BANK of ZAMBIA FINANCIAL ACCESS AND SUSTAINABILITY OF FINANCIAL SERVICES IN ZAMBIA

BANK of ZAMBIABANK of ZAMBIA

FINANCIAL ACCESS AND SUSTAINABILITY OF FINANCIAL ACCESS AND SUSTAINABILITY OF FINANCIAL SERVICES IN ZAMBIA FINANCIAL SERVICES IN ZAMBIA

Paper Presented Paper Presented By the By the

Deputy Governor – Operations, Bank of ZambiaDeputy Governor – Operations, Bank of ZambiaDr. Denny H KalyalyaDr. Denny H Kalyalya

AtAtThe Zambia Institute of Chartered Accountants The Zambia Institute of Chartered Accountants

Annual Business ConferenceAnnual Business ConferenceAugust 7-8, 2008August 7-8, 2008

LivingstoneLivingstone

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OUTLINEOUTLINE

INTRODUCTION INTRODUCTION

FINANCIAL SECTOR IN ZAMBIAFINANCIAL SECTOR IN ZAMBIA

ACCESS TO FINANCIAL SERVICES ACCESS TO FINANCIAL SERVICES

SUSTAINABILITY OF FINANCIAL SERVICES SUSTAINABILITY OF FINANCIAL SERVICES

CONCLUSIONCONCLUSION

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INTRODUCTIONINTRODUCTION

The financial sector plays a critical role in the The financial sector plays a critical role in the mobilization of finance and stimulation of economic mobilization of finance and stimulation of economic growth;growth;

Attainment and maintenance of high rates of Attainment and maintenance of high rates of economic growth requires an efficient and broad-economic growth requires an efficient and broad-based financial sector;based financial sector;

Banks and NBFIs enable efficient allocation of Banks and NBFIs enable efficient allocation of savings and investment; and savings and investment; and

Enable financial transactions to take place at Enable financial transactions to take place at minimum cost. minimum cost.

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The financial sector in Zambia comprises banks and The financial sector in Zambia comprises banks and non-bank financial institutions (NBFIs);non-bank financial institutions (NBFIs);

These are regulated and supervised by three These are regulated and supervised by three agencies, namely, the BoZ, PIA, and SEC). agencies, namely, the BoZ, PIA, and SEC).

Presentation will focus on fin sector under the BoZ. Presentation will focus on fin sector under the BoZ.

The mission statement of the Bank of Zambia is to The mission statement of the Bank of Zambia is to ““formulate and implement monetary and supervisory formulate and implement monetary and supervisory policies that achieve and maintain price stability and policies that achieve and maintain price stability and promote financial system stability in Zambiapromote financial system stability in Zambia.” .”

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In line with this mission statement, the BoZ is In line with this mission statement, the BoZ is responsible for regulating and supervising banks and responsible for regulating and supervising banks and the following types of NBFIs:the following types of NBFIs:– Leasing and finance companies;Leasing and finance companies;– Housing financial institutions (building societies); Housing financial institutions (building societies); – Savings and credit institutions; Savings and credit institutions; – Development finance institutions;Development finance institutions;– Microfinance institutions; and Microfinance institutions; and – Bureaux de change. Bureaux de change.

As at June 30, 2008 there were 14 commercial banks As at June 30, 2008 there were 14 commercial banks and 71 NBFIs .and 71 NBFIs .

Currently, commercial banks dominate Zambia’s Currently, commercial banks dominate Zambia’s financial system.financial system.

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There is a common understanding that financial There is a common understanding that financial exclusion has negative economic and social effects exclusion has negative economic and social effects on society. on society.

In the recent past, competition and the tightening of In the recent past, competition and the tightening of regulation has led to the growth of the fin. sector.regulation has led to the growth of the fin. sector.

However, like in many other developing countries However, like in many other developing countries the financial sector in Zambia still faces a number of the financial sector in Zambia still faces a number of challenges. challenges.

FSAP Report of 2002 highlighted a number of these FSAP Report of 2002 highlighted a number of these including limited access to financial services.including limited access to financial services.

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In light of FSAP findings, GRZ developed and In light of FSAP findings, GRZ developed and launched the FSDP in 2004. launched the FSDP in 2004.

The FSDP is a comprehensive five year strategy to The FSDP is a comprehensive five year strategy to build and strengthen the financial sector.build and strengthen the financial sector.

In addition, and in furtherance of the objectives of In addition, and in furtherance of the objectives of the FSDP, the BoZ Strategic Plan for 2008 – 2011 the FSDP, the BoZ Strategic Plan for 2008 – 2011 has made financial inclusion as one of its key has made financial inclusion as one of its key strategic objectives.strategic objectives.

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ACCESS TO FINANCIAL SERVICESACCESS TO FINANCIAL SERVICES

Two surveys under the FSDP completed:Two surveys under the FSDP completed:

– The FinScope™ Survey of 2005 – Demand side; The FinScope™ Survey of 2005 – Demand side; andand

– The FinScope™ Survey of 2007 – Supply side.The FinScope™ Survey of 2007 – Supply side.

These have augmented the earlier findings of the These have augmented the earlier findings of the FSAP on developmental challenges for the financial FSAP on developmental challenges for the financial sector in Zambia.sector in Zambia.

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Key findings of the 2005 FinScope™ Survey include:Key findings of the 2005 FinScope™ Survey include:

– Only 34% of the population were “financially Only 34% of the population were “financially served”, i.e., whilst 66% had no access;served”, i.e., whilst 66% had no access;

– The barriers to accessing financial services The barriers to accessing financial services include cost, distance, time and transport; andinclude cost, distance, time and transport; and

– MFIs although used by only 5% of the adult MFIs although used by only 5% of the adult population play an important role in increasing population play an important role in increasing levels of access to financial services; levels of access to financial services;

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The majority with no access to fin. services The majority with no access to fin. services are the rural poor and women.are the rural poor and women.

These are categories for whom support has These are categories for whom support has been prioritized in the FNDP and under CEAbeen prioritized in the FNDP and under CEA. .

Thus a platform to address above challenges Thus a platform to address above challenges already exist.already exist.

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During the 1During the 1stst half of 2007, the Supply Side Study was half of 2007, the Supply Side Study was undertaken. The Study revealed opportunities as well undertaken. The Study revealed opportunities as well as challenges:as challenges:– Macroeconomic policy and financial sector Macroeconomic policy and financial sector

regulation no longer viewed as a problem; regulation no longer viewed as a problem; – The enabling environment to expand access exist The enabling environment to expand access exist

(i.e. developments in the payment system and the (i.e. developments in the payment system and the greater sharing of information); greater sharing of information);

– Key constraint related to the focus and strategies of Key constraint related to the focus and strategies of FSPs with limited geographical coverage at a high FSPs with limited geographical coverage at a high cost; andcost; and

– NBFIs have not offered effective competition.NBFIs have not offered effective competition.

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Comparison of Net Interest Comparison of Net Interest

Margin and ProfitabilityMargin and Profitability

Measure Measure ZambiaZambia MauritiuMauritiuss

South South AfricaAfrica

NamibiaNamibia

RoARoA 3.2%3.2% 1.7%1.7% 1.4%1.4% 1.5%1.5%

RoERoE 37.2%37.2% 21.2%21.2% 22.0%22.0% 15.7%15.7%

NIMNIM 13.3%13.3% 3.0%3.0% 2.7%2.7% 5.0%5.0%

ERER 64.0%64.0% 41.2%41.2% 60.1%60.1% 66.3%66.3%

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Banks and NBFIs are re-positioning themselves.Banks and NBFIs are re-positioning themselves. The number of MFIs has increased overtime e.g. The number of MFIs has increased overtime e.g.

MFIs licensed by BoZ, increased to 15 as at June 30, MFIs licensed by BoZ, increased to 15 as at June 30, 2008 from 3 in 2006. 2008 from 3 in 2006.

Change due to the strong fiscal position and the drop Change due to the strong fiscal position and the drop in annual inflation to single digit levels. in annual inflation to single digit levels.

Domestic credit to the private sector as a percentage Domestic credit to the private sector as a percentage of GDP rose to 43.0% at end-2007 from 18.7% at the of GDP rose to 43.0% at end-2007 from 18.7% at the end-2005. end-2005.

These statistics indicate improving access to financial These statistics indicate improving access to financial services.services.

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SUSTAINABILITY OF FINANCIAL SUSTAINABILITY OF FINANCIAL

SERVICESSERVICES Regulatory Framework:Regulatory Framework:

– Ratio Analysis based on On-site Ratio Analysis based on On-site inspections and off-site surveillance;inspections and off-site surveillance;

– Capital Adequacy Regulations of 1995; Capital Adequacy Regulations of 1995; – 2005 amendments to the BSA, DBZ, NSCBA 2005 amendments to the BSA, DBZ, NSCBA

and the BFSA, to enhance the supervisory and the BFSA, to enhance the supervisory oversight of the BoZ; andoversight of the BoZ; and

– Bank of Zambia Act is also being reviewed to Bank of Zambia Act is also being reviewed to

enhance operationalenhance operational independence of BoZ. independence of BoZ.

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Key RatiosKey Ratios

20022002 20032003 20042004 20052005 02260226 20072007

Capital Capital AdequacyAdequacy

Tier 1 Tier 1 24.824.8 21.321.3 19.619.6 26.226.2 18.018.0 15.915.9

Total Total Regulatory Regulatory Capital Capital

28.0 28.0 23.723.7 22.222.2 28.428.4 20.420.4 18.618.6

Asset Asset QualityQuality

NPLs/Total NPLs/Total LoansLoans

11.411.4 5.35.3 7.67.6 8.98.9 11.311.3 8.88.8

EarningsEarnings

ROA ROA 7.47.4 5.45.4 3.13.1 6.56.5 5.15.1 4.74.7

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SUSTAINABILITY OF FINANCIAL SUSTAINABILITY OF FINANCIAL SERVICESSERVICES

– MF Regulations, 2006 provide set standards for MF Regulations, 2006 provide set standards for the industry.the industry.

– PPML Act 2001 criminalized ML and provides for PPML Act 2001 criminalized ML and provides for the forfeiture of property by offenders.the forfeiture of property by offenders.

– BoZ AML Directives complement PPML.BoZ AML Directives complement PPML.– BoZ has also developed a supervisory framework BoZ has also developed a supervisory framework

aimed at ensuring banks and NBFIs are aimed at ensuring banks and NBFIs are complying with the AML legislation and directives.complying with the AML legislation and directives.

– All these are aimed at ensuring that the potential All these are aimed at ensuring that the potential threatsthreats posed by money launderers are limited. posed by money launderers are limited.

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The microfinance regulations were issued in 2006 The microfinance regulations were issued in 2006 to set standards for the MFIs so that they could to set standards for the MFIs so that they could operate and grow in a safe, sound and sustainable operate and grow in a safe, sound and sustainable manner. manner.

The Capital Adequacy Regulations of 1995 were The Capital Adequacy Regulations of 1995 were amended in 2006 to provide for a tiered capital amended in 2006 to provide for a tiered capital structure to encourage entrants into the financial structure to encourage entrants into the financial

sector.sector.

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Revised Minimum Regulatory CapitalRevised Minimum Regulatory Capital

CATEGORYCATEGORY Amount (K)Amount (K)

BanksBanks 12,000 m12,000 m

Deposit-taking Leasing CompaniesDeposit-taking Leasing Companies 1,500 m1,500 m

Non-deposit taking Leasing Co.Non-deposit taking Leasing Co. 500 m500 m

Building SocietiesBuilding Societies 2,000 m2,000 m

Savings and Credit InstitutionsSavings and Credit Institutions 2,000 m2,000 m

Development Finance InstitutionsDevelopment Finance Institutions 7,500 m7,500 m

Deposit Taking MFIsDeposit Taking MFIs 250 m250 m

Non-deposit taking MFIsNon-deposit taking MFIs 25 m25 m

Bureaux de ChangeBureaux de Change 40 m40 m

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Establishment of a Credit Reference BureauEstablishment of a Credit Reference Bureau– To improve the credit culture in the countryTo improve the credit culture in the country– Credit Data (Privacy) Code and the Credit Credit Data (Privacy) Code and the Credit

Reference Services (Licensing) Guidelines were Reference Services (Licensing) Guidelines were issued in January 2006.issued in January 2006.

– Credit Reference Bureau Africa Limited licensed Credit Reference Bureau Africa Limited licensed in June 2006.in June 2006.

The main task of a CRB is to provide lenders with The main task of a CRB is to provide lenders with information upon which they can base their lending information upon which they can base their lending decision. decision.

CRB promotes responsible use of credit and helps CRB promotes responsible use of credit and helps lenders in identifying good payers from defaulters.lenders in identifying good payers from defaulters.

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Zambian banking industry has one of the Zambian banking industry has one of the highest operating costs when compared to highest operating costs when compared to other countries in Sub-Saharan Africa. other countries in Sub-Saharan Africa.

The challenge is to develop ways of The challenge is to develop ways of providing banking services at affordable providing banking services at affordable costs.costs.

BoZ is addressing this challenge through BoZ is addressing this challenge through the following:the following:

Consumer awareness - quarterly Consumer awareness - quarterly publication of bank charges; and publication of bank charges; and

the Cost of Borrowing Regulations of 1995.the Cost of Borrowing Regulations of 1995.

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Corporate GovernanceCorporate Governance– Under the Companies Act, directors are Under the Companies Act, directors are

liable for breaches of fiduciary duties liable for breaches of fiduciary duties and obligations. and obligations.

– The BFSA complements the provisions The BFSA complements the provisions of the Companies Act by placing more of the Companies Act by placing more duties and obligations on directors of duties and obligations on directors of banks and financial institutions. banks and financial institutions.

– BoZ issued Corporate Governance BoZ issued Corporate Governance Guidelines in November 2006. Guidelines in November 2006.

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Sovereign Credit Rating for ZambiaSovereign Credit Rating for Zambia– The process of obtaining a credit rating for The process of obtaining a credit rating for

Zambia has reached an advance stage. Zambia has reached an advance stage. – Sovereign credit rate is expected to reduce the Sovereign credit rate is expected to reduce the

cost of credit and increase access to finance.cost of credit and increase access to finance.

– With an increase in access particularly to rural With an increase in access particularly to rural areas, the number of excluded people is likely to areas, the number of excluded people is likely to

decline from the levels of 66% recorded in 2005.decline from the levels of 66% recorded in 2005.

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CONCLUSIONCONCLUSION

Encouraging signs in the range and reach of financial services.Encouraging signs in the range and reach of financial services. Still a lot remains to be done. Challenges ahead including the Still a lot remains to be done. Challenges ahead including the

following: following: – Developments in the external sector and the rise in food Developments in the external sector and the rise in food

prices threaten macroeconomic stability.prices threaten macroeconomic stability.– fiscal prudence and coordination - strengthening and staying fiscal prudence and coordination - strengthening and staying

the course. the course. – The provision of infrastructure, particularly in rural areas. The provision of infrastructure, particularly in rural areas. – Innovation - the need to invest in new technology and human Innovation - the need to invest in new technology and human

resources. resources. – Consumer awareness and responsible lending.Consumer awareness and responsible lending.

Strengthening of financial Sector is necessary to further Strengthening of financial Sector is necessary to further economic development. economic development.

FSDP provides a frameworkFSDP provides a framework..

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BANK of ZAMBIA FINANCIAL ACCESS AND SUSTAINABILITY OF FINANCIAL SERVICES IN ZAMBIA