9
CHAPTER
CONCLUSION
1
Introduction
In the preceding chapters, we examined the efficacy of the legal and
institutional framework for regulating banks and financial institutions
in Zambia. As we conclude, it is time to stand back to take a more
reasoned look at some policy considerations propagated by the Bank
of Zambia to strengthen the robustness and soundness of the financial
sector framework. Most of these pronouncements are contained in the
Financial Sector Development Plan (FSDP) (2004-2009). As a strategy
for implementing the FSDP (2004-2009), the Zambian government has
issued the following policy statement:
The FSDP which was approved by Cabinet in June 2004 is both a vision
statement and a master plan by the government of Zambia for the
development of the entire financial system. It is aimed at achieving a
financial system that is sound, stable, and market-based, that would
support efficient resource mobilisation necessary for economic
diversification and sustainable growth. In order to effectively and
efficiently coordinate the implementation of the FSDP on a consultative
basis, an implementation structure was established and this comprises
the FSDP Steering Committee (FSDPSC) and the FSDP Implementation
Committee (FSDPIC). The FSDPSC is domiciled at the Ministry of Finance
and National Planning (MoFNP) and provides overall direction and advice
on the implementation of the FSDP recommendations on a prioritised
basis. The FSDPIC is domiciled at the Bank of Zambia (BoZ) and is
responsible for reporting to the FSDPSC on the progress of the FSDP
implementation. The FSDPIC is supported by the FSDP Secretariat and 11
FSDP Working Groups composed of experts who are charged with the
responsibility of finding practical ways of implementing the
recommendations of the FSDP.1238
The current FSDP covers a time period of five years, and its mandate
comes to an end at the close of the year 2009. Also, the FSDP (20041238
Government of the Republic of Zambia Implementation Structure of the Financial
Sector Development Plan (FSDP)(2004-2009), available at http://www.boz.zm/
FSDP/FSDP_Implementation Structure.pdf (accessed 2 May 2009).
295
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2009) covers almost all areas of the financial sector, while our study
is limited to the banking industry. Therefore, in examining the policy
pronouncements of the government through the Bank of Zambia, we
will limit our analysis to those financial sector policies that affect the
banking industry. Elsewhere, I have examined major legal and policy
issues that cross-over between, say, the banking industry and the
securities industry, or between the banking industry and the
insurance or pensions industry.1239 With that, we now turn to examine
the relevant aspects of the FSDP (2004-2009).
2
FSDP (2004-2009) on the regulation of banks
The Bank of Zambia observes that commercial banks — mostly
subsidiaries of foreign banks — are the most dominant and oldest
financial institutions in Zambia.1240 According to the Bank of Zambia,
the dominance of these banks is reflected in the size of their total
assets relative to other types of financial institutions as well as in
their relatively wider role in financial intermediation.1241 Commercial
banks also have a wider outreach than any other financial institution
and, as at 2002, had a total branch network of 140.1242 The Bank of
Zambia postulates further:
Traditionally, the commercial banks are engaged in provision of shortterm finance whilst specialised banks and other non-bank financial
institutions provide long-term finance. Commercial banks offer
traditional retail banking services, including current, savings and term
deposit facilities, short-term and medium lending facilities, trade
finance, money market trading activities, foreign exchange trading
activities, safe deposit facilities and other banking facilities … As at 30
June 2003, there were a total of 14 commercial banks operating in
Zambia. Of these, six were private foreign owned banks, whilst two
were foreign state owned banks. One bank was state-owned and local
entrepreneurs owned the rest … Subsidiaries of foreign banks continue to
take the lead in controlling banking system assets, loans and deposits. As
at 30 June 2003 they controlled 65% of the banking systems’ total assets,
85% of total loans and 64% of total deposits compared to 64%, 82% and
66%, respectively in December 2002. Government-owned banks, on the
other hand, accounted for 26% of the industry’s total assets, 7% of total
loans and 28% of total deposits compared to 26%, 10% and 28%,
respectively in 2002. Local banks continued to lag behind and accounted
for 9% of the industry’s total assets, 8% of total loans and total deposits
compared to the previous year’s 9%, 8% and 6% in December 2002.1243
1239
1240
1241
1242
1243
See generally KK Mwenda The legal administration of financial services in common
law jurisdictions: With special attention to the dual regulation system in Zambia
(2006); and Mwenda (n 5 above).
Bank of Zambia FSDP (n 1123 above) 59.
As above.
As above.
As above.
Conclusion 297
In terms of the legal framework for the banking sector, the Bank
of Zambia observes that the framework primarily consists of the
Companies Act 1994, the Bank of Zambia Act 1996 and the Banking
and Financial Services Act 1994.1244 According to the Bank of Zambia,
banks which operate as public companies are also required to comply
with the provisions of the Securities Act 1993.1245 Under the FSDP
(2004-2009), it has been argued that:
The regulatory framework of the banking industry consists of the BoZ
(Bank of Zambia) as the regulatory agency for both the banking and nonbanking financial institutions sectors. The BoZ’s power to regulate banks
is derived from the BoZ Act and the BFSA (Banking and Financial Services
act 1994). The BFSA gives the BoZ power to supervise banks and nonbank financial institutions. It also gives the BoZ power to prescribe, issue
regulations and guidelines and to enforce them. The power to licence
banks lies with the Registrar of Banks and Financial Institutions ... An
assessment of BoZ’s supervisory practices against best practice revealed
that the framework for banking supervision was generally adequate and
that supervisory skills were of a good standard. Further, most prudential
guidelines including those for capital adequacy, single and related party
exposures, and net open foreign currency exposure are in line with the
Basel requirements.1246
Be that as it may, financial intermediation in Zambia is low.1247
According to the Bank of Zambia, Zambian banks are holding a larger
proportion of their assets in government securities and foreign assets,
in contrast to what is obtaining in other sub-Saharan African
countries.1248 The central bank observes that Zambian banks hold a
significant part of their foreign currency deposits outside the
country.1249 This practice, according to the central bank, reduces the
resources available for lending in Zambia.1250 Further, Zambia has
one of the highest ratios of public sector credit to total commercial
bank assets on the continent.1251 The ratio of private sector credit to
GDP in Zambia at 8% is said to be one of the lowest ratios in subSaharan Africa.1252 The ever-increasing demand for credit to the
government has pushed real lending rates very high and only major
corporations can borrow at the prime rate.1253 The Bank of Zambia
observes that the high real interest rates not only discourage
potential borrowers, but also make the banks wary of credit risk,
since mainly undesirably risky businesses attempt to borrow at high
1244
1245
1246
1247
1248
1249
1250
1251
1252
1253
Bank of Zambia FSDP (n 1123 above) 61.
As above.
Bank of Zambia FSDP (n 1123 above) 62.
As above.
As above.
As above.
As above.
As above.
As above.
As above.
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real rates.1254 Almost all lending is short term, partially as a measure
to control credit risk and partially because sources of finance
(deposits) are largely of a short-term nature.1255
In Zambia, the earnings of Zambian banks are mostly dependent
on foreign exchange trading and interest on government
securities.1256 This, as the central bank observes, reduces the
incentives to expand intermediation for the private sector.1257
Without income on foreign currency operations, most banks would
have been unprofitable over the last four years.1258 Other constraints
and challenges facing the banking industry, as highlighted by the Bank
of Zambia in the FSDP (2004-2009), are as follows:
Zambia has a weak credit culture. It is possible for borrowers to default
on loans without affecting their credit ratings with other financial
institutions. This discourages borrowers from repaying their outstanding
loans in both failed and operating banks … Related to the above, there is
a tendency among borrowers to have their assets (used as collateral)
overvalued in relation to the amounts of the loans they obtain. This
encourages borrowers to default on loan repayments … Zambian banks
have extremely high operating costs. This cost structure makes it
difficult to develop efficient low-cost services that the population can
afford … The treatment of erring directors of failed and operating
financial institutions by some regulatory authorities has been lenient,
with appropriate action not taken in some cases of blatant violation of
laws. In some cases, managers were/are even allowed to take jobs
elsewhere in the financial sector.1259
With regard to the issue of erring directors of failed and operating
financial institutions not being disciplined or penalised by some
regulatory authorities where there is blatant violation of law, I have
examined elsewhere the law on the legal liability of company directors
for fraudulent trading and wrongful trading, including salient and
pertinent aspects of fraud by officers of companies that have gone
into liquidation.1260 In that work, I have highlighted, inter alia, the
glaring absence of a legal framework to license and regulate Zambia’s
insolvency practitioners, giving reasons why such practitioners should
be regulated.1261 Currently, insolvency practitioners in Zambia are
not professionally regulated or licensed, in spite of the growing
evidence suggesting that some of these individuals and firms
purposely, and with wanton disregard of the law, enrich themselves
1254
1255
1256
1257
1258
1259
1260
1261
As above.
As above.
Bank of Zambia FSDP (n 1123 above) 63.
As above.
As above.
As above.
See generally Mwenda (n 1220 above).
As above.
Conclusion 299
from the estate of insolvent companies under their control. That work
argues further that Zambia continues to experience a weak
compliance culture in the area of corporate governance, and that
there are not many mechanisms to deal with the enforcement of
directors’ liability other than to rely on the judicial process.1262 As an
incentive to promote more efficient compliance with best practices in
corporate governance, and to deter misfeasance and misconduct by
company directors, legal rules to disqualify persons convicted of such
offences as wrongful trading and fraudulent trading should be
introduced. Such a development, we contend, could help to bolster
and strengthen Zambia’s legal and institutional framework for
corporate insolvency.1263
With regard to the issue of some managers of failed and operating
financial institutions being allowed to take jobs elsewhere in the
financial sector in spite of the fact that they have not been properly
cleared by the regulator, we have already explored this issue at
length in chapters 3 and 7, respectively. To some degree, Zambia has
experienced some lax compliance with and weak enforcement of laws
and regulations when it comes to the regulation of banks and financial
institutions. According to the Bank of Zambia:
There is a widespread perception that financial crimes are not
prosecuted, whether it is mismanagement and political lending in the
public financial institutions, staff embezzlement, client fraud, willful
default on loans, or mismanagement in banks that lead to failure and
loss of depositors’ funds, or corruption, or money laundering. This
adversely affects the development of the financial sector by reducing
public confidence … Notwithstanding the adequacy of the supervisory
practices, the following deficiencies are noted:
(i)Enforcement of the banking laws is weak and the general recovery
process through the legal mechanism is slow.
(ii)Interference in the execution of the supervisory function due to lack
of central bank independence.
(iii)Minimum capital requirement has been eroded in real terms by
inflation since it was last adjusted in 1996. The minimum capital
requirement in real terms is one of the lowest in Africa.
(iv)The BoZ’s internal procedures for liquidating banks are cumbersome
and lengthy.1264
Following below is an examination of the policies of the Bank of
Zambia on the regulation of non-bank financial institutions, as spelt
out in the FSDP (2004-2009).
1262
1263
1264
As above.
As above.
Bank of Zambia FSDP (n 1123 above) 64.
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FSDP (2004-2009) on the regulation of nonbank financial institutions
As pointed out at the start, we are focusing only on those non-banking
financial institutions that are regulated by the Bank of Zambia.
Although the FSDP (2004-2008) covers, in addition to specialist
lenders and bureaux de change, such contractual savings providers as
insurance companies and pension funds, these types of contractual
savings providers are not regulated by the Bank of Zambia. According
to the Bank of Zambia:
The non-bank financial institutions (NBFIs) play a complementary role to
banks in the financial system. The NBFIs present a window for
transforming the financial sector in Zambia through their role in longterm lending and provision of financial services to the under-served rural
consumers and small businesses often ignored by the traditional banking
channels.1265
The Bank of Zambia observes that its focus is on key elements of a
strategy for restructuring the development finance institutions,
housing finance institutions and the rural banking institutions as well
as developing a regulatory framework for the micro-finance
institutions.1266 Included in this strategy is the regulation of leasing
companies that engage in the provision of asset-based finance.1267
In Zambia, many commercial banks that had branches in periurban and rural areas closed down a number of their branches.1268
According to the Bank of Zambia, commercial banks still maintaining
rural branches do not cater for the financial needs of most of the
people in rural areas owing to high bank charges and minimum
amounts required for opening savings accounts.1269 Further, the
majority of Zambians are not able to meet the collateral
requirements for the credit facilities. This has created a gap in the
provision of financial services to low-income households, especially in
the rural areas.1270 As such, micro finance institutions (MFIs) have
risen to fill the gap in the provision of financial services. MFIs offer
financial services, such as, small loans and savings facilities in the
peri-urban and rural areas.1271 Although expansion is much slower in
rural areas, growth, according to the Bank of Zambia, is evident along
the line of rail and the peri-urban areas of the country.1272 The
1265
1266
1267
1268
1269
1270
1271
1272
Bank of Zambia
Bank of Zambia
As above.
As above.
As above.
Bank of Zambia
Bank of Zambia
As above.
FSDP (n 1123 above) Executive Summary vii-viii.
FSDP (n 1123 above) Executive Summary viii.
FSDP (n 1123 above) Executive Summary viii-ix.
FSDP (n 1123 above) Executive Summary ix.
Conclusion 301
provision of financial services in the rural areas has been slow due to
unsatisfactory supportive infrastructure and absence of an
appropriate regulatory and supervisory framework.1273 The Bank of
Zambia concludes that key recommendations for the specialist
lenders and bureaux de change include:1274
(i)repealing the Development Bank of Zambia (DBZ) Act, the National
Savings and Credit (NSCB) Act and the Building Societies (BSA) Act;
(ii)restructuring or closing insolvent non-bank financial institutions;
(iii)incorporating development finance institutions (DFIs), housing
finance institutions (HFIs) rural banks and micro-finance institutions
(MFIs) under the Companies Act;
(iv)establishing a legislative framework to provide for effective
regulation and supervision of DFIs, HFIs, rural banks and MFIs;
(v)reviewing value added tax (VAT) on lease finance charges in order to
stimulate growth of the leasing sector; and (vi) reviewing the 25%
shareholding limit.
That said, in both cases of regulating banks and non-bank financial
institutions, the FSDP (2004-2009) hardly talks about possibilities of
decriminalising some regulatory offences while strengthening the
regime of civil sanctions. In the case of the United Kingdom, Singh
observes, however:
Succeeding in proving criminal wrongdoing is no simple task, and
particularly difficult in the area of complex fraud. Another major
concern is the infrequent use of criminal sanctions to punish severe
regulatory wrongs. A crucial factor here is whether the culprit is a
company or an individual, giving rise to problems associated with
establishing the mental element necessary to satisfy a criminal
conviction. The growth in the use of civil sanctions is based on a
systematic process of decriminalising regulatory offences, which has
curtailed the use of criminal sanctions for all but the most serious
offences. Civil sanctions come in various forms: compensation,
injunctions, restitution, asset forfeiture or civil fines.1275
1273
1274
1275
As above.
As above.
See Singh (n 1043 above) 118-119.
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