November 27, 2016  /  Mungai N. Lenneiye

Bond Notes is another attempt to innovate the Zimbabwe financial sector; but like all innovations, its success will depend on market uptake driven by the functionality it delivers to users and the trust it builds in the market. US$-based Bond Notes can only avoid the fate of the Zimdollar-based Bearer Cheques of 2006 through consistent policies and coordinated actions by Monetary (RBZ), Fiscal (Ministry of Finance), and Trade (Ministry of Industry) leadership working with the productive sector of Agriculture, Mining, and Manufacturing to restore market-driven confidence and trust underpinned by transparent and predictable economic recovery and development strategies.

The 2006 Zimdollar denominated Bearer Cheques were the first “Bond Note-alike” to be issued in Zimbabwe, and drove the emergence of parallel trade using South African Rand, US$, British Pound, and even local currencies from neighbouring countries as hyper-inflation took root during the 2006-08.  In the same period, citizens also resorted to barter trade, but as goods for barter are cumbersome to handle and the supply of hard currencies was limited as well as illegal, citizens had to find alternative means to effect transactions. Fuel Coupons emerged as the first US$-denominated “Bond Notes”, but issued by a private company.  Fuel Coupons were backed by of fuel sold locally and imported from international traders.  Lessons of how the Fuel Coupons (the most famous and enduring of which was the Redan Fuel Coupon) worked alongside the hard currencies even before they were legalized in 2009 as the Bearer Cheques died should provide a pointer as to how the proposed RBZ Bond Notes might fare. During the 2000-2010 decade, Zimbabweans went through experiences that resonate with the historical emergence of money, and these lessons are still relevant as the country re-formulates future monetary policies inclusive of Bond Notes.

Historical evolution: In what is now present day Iraq, merchant bankers gave loans to farmers and traders engaged in carrying goods between cities at least 2000 years Before Christ (BC). By the time of the Roman Empire, temples were making loans and they had further innovated by taking deposits and changing money – a story familiar with those who read the Bible where Jesus drove out moneychangers.  Money lending had by now spread to China and India.  However, modern banking is less than 700 years old, starting with Renaissance Italy in all the large cities, where the earliest known State Deposit Bank was established in Genoa in 1407. 

By the 17th and 18th centuries, banknotes were issued as merchants in London started storing their gold with goldsmiths for safe keeping in private vaults for a small fee.  Receipts issued for these gold deposits clearly certified the quantity of and purity of gold and other precious metals held.  Soon, goldsmiths were lending out money on behalf of the depositor, a practice that gave rise to Promissory Notes that later evolved into Banknotes to represent the value loaned to the goldsmith.  Borrowers paid interest to the goldsmiths on these deposits.  Promissory notes were payable on demand, repayable over a longer period (with interest).  This marked the birth of money based on credit. 

The Bank of England issued the first banknotes in 1695, and bankers’ clearance house was established in London in the 19th century to facilitate transactions clearance by multiple banks.  At the same time, international finance on a large-scale was being pioneered by the Rothschilds; financiers of the British government to purchase the Suez Canal.

Knowledge accumulated over centuries of human history in banking has produced banks that generate revenue from interest, transaction fees, and financial advice.  In response to the economic and business cycles of boom and bust, banks have progressively relied on fees and financial advice; and have become less dependent on interest on loans to smoothen their financial performance.  This kind of response to market conditions by banks has become a major subject for policy makers, bankers, analysts, and others concerned with the direction of world economic development.  It is in this world that Zimbabwe is reviving a hybrid instrument (Bond Notes) that so far sounds like a cross between a promissory and a regular banknote. 

Will Bond Notes go the way of the Bearer Cheques of 2006 or the Goldsmiths promissory notes from a few centuries back?  The ability of RBZ to innovate and to skilfully build trust, empathy, and integrity will to a large extent determine whether Bond Notes will follow the Bearer Cheque to the heap of history or fly like the Fuel Coupons.  The following five sub-headings speak to this challenge.

Innovation: Banking has shown innovation, going from financiers of grains, to traders in temples, to using goldsmiths to store wealth, to issuing promissory notes and banknotes, to establishing dedicated institutions for financial transactions, and finally working with Governments to establish central banks. Mobile banking is the most recent innovation where traditional bankers were hauled kicking and screaming into 21st century mobile digital banking.   The RBZ Governor in 2006 innovated by issuing Bearer Cheques while the owners of Fuel Petroleum innovated by issuing Fuel Coupons to enable motorists to draw fuel from designated fuel outlets. Bearer Cheques lost value as their supply exceeded available Zimdollar notes, and eventually became worthless when their supply exceeded the value of goods in the market; while Fuel Coupons retained value because supply was carefully matched with fuel stocks.  Thus, even innovation must play within old rules of economics, which balance supply with demand.  In 2014, the RBZ and Ministry of Finance innovated to produce Bond Coins to ease transactions and address pricing problems because small change coins were in short supply; and bond coins primarily succeeded because they followed market forces.

Skills: It takes more than innovation to connect the dots (as observed by Steve Jobs), linking what is happening today with what happened in the past; and then using the resulting pattern to predict what is likely to happen in the future.  The ability of RBZ management to connect the dots over the last Century will inform decisions that can nurture or kill the Bond Notes initiative.  The skill of balancing income with expenditure is crucial in maintaining the value of Bond Notes, failure of which led to an over-printing of Bearer Cheques that were not backed by corresponding government revenues and economic production.  The wear and tear of one US$ notes had informed a 2014 policy option to produce a Bond Dollar Coin to complete the family of Bond coins; but it was instead overtaken by the 2016 proposal to issue Bond Notes of $2 and $5 at a time of acute cash shortage in the market which effectively removed the principle of voluntary adoption associated with Bond coins, and triggered panic in the market.  Fuel Coupons succeeded because fuel was immediately available on demand; and similarly with Bond coins, sweets and other small items as well as Rand and US$ coins were still freely available.

Trust: Whether by a farmer or trader, the early banker had to be trusted by those who handed over their grain for inter-city trading.  Equally, goldsmiths who became the early gold-backed currency traders had to be trusted by both the owners of gold in the vaults and those accepting promissory notes against the gold value.  This trust remains a key ingredient of good banking – whether commercial or state central banking.  Trust is still king in any banking and RBZ is still in the early stages of regaining trust lost during the hyper-inflationary period that saw forced conversion of US$ deposits into Zimdollars without the consent of account holders.

The global use of gold standard was abandoned in 1971 when it became clear that the value of US$ in the market was more than the gold held in the vaults of central banks as a result of aggressive “quantitative easing” – simply, money printing!  The result of extreme quantitative easing in Zimbabwe was hyperinflation during the last decade; and it is quite understandable for bankers and others in the business world to be sceptical about the idea of a gold-backed currency in a US$14 billion Zimbabwe economy when even an US$18 trillion US economy cannot realistically go down that road. Bond Notes, with the right measures in place, are a realistic route to take.

By December 2009, Zimbabweans had lost all trust in the RBZ and as a result traders and merchants refused to accept the Z$100 trillion note for transactions.  Over a 5-year period, Zimbabweans learnt to live within their means, produced a trading economy, but still fell short of being a production economy as long as obstacles to the full exercise of private property rights remained.  Government borrowing during the 2014-15 period produced early indications that the pre-2006 economic conditions were being recreated, only to be confirmed by the emergence of cash shortages, restrictions on cash withdrawal, the announcement of Bond Notes, and the re-introduction of bureaucratic restrictions in 2016 to regulate trade and related economic activities.

Empathy: Successful bankers have had to show empathy to their customers or clients (that excludes the mythical Shakespearean Shylock character – who by all accounts was probably not a successful trading banker anyway!).  Understanding the difficulties, possibilities for growth and development, and working with clients to find solutions has been a feature of successful banking; a feature that has gone from commercial to state to international development banks – the ability to see both sides of the coin so that those whose accounts are in the black can be supported to avoid going in the red, and those in the red are mentored and coached on their path back to black.

The Lima process was a sign that International Financial Institutions (IFIs) were ready to be empathetic with Zimbabwe’s national debt and arrears clearance strategy.  Locally, the RBZ’s focus on issues of competitiveness was also a sign that appropriate monetary policies would be in place to stimulate production and grow the economy.  However, the Monetary Policy of 4 May 2016 followed by a reversal of measures by the Ministry of Finance in the Mid-Term Budget to manage expenditures badly dented the Lima Process; as only import restrictions (in the form of Statutory Instrument 64) were left in place to address complex policies that required comprehensive Monetary, Fiscal, Production, and Trade Policies.  It is as though the economy is in the hands of the proverbial carpenter with only a hammer after losing the saw, planer, and other tools needed in the trade; while the population continues to expect government empathy with its myriad of basic needs.

Integrity: Integrity is the combined successful coming together of trust, empathy, skills, and innovation.  Integrity on the part of leadership in the banking sector is the one value that explains the presence or absence of “Banking Ethics” that has been a scourge of bank failures across Africa and around the world; and eroded trust in banks.   Ultimately, professionals with integrity give rise to leaders of integrity; and it is such leaders who work with the generality of the population to define historical periods when humans successfully exploit the prevailing environment to attain progress in human development.  Handling the Bond Notes policy with integrity (including a functional Currency Board in a broader framework of unleashing Zimbabwe’s production capacities) would go a long way in rebuilding the trust populations have lost in the RBZ; and therein could lie the difference between Bond Notes dying the Bearer Cheques death or living the Fuel Coupons’ life.




[1] This article was issued under the title “The emergence of bond notes” in the Financial Gazeete 2016 Top Companies Survey magazine sponsored by Old Mutual.