of the financial sector. among the constraints that the fsdp seeks to address is high cost of banking services and unattractive interest rates, low savings, insufficient access to financial services by the vast majority especially in rural areas, insufficient access to credit, lack of long term credit, etc. the vision of the fsdp is to develop a stable, sound and market - based financial system which would support efficient mobilisation and allocation of resources necessary for economic diversification, sustainable growth and poverty reduction. the fsdp, which is currently in its second phase of implementation, has three components, namely : – increasing market infrastructure ; – increasing competition ; and – access to finance. over the years, the number of financial institutions under the supervisory ambit of the boz has increased significantly. in 2008, the bank of zambia issued banking licences to 5 new banks to operate in zambia. as at 31 may 2011, institutions under bank of zambia supervision as at 31 may 2011 were : 18 commercial banks, 10 leasing finance companies, 3 building societies, 51 bureaux de change, 1 savings and credit bank, 1 development finance institution, 26 microfinance institutions ( mfis ) and 1 credit reference bureau ( crb ). the sector has also recorded tremendous growth in business with growth witnessed in various innovative activities carried out by the banks in order to meet the needs of increasing number of customers. some of the innovations include : an increase in automated teller machines ( atms ) including deposit taking atms ; e - banking ; telephone banking services ; bis central bankers ’ speeches in - store banking services – banks can provide some banking services within the premises of stores ; mobile top - up services – banks can sell airtime on behalf of mobile phone providers through atms ; truck - banking services – the model entails engagement of agents for provision of cash - in / cash - out transactions for clients where banks have no footprint ; bancassurance – banks can sell insurance products on behalf of insurance companies ; and introduction of visa debit and credit cards. these innovations have resulted in notable developments in the financial sector, such as : ( i ) growth in investments in loans and leases : total loans and leases have increased to k10, 182 billion as at 31st may 2011 from k1, 079 billion as at 31st december 2001. the 843 % increment has resulted in the introduction of various credit facilities, for example employer backed salaried loans, trade finance products, vehicle

directives ; the elimination of preferential credit at concessional interest rates ; the liberalization of the exchange rate ; and the removal of controls on the current and capital accounts of the balance of payments. due to liberalisation, the banking environment in zambia has become competitive as banks compete for the share of the customer deposits and good quality credit. prior to 2005, the banking industry ’ s balance sheet was largely concentrated in government securities. this was because government securities offered highly attractive yield rates ( with zero credit risk ) compared to other asset classes. recently government has maintained prudent fiscal bis central bankers ’ speeches policies and has reduced its borrowing to 1. 8 % of gdp leading to a significant fall in government securities yield rates. the reduction in yields rates on government securities has made it increasingly difficult for banks to sustain their profitability. therefore, in order to remain profitable, banks have had to become innovative and resorted to riskier banking activities. this resulted in a shift in the asset structures of most banks from government securities holdings to an expanding loan portfolio, which offers higher returns. 3. 0 the role of financial innovation in promoting the private sector innovation can generally be defined as a continuous process where enterprises and individuals seek new and improved products, processes, and organisation structures in order to reduce costs of production, better satisfy customer demands, and yield greater profits for themselves. when specifically referred to banks and other financial institutions, innovation, commonly is known as financial innovation, refers to any change in the scale, scope and delivery of financial services. financial innovations can therefore be grouped as new products ( e. g. adjustable rate mortgages ; personal loans ) ; new services ( e. g., internet banking ) ; and new production processes ( e. g., electronic record - keeping for securities ; credit scoring ) ; or new organisational forms ( e. g., internet - only banks ). whereas the need for better risk management has been the main driving force behind the recent wave in innovation in more advanced financial markets, this is not the case in less developed markets. the drive towards financial innovation in some instances can largely be attributed to the need to improve or maintain profitability. when talking about financial innovation, an important aspect that one needs to consider is whether or not the process is resulting in a reduction in the cost of doing business and providing banking services, on one hand, and whether it is translating into better pricing, on the other hand. we should therefore, not be surprised that innovation