requirement on the

ratio of approved assets in the portfolios of insurance companies and

pension funds thus enabling the GOZ to channel resources to the public

sector by selling securities in the capital market.

As discussed in Section I-C, the GOZ's deficit spending had led to

the generation of inflationary pressures in the economy which has

rendered real interest rates negative since 1980 (Table 1-2). Such a

phenomenon has surely contributed to restraining the overall growth of

financial savings. While total savings in Zimbabwe's financial

institutions grew at an annual rate of less than 11 percent during the

1980-84 period (Table 1-5), this growth rate did not keep pace with the

15 percent GDP growth rate for the same period. As a result, financial

savings' proportion of GDP has fallen from 49 percent in 1980 to 41

percent in 1984.

The net result of the increasing levels of central government

expenditures is a fiscal policy which, for all practical purposes, is

devoid of measures to encourage savings. The steep rise in the

proportion of income paid in taxes has not been sufficient to keep pace

with public expenditures. The resulting reliance upon private financial

institutions to fund the deficit has led to the crowding out of private

investment financing by the public sector.

Supporting evidence of this crowding out effect can be gleaned from

the information in Table Ill-1, which illustrates a significant decline

in savings ratios (gross fixed capital formation net of the current

account deficit as a proportion of GDP) since the early 1970s. If the

savings ratios are compared with the budget deficit's proportion of GDP,

the data indicates that domestic savings is being diverted to finance the

deficit and that rather insignificant residual amounts are available for

private sector investment. By drawing savings and investment funds away

from the productive sectors, the potential for growth and employment is

seriously reduced.

3. Recent GOZ Policies Affecting the Financial Sector

The GOZ's monetary policy has been oriented toward restraining

excessive demand pressures. In 1981 the bank (discount) rate was raised
from 4.5 percent to 9 percent and correspondingly, commercial banks'
prime overdraft lending rate was raised from 7.5 percent to 13 percent.
 - 63 -

As illustrated in Table 1-3, other interest rates including those of the

building societies rose in line with these two changes with the result

that lending rates became more closely aligned with the inflation rate,

through most still remained negative in real terms.

Together with interest rate increases in 1981, the statutory reserve

requirement for commercial banks, merchant banks and finance houses was

increased from 6 percent to 8 percent for demand deposits and from 3

percent to 6 percent for savings and term deposits. Also during 1981,

the finance houses' statutory liquid asset ratio was increased from 15

percent to 20 percent.

During the 1983/84 fiscal year, the GOZ made a concerted effort to
promote government financing outside the banking sector to counteract the

negative impact upon the economy of larger domestic financing of the

budget deficit. As such, in September 1983 yields of government stocks

were increased by up to .9 percentage point depending on maturity. At

the same time, insurance companies and pension funds were required to

increase their portfolio holdings of approved assets from 50 percent to

60 percent (from 25 percent to 30 percent for non-life insurance

companies).

As a result of this new regulation, the mix of assets held by

insurance companies and pension funds portfolios were changed and some
assets reduced, especially those with commercial banks. This action was
responsible for an abrupt liquidity squeeze in the money market during
which money market rates for non-liquid paper rose to record levels with
the 90 day rate on Negotiable Certificates of Deposit (NCD) peaking in
December 1983 at 15.5 percent. The NCD rate substantially stabilized at
around 9 percent and during the second half of 1984 it fluctuated between
8.75 percent and 10 percent. During the same period, banks and other
institutions appeared to be able to meet their liquidity requirements
without difficulty and there was little aggressive bidding for funds in
the money market.

To ease the impact on the financial sector of Ministerial

announcements in February and March 1984 detailing supplementary

estimates of expenditure and certain new exchange control measures, the

monetary authorities took a number of actions, many of which had an

impact on the amount of resources available for private sector

investment. First commercial banks' statutory liquid asset ratio was

raised to 40 percent in May, an action also affecting the merchant

banks. This was followed by the Reserve Bank's issue of

nonrediscountable and nontransferable bills. These actions were intended

to prevent excess credit from being created.

The monetary authorities then allowed the tax free deposit rates

offered by the Post Office Savings Bank (POSB) to increase from 7.5

percent to 8 percent for ordinary savings deposits and from 8.5 percent

to 10 percent on fixed deposit accounts. Additionally, ceilings or

deposits with the POSB were increased from Z$50,000 to Z$100,O0 for

individuals and from Z$20,000 to Z$45,000 for corporate bodies. These

actions were intended to attract additional funds to the POSB which would

in turn be invested in GOZ stocks.

 - 64 -

Since 1980, the large accumulation of the blocked funds of those who

have emigrated from Zimbabwe have been on the increase. These funds had

been invested in assets of various forms including deposits in building

societies. Effective March 1984, the remittance of income derived from

these assets was suspended. Furthermore, the individual or corporate

holders of such funds were given two choices, either convert them to GOZ

external bonds or leave them in place without being able to remit either

the principal or interest accruing to these funds. Individual holders of

blocked funds could acquire 12-year, 4 percent interest bonds, the

interest on which would be remittable during the first 6 years and the

principal redeemable in equal installments from the 7th through the 12th

year. Corporate entities could acquire 20 year bonds at the same rate of
interest remittable during the first 10 years and the principal
redeemable during the second ten year period. From the point of view of

the building societies, this action had the effect of releasing over Z$55

million in deposits to the RBZ for the purchase of external bonds. It is

estimated that over Z$250 million of these bonds had been subscribed for

by the end of 1984. Although the RBZ is recycling these funds back to

the building societies in the form of two-year fixed deposits, the RBZ

has suggested that the building societies should not rely on this type of

funding after the maturity date. To ease the position of the building

societies during the period during which these funds were moving into

external bonds, the monetary authorities reduced the societies statutory

liquidity ratio from 20 percent to 15 percent.

Also effective March 1984, all individuals who apply to emigrate from

Zimbabwe must liquidate their assets within six months and invest the

proceeds in external bonds. The building societies can expect a further

drain in deposits if its members continue to emigrate.

All income remittances other than pensions, alimony payments and

expatriate incomes approved for remittance by the RBZ were suspended in

March 1984.

A final March 1984 ruling concerned the holders of external

securities. All resident holders of such securities were to be
compensated in local currency at the prevailing share price as a result
of the GOZ's decision tc acquire this external securities pool.

Securities constituting the blocked funds of those who have emigrated

would be converted to GOZ external bonds. The GOZ's payment of

approximately Z$231) million for the external securities pool was a major

cause of an abrupt increase in the growth of the money supply between

June and September 1984.

4. Rent Control

A final note about a government regulation that constrains

investment in new rental housing. The Housing and Building Act of 1979
authorized the Minister of Housing to establish a Rent Appeal Board (RAB)
to "control the letting and hiring of any immovable property". The key
 - 65 ­

phrase in the legislation permits the government in the name of the

appropriate minister to "restrict or suspend the rights under common law
of lessors of immovable property, including rights relating to leases
entered into before the coming into operation of such regulations". The
rent regulations were promulgated in 1982 by the Ministry of Housing, and

as expected, their application has had a major impact on the rental

housing market (other commercial real property is covered by the law, but
it will not be discussed here).

First of all, all rental dwelling units, bcth existing and new, are
covered. In addition, rental agreements signed prior to the legislation

and regulations are subject to rent control. The RAB has the authority

to determire a fair rent of all rental units and this determination is

based on a nun;bJof-factors, including allowing the lessor a reasonable
return, and permitting the lessee to charge a reasonable rent. In
determining a fair rent, the RAB takes into consideration prevailing
rental rates in the area, the possible effect of the level of rent on
other rental rates and the condition of the property. In determining a
reasonable charge to the lessee, the RAB "assumes that supply and demnd

are in reasonable balance, and shall not have regard to any abnormal
conditions of supply and demand". In effect, the rent control

legislation has removed the establishment of rental charges from the

control of the lessor and lessee and instead placed this responsiblity
squarely in the hands of a government body. Supply and demand for rental

housing, as the regulations so clearly state, is not a factor in

determining rates. Like most rent control legislation elsewhere, the law

strongly favors the lessee.

The effect of the implementation of this legislation has been

considerable. As expected, the legislation gave immediate relief to

rentors in that rents were essentially frozen and in some cases rolled

back. And the process through which a landlord must submit in order to

raise rents is so complex and time consuming that for all practical
purposes, most landlords have resigned themselves to keeping rents at a

low level. This freeze on rents has been very beneficial to families who

found themselves in a rental unit at the time the legislation was

enacted. In fact, rents for many families are so reasonable that it is
illogical to buy a home since the amortization payments to purchase a
comparable home are so much higher than are rental payments.

On the negative side, the results are predictable, as they are in

every city throughout the world where rent controls are applied. Since

rents are controlled even on new construction, the expected financial

rate of return makes investments in the construction of new rental units

unprofitable vis-a-vis returns on other investments. For that reason

alone, the construction of new rental housing by the private sector has

dried up completely. Apparently, this condition will continue unless and

until the GOZ modifies or relaxes its rent control regulations. The

stock of rental housing will slowly decrease as landlords, in cases where

 - 66 ­

practical, sell rental property to homeowners, taking a loss on the sale,

if necessary. Moreover, the condition of rental housing can be expected
to deteriorate as landlords, confronted with the probability of further
losses, refrain from making improvements and repairs on property for
which they will receive no additional income.
The GOZ has stated that 10 percent of the units in all new housing
projects must be rental units. Since only government is financing new
housing at this time, this will not affect the private sector.
Nevertheless, the regulations do not apply to the "letting of a dwelling
by the state or a local authority". As indicated in an earlier section
of this report, the Housing and Guarantee Fund, which rents a

considerable number of houses to government employees, makes only

a
minimal profit, about 1/2 of one percent on the value of the property,
which is patently unacceptable to a private sector investor or
individual. Given these set of circumstances, it is doubtful that a
private sector investor will be able to set aside 10 percent of a new
housing development for rental housing, unless he expects to experience a

considerable loss, at least with respect to opportunity cost of

alternative investments. Regardless, private sector investment in rental

housing will remain negligible as long as this legislation in its present

form remains in force.

 - 67 -

IV. Recommendations for a Rejuvenated

Housing Finance Program in Zimbabwe

Unlike the vast majority of developing countries, Zimbabwe is in

the enviable position of having a sophisticated, well-developed financial

sector. While its complexity is unique on the African continent,

numerous events since independence have tested the system's mettle,

particularly in regard to the ability of the system to provide housing

credit. Since existing housing finance institutions cannot cater to the

needs of all Zimbabweans, the following recommendations are an attempt to

provide policy makers with a concrete agenda whereby through a public and

private joint effort, many of Zimbabwe's housing finance problems can be

overcome. The Government of Zimbabwe (GOZ) must be made aware that an

increase in the amount of credit available for housing can only become a

reality if, and only if, the GOZ is prepared to make policy changes

regarding the amount of domestic savings which can be reallocated to the

housing sector.

A. Recommendation #1.

Since it can be successfully argued that the building societies

are the country's only specialists in housing credit, the societies must
become competitive with the Post Office Savings Bank (POSB) in terms of
their ability to attract savings in order to generate mortgages. It is
therefore recommended that the tax-free status and/or the allowable
ceilings on accounts at the POSB be partially or totally eliminated in
order to allow the building societies to become, once again, viable
mortgage granting institutions. As analyzed in the body of the text, the
1984 deposit rate and ceiling increases were extremely successful in
attracting savings to the POSB thereby increasing the amount of much
needed resoutces available to finance the GOZ's domestic programs.
However, it is demonstrably less efficient for the GOZ to finance the
budget through the issue of GOZ stock than it is to generate revenue
through taxation. For example, with the top marginal effective tax rate
of 63 percent, the effective tax-free yield on a tax-free POSB fixed
savings account is 26 percent. On a POSB account of say Z$50,000, the
return to an individual in this tax bracket over a one-year period would
be Z$13,000. The same Z$50,000 in a building society taxable 9.75
percent account Would yield an individual in the highest tax bracket only
Z$1,804, Z$3,071 being collected in taxes. In other words, while the
POSB provides the GOZ access to this particular individual's Z$50,000, it
does so at a cost of $13,000 to the GOZ in the form of interest and
foregone tax revenue. By lifting the tax-free status of the POSB, the
GOZ would be foregoing the use of what resources flowed to the building
societies in the short-run but would enable it to generate tax revenue

from these resources over the longer term and fulfill a social need by

increasing the pool of savings available to meet the housing credit needs

of its citizens.

 - 68 -

B. Recommendation # 2

As analyzed in the body of the text, Zimbabwe's insurance

companies, pension funds and other institutions have experienced quite

impressive rates of growth over the past five years and future growth

prospects appear very positive. Confronted with considerable revenue

from their growing operations, these institutions seek relatively risk

free investments. The existence of this liquidity coupled with the fact

that the financial sector consists of two discount houses which maintain

markets in a number of financial instruments provides the prerequisites

for a secondary mortgage market. It is therefore recommended that the

GOZ permit building societies to sell participations in a pool of

government guaranteed mortgages utilizing the existing mechanism of the

discount houses to maintain a market.

In theory, the sale and purchase of mortgage backed securities in

order to raise new funds for housing credit is limited only to the demand

for such credit, assuming the existence of ready and willing purchasers.

With the building societies holding some Z$415 million worth of

mortgages, it ir conceivable that this entire portfolio could be sold

through a secondary mortgage market operation thereby generating Z$415
million for new loans. This process could in fact be cyclically repeated

until the demand for housing credit was satiated.

C. Recommendation # 3

Although it is an established practice for local authorities to

borrow on the open market, a precedent has only been set by Harare and

Bulawayo. Besides these two municipalities, there are 15 other urban

councils throughout the country which are trying to meet their

constituent's demands for an expanded level and range of municipal

services especially housing. However, their combined pool of financial

resources for this purpose is finite and it has been shrinking in recent

years due to the central government's appropriation of a significant

portion of a previously lucrative source of local funds. Limited by the

lack of growth potential in their only other source of income, the rates

levy (real estate taxes), the prospects of providing a wider scope of

municipal services are dim unless they are granted additional revenue

generating authority. It is therefore recommended that loans to all

urban councils be included in the list of approved assets required to be

held by financial institutions. It is particularly important that the

GOZ give these envisaged loans to other urban councils the same implicit

guarantee it has in the past reserved for loans to Harare and Bulawayo.

Such actions on the part of the monetary authorities would enable the
urban councils to tap the resources of the insurance companies and
pension funds whose growth require them to continually add to their
portfolio of approved assets.
 - 69 -

D. Recommendation #4

It has been an established budgetary practice for the GOZ to

loan money for housing finance to municipalities who in turn on-lend
these funds to low-income families. If the recommendations offered in
this report are accepted, the resource needs for housing credit of
municipal and urban councils would be met through the accessing of
private sector funds put aside for statutory-approved assets. It is
therefore further recommnended that these GOZ budgetary loans for housing
for low-income families be redirected to district and rural councils
which would enable housing credit to be extended to an even lower income
segment of the Zimbabwean population. However, due to limitations on the
absorptive capacity of district and rural councils, as well as the low
purchasing power of rural families, it is suggested that some portion of

these loans be allocated for the development of rural infrastructure

which would provide a departure point for future loans for low income
housing in the rural areas.

STATISTICAL APPENDIX

 TABLE SA-1

Zimbabwe: Holdings of Public Securities by the Private Financial Sector, 1980

(Current Z$ Millions; End of June)

Stocks and Bonds of

Loans To

Agricultural

Central Local Statutory Marketing Treasury

Local Statutory

Investor Total Goverment AL"horities Bodies Authority Bills Bills Authorities Bodies

Commercial Banks 369.6 164.3 1

- 33.3 43.9 - 128.1

Merchant Banks 38.3 28.2 2/

- 3.2 6.9 -

Discount Houses 75.5 25.9 l_/ 3.8

- 45.8 - -

Finance Houses 17.0 16.4 !1/

- - 8.6 - ­ _

Post Office Savings Bank 248.0 206.5

18.1 23.4
- _-

Building Societies 192.5 127.3 2.2 ­ 4.7 58.3

Insurance
Companies 291.9 222.5 69.4 ­ - - -

Pension and Provident Funds 404.8 251.8

64.4 66.5 - ­ 15.5 6.6

Total 1637.6 1,042.9 154.1

89.9 40.9 101.3 73.8 134.7

% of Total
63.7 9.4 5.5 2.5
6.2 4.5 8.2

Sources: Central Statistical Office, Quarterly Digest of Statistics

Report of the Registrar of Financial Institutions and Building Societies

Report of the Registrar of Insurance

Report of the Registrar of Pension and Provident Funds

1/ Includes stocks and bonds of locdl authorities and statutory bodies, if any

 TABLE SA-2

Zitabwe: Holdings of Public Securities by the Private Financial Sector, 1981

(Current Z$ Millions; End of June)

Stocks and Bonds cf

Loans To

Agricul tural

Central Local Statutory Marketing

Treasury Local Statutory

Investor
Total Government Authorities Bodies Authority Bills
Bills Authorities Bodies

Commercial Banks
438.0 129.Q/ ­ - 12.5 16.4 276.7

Merchant Banks
28.7 22.2.!/
- ­ - 6.0
-
Discount Houses
28.5 0.1! / ­ - 3.5 56.5

Finance Houses 23.5 22.1a/ ­ - 1.2 -

Post Office Savings Bank 286.7 237.2 18.3 31.2 ­ -

_

Building Societies 167.9 100.6 1.3

- 1.5 0.1
60.9
Insurance Companies 303.9 237.6 66.3 ­ - - -

Pension and Provident Funds 482.2 296.8

75.8 86.7 ­ - 16.0 6.9

Total 1,759,4 1,045.6 161.8 117.9

52.9 79.0
76.9 283.6

% of Total
59.4 9.2 6.7
3.0 3.7
4.4 16.1

Sources: Central Statistical Office, Quarterly Digest of Statistics

Report of the Registrar of Financial Institutions and Building Societies

Report of the Registrar of Insurance

Report of the Registrar of Pension and Provident Funds

l/ Includes Securities of Local Authorities and Statutory Bodies, if any

 TABLE SA-3

itmbabwe: Holdings of Public Securities by the Private Financial Sector, 1982

(Current Z$ Millions; End of June)

Stocks and Bonds of

Loans To

Agricultural

Central Local Statutory Marketing

Treasury Local Statutory

Investor Total Goverment Authorities Bodies Authority Bills Bills Authorities Bodies

Commercial Banks 559.0 133.3 1/ - 34.2 16.4 375.8

Merchant Banks 21.4 14.91/ - 0.5 6.0 -

Discount
Houses
69.1 1.0 1/ ­ 11.6 56.5

Finance Houses 20.6 20.6 1/ .

..

Post Office Savings Bank 1/ 340.2 284.0 24.1 32.1 --

Building Societies 154.8 90.0 1.3 - ­ 0.1 63.4

Insurance Companies 368.2 289.4 - 78.8 - ..

Pension and Provident Funds 576.4 366.3 86.2 100.6 - ­ 16.1 7.2
Total 2,109,7 1,199.5 190.4 132.7 46.3 79.0 79.5 382.3

% of Total 56.9 9.0 6.3 2.2

3.7 3.8 18.1

Sources: Central Statistical Office, Quarterly Digest of Statistics

Report of the Registrar of Financial Institutions and Building Societies
Report of the Registrar of Insurance

Report of the Registrar of Pension and Provident Funds

l/ Includes securities of local authorities and statutory bodies, if any

 TABLE SA-4

Zimbabwe: Holdings of Public Securities by the Private Financial Sector, 1983

(Current Z$ Millions; End of June)

Stocks and Bonds of

Loans To

Agricultural

Central Local Statutory Marketing Treasury

Local Statutory

Investor Total
Goverrment Authorities Bodies Authority Bills Bills
Authorities Bodies
Commercial Banks 507.8 167.0 1/ - - 340.8
Merchant Banks 19.4 11.3 1/ _ _ 0.5 7.6

Discount Houses 40.2 .4 1/ _ 7.0

- 32.8

Finance Houses 23.1 23.1 1/ - ­ -

Post Office Savings Bank 392.3 342.5 24.7 25.1 -

Building Societies 145.4 80.8 1.2 ­ - 63.4

Insurance Companies 484.4 420.5 63.9 - ­

Pe;sion and Provident Funds 762.3 552.9 78.7 106.6 - 17.2 6.9

Total 2.374.9 1,598.5 168.5 131.7 7.5 40.4 80.6 347.7

% of Total 67.3 7.1 5.5 0.3 1.7 3.4 14.6

Sources: Central Statistical Office, Quarterly Digest of Statistics

Report of the Registrar of Financial Institutions and Building Societies

Report of the Registrar of Insurance

Report of the Registrar of Pension and Provident Funds

1/ Includes securities of local authorities and statutory bodies, if any

 TABLE SA-5

Zimbabwe: Holdings of Public Securities by the Private Financial Sector, 1984

(Current 1S Millions; End of June)

Stocks and Bonds of Loans To

Agricultural
Central Local Statutory Marketing Treasury Local Statutory
Investor Total Governent Authorities Bodies Authority Bills Bills Authorities Bodies

Commercial Banks 492.2 160.9 1/ - 1.3 14.6 315.4

Merchant Banks 38.7 31.9 1/ - - 0.3 6.8 -

Discount Houses 50.1 13.3 _1/ - - 10.0 36.8

Finance Houses 24.3 24.3 1/ - - -

Post Office Savings Bank 471.7 407.7 24.9 39.1 - -

Building Societies 140.0 81.7 1.3 - - 57.0 -

Insurance Companies 522.6.Y NA NA NA NA NA NA NA

Pension and Provident Funds 848.1Y NA NA NA NA NA NA NA

Total

Sources: Building Societies' Annual Reports

Central Statistical Office, Quarterly Digest of Statistics

1/ .ncludes securities of local authorities and statutory bodies, if any

2/ Estimate
 Order #

Housing Finance in Z/imbabwe

Randolph S. Lintz and Daniel S. Coleman

National Council of Savings Institutions

U.S. Agency for International Development

Bureau for Private Enterprise

Office of Housing and Urban Programs

April 1985, 68p. & 1 Appendix

This Housing Finance Study is one component of a feasibility study

for

the establishment of a National

Housing Corporation in Zimbabwe.
Zimbabwe has a sophisticated and well-developed banking system, While

current

government and economic policies

restrict the ability of the
finance

sector to
mobilize the resources necessary for the sustained growth
of

the formal housin sector.

Section
I of this study looks at the financial sector in
describing the structure and trends of the financial
institutions.general,

Independence in 1980, these institutions have had to

respond Since

to the

opening of
their economy into the world market, increased demand
for

public sector financing of social

services and state-owned enterprises,

and other demands to extend economic opportunity to all Zimbabweans,

result has been increasing expenditures and revenue shortfalls,
The

Borrowing in order to increase the money supply

has added to
the debt

burden and aggravated inflation.

Section II describes the housing finance

sector in particular.
In the

public sector, two funds, the National Housing Fund and Housing

Guarantee Fund, are available through the Ministry of Construction and

National Housing. The National

Housing Fund, which provides monies and

Local Authorities for low-income

housing schemes, has suffered to

deficit

problems and a lack of resource-generating capacity.

Guarantee Fund, which guarantees mortgage loans on housingTheandHousing and

operates a

housing ownership and

management scheme from revenues on foreclosures,

rperesents a sustainable part of the finance sector which is

able to

provide loans to a large number of Zimbabweans. In the private

sector,

the three Building Societies represent the most significant source

of

finance in the formal sector.

However, strong controls by the
GOZ and

competition for resources

with the Post Office Savings Bank has
inhibited

the Societies' ability to fulfill private housing finance sector

needs.

- 17 ­
In Section III, the means for increasing the flow of financial resources

to the housing sector is explored. Domestic savings may be increased by

allowing Building Societies to compete fairly with the Post Office

Savings Bank for savings deposits, increasing deposits on Guaranteed

loans, creating savings clubs for individuals and raising the interest

rate on government loans. Additional resources may be found from other

national institutions such as pension funds and external funding from

USAID and the World Bank. However, s.ome economic and government policies

constrain the finance sector's ability to mobilize resources for housing:

-- The increased tax burden on individuals has lowered savings for a

majority of the population. Those of higher-income brackets who can
save channel their money into investments other than Building
Societies;
-- The budget deficit has restrained overall savings. The revenue from
increased taxation has not kept up with increasing expenditures;

-- Rent controls have reduced the incentive to invest in housing

construction;
-- In their attempts to reduce demand, GOZ policies such as increased
interest rates, statutory reserve requirements for banks and finance
houses, increased statutory liquid asset ratios for commercial banks
and emigration laws regarding the liquidation of assets have further
reduced the amount of resources available for the housing finance
sector.

Recommendations to improve the housing finance system in general and

redirect new and supplementary resources to the sector are offered in

Section IV:

1) Increase the Building Societies' viability by making them more

competitive with the Post Office Savings Bank with respect to their

ability to attract savings;

2) Building Societies can utilize liquid assets from other institutions

such as insurance companies and pension funds by selling

participation in a pool of government guaranteed mortgages;

3) Increase loans to urban councils in addition to Bulawayo and Harare;

4) Redirect loan money for low-income tamilies to district and rural

councils instead of municipalities. Some money should also be used

for infrastructure in low-income areas.

I- 18 ­