PHILLIMON MHLANGA
Finance and Economic Development Minister, Mthuli Ncube, this week advised players in the insurance and pensions sector to be innovative and participate in performance bonds for government and private sector.
Currently, Ncube said banks are the dominant players in performance bonds for projects in the country.
“The sector should be innovative. One area the sector has been missing out in action is that of performance bonds for projects,” Ncube said.
“Most of these are currently coming from banks.
Insurance sector should work with the Women’s Microfinance Bank and Empowerment Bank for the youth and micro-financial institutions in providing collateral for some of the borrowers.”
A performance bond, also known as a contract bond, is a financial surety guarantee typically provided by financial institutions such as banks and insurance companies to ensure the completion of projects.
It ensures that the contractor will deliver performance specified in the agreement. So, it acts as surety.
This is also used to denote a collateral deposit of good faith. It guarantees the project owner that the project will be completed, even if the current contractor fails.
The value of the bond should not exceed 5% of the value of the project.
Last week, Ncube rejected the sector’s proposal to be allowed to contract in United States dollars due to prevailing unfavourable business and economic conditions under the Zimbabwe dollar.
The government in June last year banned the multicurrency regime, leaving the Zimbabwe dollar as the only legal tender.
But, players in the multi billion insurance and pensions industry say they had been burnt by government’s decision to ban contracting of business in US dollars in favour of the Zimbabwe dollar which continues to depreciate, eroding investment values.
This is also a huge concern for the policyholders.
This week at the Insurance and Pensions Commission breakfast meeting with the finance minister, the industry’s newly established apex body, the Zimbabwe Insurance and Pensions Apex Council (ZIPAC), proposed to government that they should be allowed to contract in US dollars.
ZIPAC chairman, Tessias Chigariro said: “The informal sector has fully re-dollarised but formal business has been directed to de-dollarise.
We don’t believe that we must fight through directives.
The Finance Minister (Mthuli Ncube), please do not watch us die. “We want to contract in US dollars but we are no longer allowed to do that.”
Presenting his first Monetary Policy Statement for the year, RBZ governor said this economy could take up to five years to de-dollarise.
Ncube, however, shot down the proposal, suggesting a new window that will allow the sector to invest in foreign assets.
He promised to include this window in one of the three Bills that deals with the sector.
The Bills are expected to be tabled before Parliament this quarter.
“It should be about investing in foreign assets not in US dollars.
I prefer that kind of language. I will consult my officials for us to move fast. I can assure you that it should be done quickly,” Ncube said.
The Pensions and Provident Fund Bill will allow pension funds to invest 20% of their assets offshore.
Ncube also added that other investment product options will be launched soon, including the Exchange Traded Funds (ETFs).
‘Investors will see the launch of other products such as the ETFs, which should lower the cost of getting in and out of the equity market,” Ncube said.
“These are definitely coming. I think we should be able to launch the first ETF by the end of March this year.
I am the one pushing the industry to say ‘launch before the end of next month’. It’s good for the industry and it’s good for the economy.”
Ncube also announced that Real Estate Investment Trusts (REITs) will be launched soon as a new asset class to allow the players in the insurance and pensions sector to create liquidity.
REITs are securities that are publicly traded on stock exchanges the same way as equities.
They give investors the option to invest directly in the finished real estate products that are already earning money such as residential and office units, hotels or shopping malls or even infrastructure ventures like roads and power plants.
REITS play a critical role in providing investors to participate in real estate projects even with a small fund size.
They derive the majority of their income real estate activities, including rents from properties and interest from mortgages.
REITs holders get a regular return, which is usually a higher rate of dividends than equities or many fixed income investments.
REITs, usually receive special tax considerations and typically offer investors high dividend yields, as well as a liquid method of investing in real estate, experts told Business Times.
The move to introduce REITs on the Zimbabwe stock market are part of efforts by government to diversify local securities trading through the introduction of a wide variety of investments products, which also include derivatives and Exchange Traded Funds.
The development comes at a time when investment by players in the insurance and pensions sector is skewed towards equities and property, which does not create liquidity.
Speaking at the Insurance and Pension Commission breakfast meeting held in the capital, Ncube said he will ensure REITs take off as soon as possible.
Apart from creating liquidity, REITs tick various boxes, in terms of risk management.
“The world over, no economy has achieved socio-economic transformation without a robust insurance and pensions industry.
“It plays a critical role. But, we notice the sector’s investment is heavily weighted in equities and property market,” Ncube said.
“But, the exposure to the properties sector, which is high, does not create liquidity for the (insurance and pensions) sector. So, we need to do something for the sector as government and IPEC as soon as possible.
“We need to create liquidity. We need to introduce REITs to allow the sector to create liquidity.
We want to make sure REITs take off. I am personally going to push for that.”
