Caleb M Fundanga: Supervision of non-bank financial institutions
Speech by Dr Caleb M Fundanga, Governor of the Bank of Zambia, at the opening ceremony of a
MEFMI/ACBF/IMF - East Afritac Regional Workshop on "Supervision of non-bank financial
institutions", Lusaka, 14 February 2005.
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The Executive Director, MEFMI, Dr. Maruping
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The Executive Director, Africa Capacity Building Foundation
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Representative from the IMF
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Distinguished Workshop Participants
• Ladies and Gentlemen
On behalf of the Macroeconomic and Financial Management Institute for Eastern and Southern Africa
(MEFMI), the African Capacity Building Foundation (ACBF) and the East African Technical Assistance
Centre (AFRITAC), I wish to welcome you all to this important workshop and to the beautiful city of
Lusaka. May I also welcome our distinguished resource persons and thank them for accepting our
invitations. I hope their participation will enrich the deliberations of this workshop as well as enhance
the knowledge of the participants. Having perused through your programme, I noticed that you have a
tight schedule. However, I urge all of you to find time in your busy schedule to visit some interesting
places that the city of Lusaka has to offer, including shopping malls, museums, cultural villages, to
mention but a few.
Allow me also to thank the Executive Director of MEFMI, Dr. Maruping, for having invited me to
officiate at this regional workshop on "Supervision of non-bank financial institutions". I am reliably
informed that this workshop is organised by MEFMI, in conjunction with the IMF through the East
AFRITAC and the ACBF. The workshop is indeed timely as it is aimed at building sustainable capacity
for effective financial sector supervision at a time when our region is beset with a lot of non-bank
financial institutions that are financially constrained. I, therefore, wish to commend these organisations
for their collaborative efforts and hope that the cooperation exhibited by these institutions through the
sponsorship of this workshop will not just end here, but will also grow from strength to strength.
Ladies and Gentlemen
The liberalisation and continued reforms of the financial sectors in our countries has brought
interesting challenges to supervisors and regulators, alike. Of particular importance, are the reforms
currently taking place in the areas of regulation and supervision of financial institutions. As you are
well aware, in a liberalised environment financial institutions play a critical role in the allocation of
resources through intermediating between those with surplus resources (depositors) and those in
need of resources (investors). In view of the foregoing, effective and efficient supervision is crucial to
limit the risk of loss to depositors, henceforth maintaining public confidence in the financial system.
In response to the liberalised environment, there has been a proliferation of linkages between
institutions operating in various segments of the financial sector and a growing number of financial
mergers and acquisitions, thus creating, in the process, huge financial conglomerates. For instance,
banks and insurance companies are searching for growth through the diversification of their activities
in such a way that they can no longer be considered as homogeneous institutions falling within the
scope of one economic sector and one supervisory system! These conglomerates aim to exploit the
synergies that exist among banking, insurance and investment.
This market evolution towards huge financial conglomerates, with integrated product development is
slowly blurring the traditional boundaries between banks and non-bank financial institutions, on the
one hand, and the supervision of these institutions, on the other. In spite of these trends in the
international financial markets, regrettably, supervisory systems, in our sub-region, are mainly
structured along the traditional boundaries demarcating banks, insurance companies, investment and
micro-finance institutions. These integration changes represent major challenges to the supervisors of
the different sectors, especially as the financial institutions become more complex in their structures
and operations.
Notwithstanding the foregoing, the sluggish growth of our economies in the sub-region has also
created a difficult operating environment for financial institutions, especially banks. As a result, this has
contributed to the mushrooming of non-bank financial institutions, such as, micro-finance. It is a fact
that the financial sector in our sub-region is dominated by commercial banks, which have continued to
service only a small section of the population. The majority of the people are denied access, largely,
due to numerous reasons, including perceived risks, high costs involved in dealing in small
transactions and the inability to provide marketable collateral for loans.
It is against this background that financial sector supervision should also be directed at financial
institutions that pose the greatest risks, such as, non-bank financial institutions. In this regard, the
adoption of the risk-based approach allows the supervisor to devote more supervisory effort to those
areas that have a high-risk profile.
This therefore, entails that supervisory authorities should shift their focus from the traditional Capital,
Assets, Management, Earnings, Liquidity, and interest rate Sensitivity (CAMELS) approach to a more
risk-based approach. A risk-based supervisory approach would involve the identification of key risks,
the level of these risks and the key risk areas. After identifying these risk factors, a comprehensive
supervisory framework with appropriate resources is then assembled to mitigate the risks. The amount
of resources required is dependent on the level and intensity of the perceived risk. However, suffice to
mention that this does not mean that the risk-based supervisory approach ignores the strengths of the
CAMELS approach, but rather addresses the weaknesses by putting more emphasis and resources
on areas with potentially higher risk.
Ladies and Gentlemen
As many of us are aware, financial sector operations have become complex nowadays, as they entail,
among others, managing financial, market and operational risks, which depend, to a large extent, on
public confidence in the financial system. In this regard, proper supervision is critical to minimising
risks as well as ensuring the stability of the financial sector and engendering public confidence. This
justifies the need for effective regulation and supervision of the operations of banks and non-bank
financial institutions compared to other business operations.
Further, with the increase in non-bank financial institutions, their level of risk has also risen.
Accordingly, the sheer size of the sector is of systemic importance, hence, effective and efficient
regulation and supervision is required to stem any systemic risks.
Ladies and Gentlemen
I am happy to note that this workshop is addressing, in greater details, issues relating to the regulation
and supervision of the non-bank financial sector, so as to ensure that the financial sector is safe,
secure and efficient.
As I conclude therefore, I wish to urge the workshop participants to participate actively in the
deliberations and use this opportunity to tap from the vast experience of the resource persons. I have
every reason to believe that this workshop will provide you with the opportunity to share experiences
and enhance your knowledge of issues pertaining to regulation and supervision of the non-bank
financial sector.
With these remarks, Ladies and Gentlemen, it is now my honour and privilege to declare this regional
workshop officially open.
I thank you.