FOREIGN EXCHANGE LENDING: ARGUMENTS FOR AND AGAINST IT
Abolishing the current restrictions on
foreign exchange lending in Moldova is an issue that has been risen
several years ago. At that time NBM asked for the opinion of IMF
officials and they were against it. Now, we asked Johan Mathisen, the
new IMF Resident Representative in Moldova, to discuss this issue.
“In Moldova this issue should be given a
lot of consideration. A decision on it should be done for the right
reasons”, says Mr. Mathisen. “In my opinion, it would be useful to
discuss possible developments from the viewpoint of eventual strengths
and shortcomings. It is necessary to weigh benefits from proposed
liberalization of foreign exchange lending against potential risks that
might be caused by such actions”.
IMF Resident Representative in Moldova proposed to look at the potential
outcomes at three levels. At the consumer – borrower – level, at the
lending bank level, and at the aggregated national level.
Let us start our analysis from the bank level. For commercial banks
foreign exchange lending may seem profitable as it may lead to a
significant increase of the lending portfolio.
However, foreign exchange lending, in Mr. Mathisen’s opinion, would
increase the banks’ credit risk. “As the exchange risk undertaken by
lenders increases their risk of insolvency. The foreign exchange lending
risk is higher than the national currency lending risk”.
These statements are partly true, we think. First, the exchange risk –
when the exchange rate can change in both directions – is a potential
risk for national currency loans as well. Hence, if the MDL position
strengthens – and we have witnessed this repeatedly lately – the risk of
the decrease of profit from export proceeds leads to problems in
repaying MDL loans.
Secondly, it seems to us incorrect to approach the Moldovan commercial
banks from the position “we know what threats await you”. We would like
to believe that during 10-15 years of activity many of them have learnt
by now how to evaluate risks and weigh them against real benefits of
some action or another. If risks are higher in the case of foreign
exchange lending then this should be reflected in normative acts.
However, it cannot serve by itself as reason to forbid operations that
are usual in the international banking practice.
As for the profit increase, some banks are concerned that their real
profit will decrease if foreign exchange lending is liberalized, since
interest rates for foreign exchange loans are currently lower than for
MDL loans. If all other conditions are equal it is more profitable to
lend strong MDL at an interest rate of even 20% a year rather than in
foreign currency at an interest rate under 15%. It seems that this is
the reason why not all banks are in favor of expanding foreign exchange
Still, many banks want to get wider foreign exchange lending rights to
get more freedom for development, bearing in mind real needs and
possibilities of the local market.
Let us refer to the consumer level now. At the moment, importers can get
foreign exchange loans without restrictions. There is also another
source of foreign exchange borrowing – credit lines of international
financial organizations re-financed through local banks. However, this
source is available for a limited number of banks that have received the
right to use such credit lines, which is in itself a certain
‘discrimination’ in banking activity, in the opinion of those who have
no access to them. Foreign exchange lending may be interesting for three
categories of borrowers, namely enterprises that can be both importers
and exporters, as well as individuals or households. Needs and risks in
foreign exchange lending are specific for different categories of
borrowers, and should be examined separately, to a certain extent,
considers Johan Mathisen.
Importers usually are short in foreign currency and long in national
currency. For exporters, on the opposite, is characteristic to be short
in MDL and long in foreign currency (to explain the expert’s opinion let
us say that being long in one currency is related to potential risks
that appear in time).
When it comes to export, the problem is that appropriate mechanisms
should be put in place – both at the banks’ level and at the NBM level –
to identify for certain if the borrower would generate enough income in
foreign currency so that it could pay back easily the foreign exchange
loan when its maturity expires.
“However, a more effective alternate method to cover such risks might be
the development of the derivatives market where exporters could insure
themselves directly against unfavorable exchange rate differences”, adds
Such method – in the opinion of local experts as well – is the
preferable one. However, there is no real mechanism in place that would
allow insurance against unfavorable conjuncture in the internal foreign
currency market. Even futures or forwards (agreements that sets forth
the prices, terms and volumes) that are similar to futures, to be used
to buy foreign currency, are extremely rare at the moment. The reason
is, as local experts explain, that commercial banks are ready to
undertake the customers’ exchange risks only for a price that seems to
customers too high.
However, if the exchange rate of MDL against foreign currencies will
stay stable, then, possibly with time such service would get cheaper and
there will be more demand for it. Regarding this issue, some say that
progress would be quicker if NBM used more such tool as forwards. It
allows commercial banks to conclude with NBM (and with each other)
contracts for purchasing foreign currency which term, amount and price
would be agreed preliminary, thus sharing potential exchange risk.
Still, so far the longest term for NBM forwards for purchasing foreign
currency is 30 days. Certainly, such term is far from sufficient to
cover exchange risk in lending operations.
On the other hand, one should take into account that NBM is not, by
definition, an enterprise seeking profit. If income is not the ultimate
goal, why to risk then? “Forwards with commercial banks are used by NBM
to maintain the stability of the national currency and the liquidity of
the banking system. NBM does not consider them a tool to encourage the
increase of foreign currency credit reserves by commercial banks”,
explained the Chief of the Foreign Exchange Operations Division of NBM,
Besides, according to Mr. Mathisen – foreign exchange lending leads to
an increase in imports and other types of payment balance worsening.
(Here we talk about the national level already). Liberalization of
foreign exchange lending, as the experience of other countries shows,
can lead to the decrease of the national foreign exchange reserves and
to the increase of exchange liabilities of local borrowers. Such
situation conditions the worsening of the macroeconomic stance of the
country because of so-called exchange differences”, states the IMF
This risk can arise, for instance, in the form of a specific attack on
the currency as a result of increased interest for foreign currencies
rather than for national currency, when most foreign exchange assets
will turn into foreign exchange loans to residents, i.e. local
enterprises and individuals. If, under such conditions, a decrease of
the volume of foreign exchange deposits begins - it could lead to
liquidity problems in the banking system.
When we talk about foreign exchange lending liberalization in Moldova,
we should keep in mind two things. The first is the redistribution of
the large foreign exchange lending resources of the banks. At the moment
foreign exchange loans are given to importers for acquisition of goods
abroad. But why cannot exporters be allowed to get loans linked to USD
or Euro? Since now depositors are inclined to give their savings to
banks in foreign exchange, even at a lower interest rate. If offer from
depositors changes - interest rates will change as well. It is a normal
market mechanism for pricing financial resources. And it is a sufficient
counterbalance for the exchange risk, on condition that NBM makes
efforts to maintain the dynamic stability of MDL.
Finally, let us refer to foreign exchange lending for individuals. Now
one notices an increased demand for mortgage loans. People would like to
get them for extended periods of time, at low interest rates. However,
banks have limited MDL resources for lending under such conditions. At
the same time, bankers say that they could gather from individuals more
USD and Euros for long terms, at rates lower than for deposits with
fixed terms in MDL. Why should not they use such possibility? Again,
answers the IMF expert, there is an exchange risk for borrowers.
Of course, we can't agree more with the IMF official’s opinion here,
namely that if MDL weakens the borrower will have to pay more for the
foreign exchange loan reported to MDL. However, at this moment, when MDL
is strong, the MDL loans are more expensive, especially if we bear in
mind that during the last years the inflation rate growth in the
consumer market has noticeably exceeded the rate of MDL devaluation
Thus, we consider the topic of foreign exchange lending liberalization
an open and actual one.