BANK of ZAMBIA BANK of ZAMBIA FINANCIAL ACCESS AND SUSTAINABILITY OF FINANCIAL SERVICES IN ZAMBIA Paper Presented By the Deputy Governor – Operations, Bank of Zambia Dr. Denny H Kalyalya At The Zambia Institute of Chartered Accountants Annual Business Conference August 7-8, 2008 Livingstone

2 OUTLINE INTRODUCTION INTRODUCTION FINANCIAL SECTOR IN ZAMBIA FINANCIAL SECTOR IN ZAMBIA ACCESS TO FINANCIAL SERVICES ACCESS TO FINANCIAL SERVICES SUSTAINABILITY OF FINANCIAL SERVICES SUSTAINABILITY OF FINANCIAL SERVICES CONCLUSION CONCLUSION

3 INTRODUCTION The financial sector plays a critical role in the mobilization of finance and stimulation of economic growth; The financial sector plays a critical role in the mobilization of finance and stimulation of economic growth; Attainment and maintenance of high rates of economic growth requires an efficient and broad- based financial sector; Attainment and maintenance of high rates of economic growth requires an efficient and broad- based financial sector; Banks and NBFIs enable efficient allocation of savings and investment; and Banks and NBFIs enable efficient allocation of savings and investment; and Enable financial transactions to take place at minimum cost. Enable financial transactions to take place at minimum cost.

4 FINANCIAL SECTOR IN ZAMBIA The financial sector in Zambia comprises banks and non-bank financial institutions (NBFIs); The financial sector in Zambia comprises banks and non-bank financial institutions (NBFIs); These are regulated and supervised by three agencies, namely, the BoZ, PIA, and SEC). These are regulated and supervised by three agencies, namely, the BoZ, PIA, and SEC). Presentation will focus on fin sector under the BoZ. Presentation will focus on fin sector under the BoZ. The mission statement of the Bank of Zambia is to “formulate and implement monetary and supervisory policies that achieve and maintain price stability and promote financial system stability in Zambia.” The mission statement of the Bank of Zambia is to “formulate and implement monetary and supervisory policies that achieve and maintain price stability and promote financial system stability in Zambia.”

5 FINANCIAL SECTOR IN ZAMBIA In line with this mission statement, the BoZ is responsible for regulating and supervising banks and the following types of NBFIs: In line with this mission statement, the BoZ is responsible for regulating and supervising banks and the following types of NBFIs: –Leasing and finance companies; –Housing financial institutions (building societies); –Savings and credit institutions; –Development finance institutions; –Microfinance institutions; and –Bureaux de change. As at June 30, 2008 there were 14 commercial banks and 71 NBFIs. As at June 30, 2008 there were 14 commercial banks and 71 NBFIs. Currently, commercial banks dominate Zambia’s financial system. Currently, commercial banks dominate Zambia’s financial system.

6 FINANCIAL SECTOR IN ZAMBIA There is a common understanding that financial exclusion has negative economic and social effects on society. There is a common understanding that financial exclusion has negative economic and social effects on society. In the recent past, competition and the tightening of regulation has led to the growth of the fin. sector. In the recent past, competition and the tightening of regulation has led to the growth of the fin. sector. However, like in many other developing countries the financial sector in Zambia still faces a number of challenges. However, like in many other developing countries the financial sector in Zambia still faces a number of challenges. FSAP Report of 2002 highlighted a number of these including limited access to financial services. FSAP Report of 2002 highlighted a number of these including limited access to financial services.

7 FINANCIAL SECTOR IN ZAMBIA In light of FSAP findings, GRZ developed and launched the FSDP in In light of FSAP findings, GRZ developed and launched the FSDP in The FSDP is a comprehensive five year strategy to build and strengthen the financial sector. The FSDP is a comprehensive five year strategy to build and strengthen the financial sector. In addition, and in furtherance of the objectives of the FSDP, the BoZ Strategic Plan for 2008 – 2011 has made financial inclusion as one of its key strategic objectives. In addition, and in furtherance of the objectives of the FSDP, the BoZ Strategic Plan for 2008 – 2011 has made financial inclusion as one of its key strategic objectives.

8 ACCESS TO FINANCIAL SERVICES Two surveys under the FSDP completed: Two surveys under the FSDP completed: –The FinScope™ Survey of 2005 – Demand side; and –The FinScope™ Survey of 2007 – Supply side. These have augmented the earlier findings of the FSAP on developmental challenges for the financial sector in Zambia. These have augmented the earlier findings of the FSAP on developmental challenges for the financial sector in Zambia.

9 ACCESS TO FINANCIAL SERVICES Key findings of the 2005 FinScope™ Survey include: Key findings of the 2005 FinScope™ Survey include: –Only 34% of the population were “financially served”, i.e., whilst 66% had no access; –The barriers to accessing financial services include cost, distance, time and transport; and –MFIs although used by only 5% of the adult population play an important role in increasing levels of access to financial services;

10 ACCESS TO FINANCIAL SERVICES The majority with no access to fin. services are the rural poor and women. The majority with no access to fin. services are the rural poor and women. These are categories for whom support has been prioritized in the FNDP and under CEA. These are categories for whom support has been prioritized in the FNDP and under CEA. Thus a platform to address above challenges already exist. Thus a platform to address above challenges already exist.

11 ACCESS TO FINANCIAL SERVICES During the 1 st half of 2007, the Supply Side Study was undertaken. The Study revealed opportunities as well as challenges: During the 1 st half of 2007, the Supply Side Study was undertaken. The Study revealed opportunities as well as challenges: –Macroeconomic policy and financial sector regulation no longer viewed as a problem; –The enabling environment to expand access exist (i.e. developments in the payment system and the greater sharing of information); –Key constraint related to the focus and strategies of FSPs with limited geographical coverage at a high cost; and –NBFIs have not offered effective competition.

12 Comparison of Net Interest Margin and Profitability MeasureZambiaMauritius South Africa Namibia RoA3.2%1.7%1.4%1.5% RoE37.2%21.2%22.0%15.7% NIM13.3%3.0%2.7%5.0% ER64.0%41.2%60.1%66.3%

13 ACCESS TO FINANCIAL SERVICES Banks and NBFIs are re-positioning themselves. Banks and NBFIs are re-positioning themselves. The number of MFIs has increased overtime e.g. MFIs licensed by BoZ, increased to 15 as at June 30, 2008 from 3 in The number of MFIs has increased overtime e.g. MFIs licensed by BoZ, increased to 15 as at June 30, 2008 from 3 in Change due to the strong fiscal position and the drop in annual inflation to single digit levels. Change due to the strong fiscal position and the drop in annual inflation to single digit levels. Domestic credit to the private sector as a percentage of GDP rose to 43.0% at end-2007 from 18.7% at the end Domestic credit to the private sector as a percentage of GDP rose to 43.0% at end-2007 from 18.7% at the end These statistics indicate improving access to financial services. These statistics indicate improving access to financial services.

14 SUSTAINABILITY OF FINANCIAL SERVICES Regulatory Framework: Regulatory Framework: –Ratio Analysis based on On-site inspections and off-site surveillance; –Capital Adequacy Regulations of 1995; –2005 amendments to the BSA, DBZ, NSCBA and the BFSA, to enhance the supervisory oversight of the BoZ; and –Bank of Zambia Act is also being reviewed to enhance operational independence of BoZ.

15 Key Ratios Capital Adequacy Tier Total Regulatory Capital Total Regulatory Capital Asset Quality NPLs/Total Loans NPLs/Total Loans Earnings ROA

16 SUSTAINABILITY OF FINANCIAL SERVICES –MF Regulations, 2006 provide set standards for the industry. –PPML Act 2001 criminalized ML and provides for the forfeiture of property by offenders. –BoZ AML Directives complement PPML. –BoZ has also developed a supervisory framework aimed at ensuring banks and NBFIs are complying with the AML legislation and directives. –All these are aimed at ensuring that the potential threats posed by money launderers are limited.

17 SUSTAINABILITY OF FINANCIAL SERVICES The microfinance regulations were issued in 2006 to set standards for the MFIs so that they could operate and grow in a safe, sound and sustainable manner. The microfinance regulations were issued in 2006 to set standards for the MFIs so that they could operate and grow in a safe, sound and sustainable manner. The Capital Adequacy Regulations of 1995 were amended in 2006 to provide for a tiered capital structure to encourage entrants into the financial sector. The Capital Adequacy Regulations of 1995 were amended in 2006 to provide for a tiered capital structure to encourage entrants into the financial sector.

18 Revised Minimum Regulatory Capital CATEGORY Amount (K) Banks 12,000 m Deposit-taking Leasing Companies 1,500 m Non-deposit taking Leasing Co. 500 m Building Societies 2,000 m Savings and Credit Institutions 2,000 m Development Finance Institutions 7,500 m Deposit Taking MFIs 250 m Non-deposit taking MFIs 25 m Bureaux de Change 40 m

19 SUSTAINABILITY OF FINANCIAL SERVICES Establishment of a Credit Reference Bureau Establishment of a Credit Reference Bureau –To improve the credit culture in the country –Credit Data (Privacy) Code and the Credit Reference Services (Licensing) Guidelines were issued in January –Credit Reference Bureau Africa Limited licensed in June The main task of a CRB is to provide lenders with information upon which they can base their lending decision. The main task of a CRB is to provide lenders with information upon which they can base their lending decision. CRB promotes responsible use of credit and helps lenders in identifying good payers from defaulters. CRB promotes responsible use of credit and helps lenders in identifying good payers from defaulters.

20 SUSTAINABILITY OF FINANCIAL SERVICES Zambian banking industry has one of the highest operating costs when compared to other countries in Sub-Saharan Africa. Zambian banking industry has one of the highest operating costs when compared to other countries in Sub-Saharan Africa. The challenge is to develop ways of providing banking services at affordable costs. The challenge is to develop ways of providing banking services at affordable costs. BoZ is addressing this challenge through the following: BoZ is addressing this challenge through the following: Consumer awareness - quarterly publication of bank charges; and Consumer awareness - quarterly publication of bank charges; and the Cost of Borrowing Regulations of the Cost of Borrowing Regulations of 1995.

21 SUSTAINABILITY OF FINANCIAL SERVICES Corporate Governance Corporate Governance –Under the Companies Act, directors are liable for breaches of fiduciary duties and obligations. –The BFSA complements the provisions of the Companies Act by placing more duties and obligations on directors of banks and financial institutions. –BoZ issued Corporate Governance Guidelines in November 2006.

22 SUSTAINABILITY OF FINANCIAL SERVICES Sovereign Credit Rating for Zambia Sovereign Credit Rating for Zambia –The process of obtaining a credit rating for Zambia has reached an advance stage. –Sovereign credit rate is expected to reduce the cost of credit and increase access to finance. –With an increase in access particularly to rural areas, the number of excluded people is likely to decline from the levels of 66% recorded in 2005.

23 CONCLUSION Encouraging signs in the range and reach of financial services. Encouraging signs in the range and reach of financial services. Still a lot remains to be done. Challenges ahead including the following: Still a lot remains to be done. Challenges ahead including the following: –Developments in the external sector and the rise in food prices threaten macroeconomic stability. –fiscal prudence and coordination - strengthening and staying the course. –The provision of infrastructure, particularly in rural areas. –Innovation - the need to invest in new technology and human resources. –Consumer awareness and responsible lending. Strengthening of financial Sector is necessary to further economic development. Strengthening of financial Sector is necessary to further economic development. FSDP provides a framework. FSDP provides a framework.

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