caleb m fundanga : overview of zambia ’ s banking sector remarks by dr caleb m fundanga, governor of the bank of zambia, on the occasion of the 10th anniversary of bank of china ( zambia ) limited, lusaka, 13 april 2007. * * * • his excellency – the chinese ambassador to zambia ; • vice - president of the bank of china – head office ; • chairman of the board of the bank of china ( zambia ) limited ; • managing director of the bank of china ( zambia ) limited ; • distinguished invited guests ; and • ladies and gentlemen let me first express my sincere gratitude for having been invited to speak on the occasion of the 10th anniversary of the bank of china ( zambia ) limited. ladies and gentlemen, during the last ten years, the performance of bank of china has been satisfactory with total assets steadily increasing to k391. 4 billion in december 2006from k6. 4 billion in december 1997 and total deposits increasing to k294. 2 billion in december 2006 from k2 billion in december 1997. on this basis, bank of china had grown to become the eighth largest bank in zambia albeit operating with only one branch. bank of china ( zambia ) is a 100 % subsidiary of bank of china which went through a successful initial public offer ( ipo ) and has resulted in bank of china being a top tier globally listed bank. over the same period in zambia, the overall financial performance and condition of the banking sector has been satisfactory. the banking sector has maintained adequate capitalization and all the banks met the minimum capital requirements of 5 % for primary capital and 10 % for total regulatory capital. however, in january 2007, the bank of zambia revised the minimum required capital to start a bank from k2 billion to k12 billion. the bank of zambia anticipates increased economic and investment activity in zambia in the coming years and so banks operating in zambia need to stand ready to safely provide the required level of financing. it is therefore the expectation of the bank of zambia that all banks will comply with this requirement by june 2008. ladies and gentlemen, since our two countries, zambia and china, established diplomatic ties 43 years ago, the relationship has been both cordial and beneficial as seen by the growth in chinese investment into zambia in mining, textile, construction, banking, and agriculture. currently, china is zambia's third largest investor, after south africa and the united kingdom. the expected creation of the us $ 800 million special economic zone

in the emergence of peer - to - peer lenders and technology firms offering banking services. there is also increasing competition in banking services more generally, as firms like paypal become well - established in markets like retail payments that were previously the preserve of high street banks. on top of this, the trend towards more capital market - based financing in europe – supported by the new initiative on capital markets union – will inevitably weaken banks ’ market power, especially for firms that can easily substitute bank and market finance. and though still relatively small in quantitative terms, we are also seeing a greater role of “ shadow banks ” in direct lending – asset managers, pension funds, private debt funds – that heralds a shift towards a less bank - dominated financing mix. taken together, this represents a uniquely challenging environment for european banks, and this is visible in their generally weak financial performance : price - to - book ratios are low and profitability is meagre. many banks have a cost of equity exceeding their return on equity. bis central bankers ’ speeches moreover, there is little chance of the economy coming to the rescue or of interest rates rising any time soon. banks will have to return to profitability in the context of a slow recovery with depressed net interest margins. so, should we be concerned about how banks will fare in this difficult climate? as i already intimated, in my view we need to take a nuanced stance here that balances principle and practice. in principle, the developments in the banking sector should be largely positive for society at large. many banks grew too quickly before the crisis and developed unsustainable business models, so a period of consolidation is both desirable and inevitable. the aim of the regulatory agenda, which is to make banks more resilient and reduce the burden of bank failure on society, is also fully justified. and the ongoing structural changes are welcome. if we believe in the benefits of creative destruction for normal firms, then we must also believe in it for financial firms. innovation that raises competition in retail lending, and leads to better and cheaper services for customers, is a net gain for the economy. so, a priori, i do not see any role for regulators in protecting banks from new operators – on the contrary, innovation should be nurtured and encouraged. equally, the objective of a capital markets union is clearly in the public interest. it would benefit, in various ways, financial stability, access to finance and entrepreneurship. in particular for equity risk capital