Denny H Kalyalya: Financial access and sustainability of financial
services in Zambia
Paper presented by Dr Denny H Kalyalya, Deputy Governor Operations, Bank of Zambia, at
The Zambia Institute of Chartered Accountants Annual Business Conference, Livingstone,
7-8 August 2008.
* * *
1.0 Salutation
• The Guest of Honour
• Chairperson
• Distinguished participants
• Ladies and Gentlemen
It is an honour and privilege for the opportunity to make a presentation to this important ZICA
Annual Conference. Before going any further allow me to convey the Governor's sincere
apologies for not being able to come due to prior commitments. He did also send his good
wishes for a successful conference.
2.0 Introduction
In my brief intervention, I will endeavour to address the question of financial access and
sustainability in Zambia. It is generally recognized that the financial sector plays a critical role
in the mobilization of development finance and stimulation of economic growth and
development in general. An efficient, broad-based and dynamic financial sector is an
essential element in the attainment and maintenance of high rates of economic growth and
sustainable development. Through their services, banks and non-bank financial institutions
(NBFIs), they provide an efficient mechanism for the allocation of savings and investment
and they enable financial transactions to take place at minimum cost.
To discuss the issues of financial access and sustainability in Zambia in a little more detail,
our presentation is organized as follows. In Section Three, we provide a brief summary of the
financial sector in Zambia. This will be followed by a discussion of financial access in section
Four. In sections Five and Six highlights on the issue of sustainability and concluding
remarks are provided, respectively.
3.0 The financial sector in Zambia
The financial sector in Zambia comprises banks and non-bank financial institutions (NBFIs)
and are regulated and supervised by three agencies, namely, the Bank of Zambia (BoZ), the
Pensions and Insurance Authority (PIA), and the Security and exchange Commission
(SEC).1 However, the presentation will focus on the component of the financial sector under
the regulatory and supervisory ambit of the BoZ. It is expected that the rationale for such a
focus will become clear as the presentation progresses.
As participants may be aware, the mission statement of the Bank of Zambia is to "formulate
and implement monetary and supervisory policies that achieve and maintain price stability
and promote financial system stability in
Zambia."
In line with this mission statement, the BoZ is responsible for regulating and supervising
banks and the following types of NBFIs:
• Leasing and finance companies;
•
Housing financial institutions (building societies);
•
Savings and credit institutions;
•
Development finance institutions;
•
Microfinance institutions; and
• Bureaux de change.
As at June 30, 2008 there were 14 commercial banks and 71 NBFIs (see Appendix I).
Currently, commercial banks dominate Zambia's financial system with total assets and
liabilities amounting to K14,465,045 million as at June 30, 2008 (about 31.8% of GDP). The
reference NBFIs, notably, the leasing and finance companies (11, two of which are under
statutory management of the Bank of Zambia2), building societies (3), microfinance
institutions licensed under the BFSA (15), development finance institutions (1) and savings
and credit institutions (2). The combined balance sheet of these institutions, as at June 30,
2008 amounted to about 7.9% of the aggregated balance sheet of the commercial banks
(see Table 1).
4.0 Access to financial services
In May 2007, here in Livingstone, the World Bank organized a Southern Africa roundtable
discussion on the launch of their new report entitled, "Making Finance Work for Africa". A
common understanding arising from this debate was that financial exclusion has negative
economic and social effects on society. These include the following:
i. The lack of efficient financial service provision means that poor people are either
forced to use inefficient provisions, often at high cost (for instance, with high
transactions costs, excessively high interest rates on loans, or poor returns on
savings) thereby entrenching poverty - or they do not have access to certain
financial products, either because of an absolute absence of suitable products or
because available products are too expensive;
ii. This in turn tends to restrict the economic opportunities open to the poor and makes
the poor vulnerable to adverse events and financial loss (e.g. due to the lack of
insurance and secure savings products);
iii. The absence of savings products makes it difficult to build up capital; and
iv. As the poor are faced with the high costs of accessing financial services, and are
denied entrepreneurship opportunities that might provide them with a chance to earn
an income, poverty becomes entrenched.
In the recent past, it is gratifying to note that financial sector in Zambia has begum to
demonstrate that it is reasonably efficient, sound and profitable. Since the many bank
closures of the mid- to late-1990s following stiff competition and the tightening of regulation
and oversight through the promulgation of the Banking and Financial Services Act (BFSA) in
1994 we have not experienced any serious banking crisis. That be as it may, like in many
other developing countries the financial sector in Zambia still faces a number of challenges.
The Financial Sector Assessment Programme (FSAP) Report of 2002 highlighted a number
of these including limited access to financial services by the rural and peri-urban population
and doubtful sustainability of financial services in Zambia.
In light of these findings, and in recognition of the strategic importance of the development of
the financial sector in contributing to sustainable economic growth and poverty reduction, the
Government of the republic of Zambia developed and launched the Financial Sector
Development Plan (FSDP) in 2004.
The FSDP is a comprehensive five year strategy to build and strengthen the financial sector
infrastructure to enable it to support economic diversification and sustainable growth. In
addition, and in furtherance of the objectives of the FSDP, the BoZ Strategic Plan for 2008 -
2011 has made financial inclusion as one of its key strategic objectives.
Under the FSDP two important studies, the FinScopetm Surveys of 2005 and 2007, on the
demand for and supply of financial services in Zambia have been completed. These studies
have augmented the earlier findings of the FSAP with respect to the key developmental
challenges for the financial sector in Zambia.3
The key findings of the Finscope Survey on the demand for financial services included the
following:
•
Only 34% of the population were "financially served", i.e., used formal and/or
informal financial products, whilst 66% had no access to financial services;
•
77.5% of Zambians report to have never had a bank product or service;
•
40% of salaried staff reported not having bank accounts, signifying that they
received money in cash rather than through the financial system;
•
The barriers to accessing financial services include cost, distance, time and
transport to reach the bank or financial service provider;
•
Rather than purchase treasury bills, buy life insurance or stocks on the stock
exchange, most of the respondents preferred to invest in agriculture or a business;
•
Microfinance institutions although used by only 5% of the adult population plays an
important role in increasing levels of access to financial services; and the
•
The informal sector in Zambia played a significant role in the provision of financial
services catering for 11% of the population, compared with other countries in the
Southern African Development Community (SADC) where similar surveys have
been undertaken, namely, Botswana, Namibia and South Africa at 5%, 1% and 8%,
respectively.
An important point to note for policymakers is the fact that the majority of those who had no
access to financial services are the rural poor, with women more disadvantaged than men.
Importantly, these are the very areas and categories of people for whom support has been
prioritized in the Fifth National Development Plan (FNDP) and under the Citizens
Empowerment Act (2006). The Government, working with the private sector and other key
stakeholders, thus already has platform from which to address these challenges.
During the first half of 2007, the Supply Side Study was undertaken as a follow up to the
FinScopetm2005 demand side survey. The Study revealed opportunities as well as
challenges in addressing access to financial services and financial sector development in
general.
First, macroeconomic policy and financial sector regulation were no longer viewed as a
problem, following the downward trend in inflation to single digits in 2006, the consolidation
of the Government's fiscal position, strong economic growth. Second, the enabling
environment to facilitate the expansion in access to credit, i.e. developments in the payment
system and the greater sharing of information in the financial markets through credit bureaux
is also not yet a binding constraint.
The Study does, however, recognize the need to continue to develop the payment system
and improve the flow of information between financial services providers as well as with their
potential clients to avoid this becoming a binding constraint as the financial system develops.
Third, the key constraint to expanding access related to the focus and strategies of individual
banks and NBFIs. The Study points out that commercial banks have tended to provide
financial services to a narrow group of clients (typically corporate entities and formal sector
employees), at a high cost, within a narrow geographical location (typically the major towns
and peri-urban areas, and they have made high returns in doing so (see Table 2).
Disappointingly, NBFIs have typically served the same client base and have not offered
effective competition to commercial banks.
4.1 Initiatives to expand access to financial services
There are a number of strategies being implemented by both the private and public sectors
to make the financial sector more inclusive, thereby increasing the benefits to the poor of
participating in the formal economy.
4.1.1 Financial service providers
Currently, there are signs that a number of financial institutions are re-positioning themselves
in terms of location and product offerings. This is evidenced by an expanding branch
network and the range of lower-cost products that are now available in the market. For instance,
some commercial banks have begun to offer new financial products and services, particularly
in retail and community banking. This expansion has also been noted in the microfinance
sector which is growing to fill the supply gap for finance that arose from the closure of banks
and branches in rural and peri-urban areas earlier on. With the microfinance regulations
issued in 2006, the number of microfinance institutions licensed by BoZ, for instance, has
grown from 3 in 2006 to 15 as at June 30, 2008, with several other applications currently
under consideration.
This change in strategy is partly due to the strengthened fiscal position of the Government
and the significant fall in annual inflation to single digit levels in 2006 for the first time in three
decades. These developments have resulted in reduced returns on investment in Treasury
bills and Government bonds thus compelling banks and NBFIs to actively seek other
investment avenues. To this end, domestic credit to the private sector as a percentage of
GDP has increased from 18.7 percent at the end of 2005 to 43.0 percent at end of 2007. In
the same period, the proportion of national savings increased from 18.1 percent to 21.6
percent.4 These statistics are good indicators of improving access to financial services.
4.1.2 Government
The Government is encouraging the state-owned NBFIs, that already deal with the
lowincome market to deepen and broaden their services. Some of these already have an
increasing presence country wide and have developed strategic development plans, aimed
at extending financial services to the low income population.
The role of Government as shareholder of public NBFIs has been to implement a coherent
shareholder strategy to bring these public financial institutions back to commercial viability
through provision of financial support. The Government has indicated its intention to further
capitalize these institutions for this purpose.
4.1.3 Citizen economic empowerment
The Government has also pushed the issue of "access" to the top of its financial policy
agenda and is emphasizing on the need for financial inclusion for all citizens as evidenced by
share floatation in favour of Zambian citizens in privatized state enterprises through the
Citizens Economic Empowerment Act.
5.0 Sustainability of financial services
5.1 Regulatory framework
The BoZ is responsible for regulating and supervising banks and the specified NBFIs. This
entails, among other aspects, ensuring that financial service providers (FSPs), as these
institutions may generally be referred to, are adequately capitalized and have risk
management systems appropriate for their size, nature of operations and level of complexity.
Safe, strong and sound FSPs are vehicles for the provision of sustainable financial services
as they better cope with external shocks.
A significant part of the BoZ analysis involves reviewing key ratios from financial statements.
The objectives of this ratio analysis are, among other things, to discern trends, identify key
risk areas to focus on and to compare performance with competitors, industry average or
standard. For instance the key ratios relating to banks' performance in the recent past is
shown in Table 3.
The BoZ also recognizes that financial stability is essential for strong macroeconomic
performance and execution of monetary policy. This is clearly reflected in the Bank's mission
statement, referred to earlier. To ensure stability, our supervisory processes are based on a
robust regulatory framework, underpinned by on-site inspections and off-site surveillance,
which places emphasis on banks proactively managing the risks inherent in their products
and services.
Financial stability can only exist when all financial system risks are adequately identified,
allocated, priced and managed. FSPs face a significant number of risks, which include credit
risk, operational risk, market risk and liquidity risk. As a result, a minimum regulatory capital
charge is defined to cover these. In responding to the challenge, in 2006, the Capital
Adequacy Regulations of 1995 were amended to provide for a tiered capital structure to
encourage entrants into the financial sector (see Table 4) The review was aimed at ensuring
that banks are adequately capitalised at commencement, and as they operate.
In 2005 amendments were made to the Buildings Societies Act, Development Bank of
Zambia Act, National Savings and Credit Bank Act and the Banking and Financial Services
Act, to ensure harmonisation of these pieces of legislation under this sector. The
amendments have enhanced the supervisory oversight of the BoZ on the financial sector.
The Bank of Zambia Act is also being reviewed with a view to enhancing operational
independence of BoZ.
In 2006, Microfinance Regulations were introduced to provide a framework to set standards
for the industry thereby affording the microfinance sector a chance to operate and grow in a
manner that is safe, sound and sustainable. For instance, no Trust is allowed to own shares.
Regulation 20 provides that an MFI shall have a board of directors of not less than 5
members, the majority of whom shall be permanent residents in Zambia. Regulation 35
provides that no person shall, without prior BoZ approval, own more than 25% shares in a
deposit taking MFI, while Regulation 35(4) provides that no person shall, without prior BoZ
approval, own more than 50% shares in a non-deposit taking MFI.
5.2 Prevention of money laundering
The increasing threat posed by money laundering can undermine confidence in any
economy. Some of the threats of Money Laundering that distort countries' economies include
the following:
i. Undermining of the legitimate private sector - Money launderers use money obtain
through criminal activities to set up front companies in order to hide the ill-gotten
wealth. This gives the front companies an unfair competitive advantage over
genuine companies as they can afford to undercut prices with subsidised laundered
resources.
ii. Loss of control of economic policy - Depending on the magnitude of the laundered
money in an economy, these funds may dwarf government's budgets, resulting in
loss of control over economic policy by governments.
iii. Economic distortion and instability - Criminal money responds not to economic or
financial signals but to opportunities for further crime and the threat of being caught.
Therefore money launderers will not generally invest funds in activities that are
economically beneficial to the country.
iv. Loss of revenue - Money laundering makes governments' tax collection efforts
difficult and diminishes tax revenues.
v. Reputation risk - In today's global economy, nations can not afford to have their
reputations eroded by association with money laundering. Legitimate businesses will
not want to deal with a bank or financial institution suspected to handle criminal
funds.
vi. Undermines the financial sector - The unchecked use of the financial system by
criminal organisations risks undermining individual institutions and ultimately entire
financial systems. When banks or financial institutions become part of a criminal
network, they lay themselves open to loss from fraud if they do not screen out
undesirable customers or if their own officers are compromised. In the face of the
above economic, financial and political threats, the international financial community
has recognised that public confidence in such institutions, and hence their stability,
could be undermined if they became associated, even inadvertently, with criminals.
In order to prevent the escalation of money laundering, the following measures have been
undertaken:
i. The Government has enacted the Prohibition and Prevention of Money Laundering
(PPML) Act 2001 which has criminalized money laundering and provides for the
forfeiture of property by offenders;
ii. BoZ has issued Directives to all regulated financial institutions on combating money
laundering to ensure that the potential threats posed by money launderers are
limited; and
iii. BoZ has also developed a supervisory framework aimed at conducting targeted
inspections to ensure banks and NBFIs are complying with the anti-money
laundering legislation and directives.
5.3 Improvement of credit culture
In order to improve the credit culture in the country, the BoZ issued the Credit Data (Privacy)
Code and the Credit Reference Services (Licensing) Guidelines to facilitate the
establishment of credit reference bureaux (CRBs). The guidelines were gazetted on 30
January 2006. Subsequently, the first credit bureau, namely, Credit Reference Bureau Africa
Limited (CRBAL) was licensed on June 5, 2006 and was launched on January 11, 2007.
The main task of a CRB is to provide lenders with factual information upon which they can
base their lending decision. While CRBs facilitate sharing of information without approving or
disapproving credit, or collecting debts they also assist consumers understand the
responsible use of credit and help lenders in identifying good payers from defaulters. Once
fully operational the credit bureau will:
i. Allow for increase in credit extension because of better risk profiles;
ii. Reduce credit processing costs and times as well as loan write-offs;
iii. Lower borrowing costs; and
iv. Enhance the credit culture, which in turn will allow for the provision of the much
needed finance for the development of various sectors.
5.4 Cost of banking services
•
It has been observed that the Zambian banking industry has one of the highest
operating costs when compared to other countries in Sub-Saharan Africa. In turn,
the cost structure makes it difficult to develop efficient, low cost services that the
general populace can afford. The challenge for the industry is to come up with
innovative ways and means of providing banking services at affordable costs in
order to capture the larger un-banked population and also improve economic
activities in productive sectors. This challenge is slowly being addressed in various
ways including the following:
i. Consumer awareness through quarterly publication of bank charges in the
daily papers of circulation in order to allow the public an opportunity to
make informed decisions by comparing charges offered by banks; and
ii. Banks are required to comply with the Cost of Borrowing Regulations of
1995 and to disclose to the borrower the cost of borrowing whenever a loan
is made.
5.5 Corporate governance
In recent years, corporate governance has emerged on the global agenda as a key part of
the pursuit of proper and effective business practice. The objective being the need for probity
in business activity, compliance with the law and regulations, and to secure good reputation
and confidence and thus attract investment.
At the heart of the debate on good corporate governance lie the conflicts or potential conflicts
of interest, between shareholders and either the board of directors as whole or individual
board members. Areas where a conflict of interest might be apparent include the following:
i. Financial reporting and auditing. The directors may try to disguise the true financial
performance of their company by "dressing up" the published accounts and giving
less than honest statements;
ii. Director's remuneration. Directors may reward themselves with huge salaries and
other rewards, such as bonuses, a generous pension scheme, share options and
other benefits with little regard to the needs of the shareholders and the company;
and
iii. Risk taking. Directors of companies might take decisions intended to increase profits
without regard to the changing risk profile of their existing businesses.
•
Under the Companies Act, directors are liable for breaches of fiduciary duties and
obligations. For instance, directors are liable for any loss suffered as a result of their
acting outside their authority or for failure to exercise the degree of care, skill and
diligence expected of them in the circumstances. The BFSA complements the
provisions of the Companies Act by placing more duties and obligations on directors
of banks and financial institutions. Chapter III, Parts III and IV of the BFSA deals
with the boards of directors of banks and financial institutions. Under these parts:
i. Every bank or financial institution is expected to have a board of directors in
which shall vest all the powers of management and control and which shall
be responsible for the formulation of policies of the bank or financial
institution (Section 30(1);
ii. The Board of directors shall consist of not less than 5 members (Section
30(2);
iii. Every financial service provider must have a Chief Executive Officer and
Chief Financial Officer who shall not qualify to hold office unless it is shown
that they are fit and proper persons, above 21 years old, have not been
convicted of a felony or offence involving dishonesty, are not mentally
incompetent, have never been removed from office under the BFSA, have
not managed a company that has gone into liquidation or entered into a
composition with creditors (Section 31);
iv. The majority of directors must be from outside the bank (Section 32(1);
v. Directors, Chief Executive Officers and Chief Financial Officers are
expected to act honestly, in good faith and in the interest of the company
whilst exercising due care, diligence and skill (Section 33);
vi. A director is required to declare in writing to the board annually, the names
and addresses of the director's associates and full particulars of every
material interest (Section 35);
vii. A director who (a) negligently or with intent to deceive, makes any false or
misleading statement or entry or omits any statement or entry that should
be made in any book, account, report or statement of the financial service
provider, or (b) obstructs or endeavours to obstruct (i) the proper
performance by an auditor of the auditor's duties in accordance with this
provisions of this Act; or (ii) a lawful inspection of the service provider by a
duly authorised inspector appointed by the Bank of Zambia, commits an
offence and is liable on conviction to a fine or to imprisonment (Section 36).
In addition to the provisions of the BFSA, the BoZ has put in place a number of regulations
aimed at enhancing good corporate governance for the FSPs regulated by the BoZ, some of
which are listed below:
i. The Prohibition and Prevention of Money Laundering Act of 2001 (PPMLA)
and the Anti-Money Laundering Directives obligate the board of directors to
formulate anti-money laundering policies and ensure senior management
implement these policies; and
ii. The Corporate Governance Guidelines for Financial Institutions issued in
November 2006 set forth a broad framework of fundamental corporate
governance principles to guide the actions of the directors and managers of
the institutions operating in Zambia.
5.6 Sovereign credit rating for Zambia
The process of obtaining a credit rating for Zambia has reached an advanced stage. With
increased funding, particularly through foreign direct investment, institutions which are
involved in medium- to long-term financing, are expected to access relatively cheaper credit
and increased access to finance. With an increase in access particularly to rural areas, the
number of excluded people is likely to decline from the levels of 66% recorded in 2005.
6.0 Conclusion
Recent developments in the financial sector offer some encouragement that working
together, the Government, the BoZ, and the financial service providers can extend the range
and reach of financial services that are available to both corporate and individual clients. Still
a lot remains to be done to extend financial services to the majority of our people and foster
ongoing sustainability of our financial institutions. In this regard, there are a number of
challenges that lie ahead including the following:
i. Developments in the external sector are a constant threat to macroeconomic
stability in general and implementation of effective monetary policy, in particular. In
this regard, maintaining single digit inflation, given the rising fuel and food prices will
be quite challenging and therefore requires concerted efforts of all key stakeholders.
ii. Strengthening and staying the course with regard to the recently achieved fiscal
prudence as well as forging relatively stronger coordination between fiscal and
monetary policies is an equally challenging task in the period ahead.
iii. The provision of infrastructure, particularly in rural areas is an equally important
challenge as without good infrastructure very little will happen in the way of
expanding financial and other services to these areas and not to mention the
resident population.
iv. Innovation - the Financial Service Providers themselves need to invest in new
technology and human resources that will enable them to provide lower cost
financial services and expand their client base. While conventional dedicated,
fullservice banks, with "brick and mortar" branches, have high costs and staffing
requirements, the use of technology can aid the delivery of low-cost (and hence
lowcharge) banking services. Many financial transactions do not require staffed bank
branches; for instance cash can be assessed through ATMs (which could, for
instance, be installed in all post offices). Another opportunity arises from mobile
phone banking, which has much potential for low-cost banking and financial services
and therefore able to transform financial access through extending banking to the
unbanked using existing mobile communications infrastructure which already
reaches many unbanked people.
v. Consumer awareness, there is need to enhance financial literacy so that the public
can fully appreciate the cost of financial services. Such knowledge would enable
them to make informed decisions about their levels of financial commitments. Tied
to this is the need to promote responsible lending.
Developments in the financial system are critical for the achievement of sustainable growth in
the long term. Given the undeveloped nature of Zambia's financial system, it is evident that
the diversification and strengthening of financial institutions, instruments and markets must
be regarded as a prerequisite to further economic development. In this regard, the
Government approved the Financial Sector Development Plan provides a framework for
focused development of the financial system.
Bearing the foregoing, the BoZ continue to closely monitor the financial condition and
performance of the financial sector.
References
1. FinMark Trust (2005). Measuring Financial Access in Zambia: Summary of Topline
Findings, FinScopetm(2005) Survey.
2. GRZ (2004). Financial Sector Development Plan for Zambia.
3. Honohan P., and T. Beck (20070. Making Finance Work for Africa. World Bank,
Washington DC.
4. Jefferies. K. Enhancing Access to Banking and Financial Services in Botswana.
Appendix I containing contact details of banking and other institutions in Zambia can be
found on Bank of Zambia's website www.boz.zm.