Caleb M Fundanga: The history and experiences of the financial sector
and regulatory framework in Zambia
Address by Dr Caleb M Fundanga, Governor of the Bank of Zambia, at the Co-operative
Bank Capitalisation Consultative Forum "The history and experiences of the financial sector
and regulatory framework in Zambia", Lusaka, 3 March 2011.
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 The Honourable Minister of Agriculture and Co-operatives, Hon Eustarkio
Kazonga, M.P;
 The Board Chairman of the Co-operative Bank Zambia Limited, Mr Mulilo
Kabesha;
 Members of the Diplomatic Corps;
 Distinguished Invited Guests;
 Ladies and Gentlemen
It is with great pleasure and privilege to speak to you at this very important Consultative
Forum. I have been requested to speak briefly on the history and some of the experiences of
the financial sector in Zambia.
Ladies and Gentlemen, as you are aware, considerable developments have been recorded
in the Zambia economy in general and the financial sector in particular, following the
liberalization of the economy in the early 1990's. These developments include the
proliferation of banks and non-bank financial institutions, which have necessitated the review
of supervisory policies as well as the legal and regulatory frameworks in order re-align them
to the liberalised environment.
A significant development relating to the Zambian financial sector was the decision to
relocate the function of the Registrar of Banks and Financial Institutions to the Bank of
Zambia from the Ministry of Finance and National Planning where it was previously located.
This decision was taken in an effort to enhance regulatory oversight of banks and financial
institutions starting from the licensing stage. Currently, all applicants have to be evaluated in
line with relevant provisions of the Banking and Financial Services Act (BFSA) and
international best practice such as the Basel Core Principles on Effective Banking
Supervision. The intention is to ensure that only applicants who meet these stringent criteria
enter the financial system in Zambia. This is crucial for fostering confidence and stability in
the financial system.
Mr Chairman, you may be aware that in the early stages of the reforms, a number of
commercial banks faced serious problems and were subsequently liquidated. The closures
were in part a consequence of the reforms. The reforms also highlighted some weaknesses
in corporate governance arrangements at most failed banks.
However, following improvements in the regulatory and supervisory frameworks, no bank
closure has been recorded since 2002 and the banking sector has recorded significant
growth. The growth in the sector can also be attributed to prudent fiscal and monetary
policies aimed at achieving sustainable macroeconomic stability. This has been
accomplished under a stable political environment and liberalised market conditions.
Furthermore, in 2002, the International Monetary Fund and the World Bank undertook a
comprehensive assessment of the Zambian financial sector through the Financial Sector
Assessment Program (FSAP). In response to the weaknesses noted in the FSAP, Cabinet
approved the Financial Sector Development Plan (FSDP) covering the period 2004 - 2009.
Apart from addressing the weaknesses identified in the FSAP, the FSDP sought to further
strengthen the Zambian financial sector as well as to guide efforts for realizing the vision of a
stable, sound and market based financial system that would support the efficient mobilisation
and allocation of financial resources necessary for economic diversification and sustainable
growth. To this end, the Bank of Zambia in conjunction with the Government has been
undertaken reforms in the financial sector under the FSDP, which is now in the second
phase.
Through the FSDP, the Bank of Zambia promoting competition among banks. Competition in
the banking sector while desirable can have both negative and positive effects. In this regard,
competition can be viewed in terms of being a public good which can significantly contribute
towards access to better quality and cheaper financial services. The challenge, therefore, is
to ensure that supervisory effort is adequately able to change and effectively respond to
innovations and events in the financial system. It is expected that this would consequently
promote confidence in the financial system which is necessary for insulating the economy
from adverse internal and external shocks.
The Bank of Zambia has attempted to develop supervisory and regulatory approaches which
answer to these challenges. For instance, Bank of Zambia has adopted a risk-based
approach to supervision. This approach entails closer interaction with banks and allows early
identification of risk as well as close monitoring of the nature and direction of risks as they
emerge. This paradigm shift in supervisory approaches requires a permissive legal and
regulatory framework.
Chairperson, currently, the legal and regulatory frameworks in Zambia comprise of the
Banking and Financial Services Act, Chapter 387 of the Laws of Zambia; the Bank of Zambia
Act, Chapter 360 of the Laws of Zambia; the Prohibition and Prevention of Money
Laundering Act; the Bank of Zambia Anti-Money Laundering Directives; and the Bank of
Zambia Corporate Governance Guidelines. In addition, the Bank of Zambia also issued Risk
Management Guidelines to provide minimum standards to be observed by commercial banks
in the area of risk management. The Bank has continued to revise these frameworks on an
on-going basis to ensure that they address current challenges in the sector. However, the
major challenge in this regard remains the extent and speed at which changes to these
regulatory frameworks can be made in order to improve policy responsiveness.
Ladies and Gentlemen, the Bank of Zambia has always strived to strike a balance between
having a robust supervisory and regulatory framework and the need to promote investments
in the sector. The entry of new players in the market is testimony of the confident that Bank's
supervisory oversight of the sector has instilled in both the general and investing public. We
remain committed to executing our mandate and in ensuring that the financial system is
properly regulated in order for economic agents to undertake their activities in a safe and
sound environment.
Distinguished guests, we note that financial intermediation is still very low in our economy
and as such a lot of work still remains in this area. The Bank of Zambia encourages and
supports market initiatives aimed at the financially excluded in order to achieve the objective
on financial inclusion. It is therefore my view that promoting the initiative of reviving the
operations of a Co-operative bank is important. As you are all aware, in a co-operative bank,
shareholders and customers are the same group of people whose dominant purpose is to
provide customer value by offering tailored-made products and services cost-effectively and
close to home.
Through their membership structures, Co-operatives are known to have a firm foothold in
local communities and a sound knowledge of people's overall financial situation. This
enables accurate decision making and risk control which in turn, fosters regional
development and social cohesion. Co-operative banks are also known for pioneering
sustainable development and corporate social responsibility, through continuous
engagement to fight unemployment and eradicate social exclusion. In fact, if properly
managed, Co-operative banks can make the financial system more competitive. This can be
done through proper organization, meaningful investment in technology and proper pricing of
products.
Lastly, let me remind all of us here that like any player seeking entry in the market, the
cooperative bank which we wish to revive will be bound by the same legal, fiscal and prudential
regulations as other players. It is therefore important for those who will be entrusted to
manage the affairs of the institution to prudently provide leadership that seeks to promote the
well being of all stakeholders. As such the aspect of good corporate governance practices in
the banking and financial services sector cannot be over-emphasized.
I thank you all for your attention!