Caleb M Fundanga: Financial sector challenges and progress in Zambia
Speech by Dr Caleb M Fundanga, Governor of the Bank of Zambia, at the Information
Exchange Forum on Sources of Finance, Lusaka, 10 December 2007.
* * *
• Mr Chairman
• Representatives of International Financial Institutions
• Chief Executives and representatives of Financial Institutions
• Distinguished ladies and gentlemen
I am greatly honoured to be given an opportunity to make some remarks at this forum. I wish
to extend a warm welcome to all participants gathered here today, particularly those who
have travelled from outside the country. I hope that you will not only have fruitful
deliberations but also find time to explore the beautiful scenery and experience the warm
hospitality that Zambia has to offer.
Mr Chairman, Ladies and Gentlemen, this forum is more than timely as Zambia is working
tirelessly towards financial deepening, wealth creation and reducing the levels of
unemployment. In order to achieve this, affordable financial services should be available to
the majority of businesses. In fact, the forum has come at an opportune time when the
economy has shown signs of macroeconomic stability and growth.
The financial sector in Zambia is considered relatively under developed. In spite of this
status, post independence governments have always recognised the importance of the
financial sector to national economic development. This is the reason why the activities of the
sector had up until 1992 been controlled by the state. Since then, the financial sector has
been liberalized while simultaneously strengthening the regulatory framework.
Concerned with the limited contribution of the financial sector to economic development, the
Government devised and formulated policy mechanisms for addressing a number of
identified obstacles within the framework of the Poverty Reduction Strategy Paper (PRSP)
whose implementation started in 2002. In line with the PRSP framework, the World Bank and
the International Monetary Fund undertook an assessment of the financial system through
the Financial Sector Assessment Programme (FSAP) which was complimented by our own
review.
Some of the principle areas of concern identified included:
•
Low financial intermediation with limited access to financial services, especially for
the rural and peri-urban population and the low-to-middle income earners;
•
Poor credit culture in the market;
•
Multiple and potentially conflicting roles of the government in the financial sector;
• Weak regulatory framework for non-bank financial institutions, insurance and
pension funds;
• Undeveloped money and capital markets; and
•
Limited long-term development and housing finance.
In recognition of the strategic importance of the financial sector to the country's development
and poverty reduction efforts, the Zambian government launched the Financial Sector
Development Plan (FSDP) in 2004 to address weaknesses that had been identified in the
financial sector. The FSDP is therefore a comprehensive strategy that is aimed at achieving
a financial system that is sound, stable and market-based, that would support efficient
resource mobilization necessary for economic diversification and sustainable growth.
The financial sector weaknesses are being addressed through a public and private sector
partnership. The implementation structure is chaired by the Secretary to the Treasury at
Ministry of Finance and National Planning with the secretariat function responsible for the
coordination of activities based at the Bank of Zambia.
Mr Chairman, the goal of the FSDP is to have a financial system that is stable and
marketbased in order to support efficient resource mobilization necessary for economic
diversification and sustainable growth. A number of reforms have already been undertaken
under this plan. For instance, a Credit Reference Bureau has been established and we
expect it to be operational in the coming year. In addition, studies have also been taken to
comprehend the constraints to broader access financial services.
One of the outputs of the FSDP has been a market knowledge study called Finscope Zambia
which is a nationally representative survey of the use of, and demand for, financial services.
It provides insights into how consumers source their income and manage their financial lives.
This is the first time a survey like this has been conducted in Zambia and provides valuable
information for players in the financial market.
The survey, which was conducted in 2005, notes that very few Zambians use the formal
financial sector. The report reveals that most Zambians prefer to invest in non-financial
instruments such as a business, livestock, land or agriculture equipment.
Mr Chairman, the year 2006 marked the eighth consecutive year of positive real growth in
output while inflation declined remarkably to single digit level of 8.2%. During this period,
investment was strong, particularly in the mining, tourism, construction, transport and
agricultural sectors. This set a good basis for further favourable economic growth in the
medium to long-term. Increased private sector investment, particularly in the mining sector,
contributed to this growth.
Mr Chairman, Ladies and Gentlemen, Zambia's external position has also shown remarkable
improvements with the trade surplus rising to US $1,176.0 million in 2006 from US $10
million in 2005. Similarly, the current account deficit as a percent of GDP (excluding grants)
reduced to 2.3% from 11.8% during the same period. This outturn was mainly attributed to
high receipts from increased copper exports. Debt relief and increased budget support from
cooperating partners also helped strengthen the external position.
Mr Chairman, the financial system has exhibited continued stability in the last eight years
with the banking sector recording an average annual growth of more than 27% in total
assets. Similarly, the deposit base has recorded an annual average growth of 28% over the
same period. This is evidence of rising economic activities. However, the increase in the
deposit base alone can not fully support the enormous need for access to affordable
loanable funds in the economy.
I must mention here Ladies and Gentlemen, that financial markets in Zambia are still
developing. With respect to money market developments, commercial banks lending rates
have been declining but not at the rate as inflation or treasury bill rates. Commercial banks
nominal average lending rate declined from 33.9% in December 2005 to 27.6% in December
2006 and stood slightly lower at 27.3% in February 2007. This is still on the high side for
most entrepreneurs. However, there are positive indications from commercial banks due to
the growing confidence in the economy and lower lending rates are therefore expected given
the current environment of low inflation.
Mr. Chairman, in the Non-Bank Financial Institutions (NBFIs) sector, institutional growth has
continued to be a challenge. The number of NBFIs supervised by the Bank of Zambia has
increased in the last 6 years, by 15% from 52 in 2001 when a specialized NBFIs department
was established, to 60 today. The establishment of this specialised department was in
response to:
•
the expansion of the NBFIs sector;
•
the increased innovation in the sector; and
•
the increase in the number of NBFIs supervised by BoZ after amendments to the
Banking and Financial Services Act (BFSA) in 2000.
The increase in the number of new entrants in the NBFI sector has been due to the stability
in the macro-economic environment in general and the financial sector in particular. To
illustrate this further the BOZ receives on average about 7 applications per quarter, mainly
from bureaux de change.
This is also being driven by the growing demand for finance by both public and private
investors in this sector. In the recent past for instance, a private leasing company received
structured finance of US$10 million (or approximately K38 billion at today's exchange rate)
while the Development Bank of Zambia also issued a corporate bond of K68 billion (which is
just under US$18million). Increased participation in both the money and capital markets by
non-bank financial institutions with proposals for issuance of other corporate bonds are also
under current consideration.
Mr Chairman, some of the key sectors with potential investment include agriculture, mining,
manufacturing, tourism and energy.
Mr. Chairman, given all these developments which I have cited, one can tell that there are
enormous possibilities for the financial sector in Zambia. In this regard, our expectation, at
the Bank of Zambia, is that the financial sector should take a leading role in facilitating further
developments in the areas which I have discussed. However, during our interactions, key
players in the financial sector have informed us that they have a limited capacity to provide
the required services in this regard.
This forum has therefore been organized and arranged by the Bank of Zambia to bring
together Zambian financial sector players and international financial players who have an
interest to see that Zambia takes its rightful place in the world economy. Our expectation is
that after this forum, we shall see the emergence of an interactive and symbiotic alliance
between International and Zambia financial institutions whose goal will be to provide financial
services that will uplift the well-being of the Zambian populace at large. This sounds like a
difficult task to achieve but it is my conviction that it is better to begin a step towards this
direction rather than waiting for it happen in future.
On a lighter note, Ladies and Gentlemen, let me remind you that the Soccer World Cup to be
hosted by South Africa in 2010, has attracted increased demand in the construction and
tourism sectors in the whole Southern African Region. Zambia needs to take advantage of
this and invest heavily in the tourism industry to benefit from the event; particularly that it has
a vast number of national parks and the Victoria Falls, one of the seven natural wonders of
the world. Obviously this can only be done if there is long term partnerships between local
financial institutions and International financial institutions like the ones invited here today.
Mr. Chairman,
Ladies and Gentlemen,
I thank you for your attention.