On 18 May 2012 Statutory Instrument No 33 of 2012 was published setting out the Bank of Zambia (Currency) Regulations (the “Regulations”).
The Regulations stipulate that ‘[a] person shall not quote, pay or demand to be paid or receive foreign currency as legal tender for goods, services or any other domestic transaction.’ A domestic transaction is defined as ‘any transaction within the Republic that involves a payment of a sum of money in or towards the satisfaction of a debt due or for a credit of, a person resident in the Republic’.
The Regulations effectively prohibit a Zambian resident from contracting in any currency other than the currency of Zambia for purposes of a ‘domestic transaction’. The question is whether this by implication mean that all loans granted to Zambian entities should be denominated in Kwacha (as opposed to US Dollars, or Euro, or Rand or Sterling).
Several lenders approached the Bank of Zambia to obtain clarity on the impact of the Regulations on foreign currency loans. The Bank of Zambia issued a clarification on 13th June 2012. Unfortunately – it still remains unclear whether a loan made by a foreign entity to a Zambian resident would be classified as a “domestic” transaction. The clarification states that domestic transactions ‘shall not include’¦ foreign currency loans and advances by commercial banks registered in Zambia’. It is not clear whether this means that the loans have to be advanced by the actual Zambian entity or whether the loans can be made by any branch of a bank ‘ provided that that bank is registered in Zambia. In either case, the clarification is not quite as clear as lenders (or Zambian borrowers) would like it to be.
In the meantime, the advice is that as a condition precedent to disbursement, lenders seek a letter or other documentary evidence from the Bank of Zambia confirming that the loan and all payments under the relevant finance documents can be made in the foreign currency and do not fall under the Regulations.
We will keep clients updated as to any movements in the advice.
Kaushik Ray, Simon Norris, Trinity International LLP