The University of Zambia
in association with
The Zambia Centre
for Accountancy Studies
BACHELOR OF ARTS IN FINANCIAL SERVICES
BFS 142: INTRODUCTION TO FINANCIAL MARKETS
MODULE
FIRST YEAR
SEMESTER 2
Author: Simataa Simataa –FZIBFS
1
Table of Contents
COPYRIGHT ..................................................................................................................... 4
ALL RIGHTS RESERVED .............................................................................................. 4
DISCLAIMER .................................................................................................................... 0
ACKNOWLEDGEMENTS ............................................................................................... 1
MODULE – OVERVIEW ................................................................................................. 2
Module introduction .................................................................................................. ….2
Module structure ................................................................................................... …….2
Module aim ...................................................................................................................... 2
Module objectives ........................................................................................................... 3
Module assessment details ............................................................................................. 3
Module method of study................................................................................................. 4
Need help with the Module? .......................................................................................... 4
Module prescribed reading .......................................................................................... 54
Module recommended reading ...................................................................................... 5
PART I – INTRODUCTION TO FINANCIAL SYSTEMS .......................................... 6
Unit 1
Nature and Role of a Financial System .......................................................... 7
Unit 2
The Structure of the Financial System ............................................................. 17
Unit 3
Financial System Reform in Zambia ............................................................... 22
PART I –Summary ............................................................................................................. 28
PART II – FINANCIAL MARKETS ............................................................................ 3029
Unit 4
Introduction to Money Markets ................................................................... 3332
Unit 5
Call Money Markets .................................................................................... 3735
Unit 6
Commercial paper ........................................................................................ 4038
Unit 7
Certificate of deposit .................................................................................... 4240
Unit 8
Treasury Bills ............................................................................................... 4442
Unit 9
REPO [Repurchase Order] ........................................................................... 4846
Unit 10
Primary Markets........................................................................................... 5048
Unit 11
Secondary Markets....................................................................................... 5452
Unit 12
Dematerialization ......................................................................................... 6058
Unit 13
Lusaka Stock Exchange ............................................................................... 6361
Unit 14
Bond Market ................................................................................................ 6765
PART II –Summary ....................................................................................................... 7068
PART III - FINANCIAL INSTITUTIONS ................................................................... 7169
Unit 15
Bank of Zambia (BOZ) ................................................................................ 7270
Unit 16
Securities Exchange Commission [SEC] ..................................................... 7775
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Unit 17
Pensions and Insurance [PIA] ...................................................................... 8280
Unit 18
Patents and Companies Registry Agency [PACRA] ................................... 8684
Unit 19
Competition and Consumer Protection Commission [CCPC] ..................... 8886
Unit 20
Financial Intelligence Centre [FIC] ............................................................. 9189
Unit 21
Commercial Banking System in Zambia ..................................................... 9694
Unit 22
Non-banking Financial Services ................................................................ 10199
Unit 23
Development Bank of Zambia ................................................................. 104102
Unit 24
Citizens Economic Empowerment Commission (CEEC)........................ 107105
Unit 25
Insurance .................................................................................................. 113111
Unit 26
Pensions Institutions ................................................................................ 121118
PART III –Summary .................................................................................................. 124121
PART IV - OTHER FINANCIAL SERVICES ......................................................... 125122
Unit 27
Venture Capital [VC] ............................................................................... 126123
Unit 28
Credit Rating ............................................................................................ 131127
Unit 29
Merchant Banking .................................................................................... 135131
Unit 30
Mutual Funds ........................................................................................... 138134
Unit 31
Securitization ........................................................................................... 141137
Unit 32
Internet Banking....................................................................................... 144140
Unit 33
Leasing ..................................................................................................... 148143
Unit 34
Hire Purchase ........................................................................................... 152147
Unit 35
Factoring & Forfaiting ............................................................................. 154149
PART IV –Summary .................................................................................................. 159152
REFERENCES
3
COPYRIGHT
ALL RIGHTS RESERVED
No part of this publication may be reproduced, stored in a retrieval system, or transmitted
in any form or by any means, electronic or mechanical, including photocopying, recording
or otherwise without the permission of the Zambia Centre for Accountancy Studies.
4
DISCLAIMER
Every effort and care to avoid errors and omissions and provide information has been taken. We believe
the information provide in this module is accurate, and reliable but in spite of this, errors might have crept
in inadvertently. We shall be obliged if mistake, error or discrepancy, if any, is brought to our notice for
carrying out correction in the next edition.
This module is circulated and sold on the condition and understanding that the information given herein
is merely for guidance and reference. The author, editor, publisher and seller do not owe any responsibility
for any damage or loss to any person, who may or may not be a purchaser of this module, on account of
any action taken on the basis of this publication. The readers, in order to avoid doubts, may cross check
the facts, Law and contents in the module with original sources such as Bank of Zambia guidelines,
Bankers Association of Zambia’s Code of Banking Practice, Instructions of Pensions & Insurance Agency
and Securities Exchange Commission etc.
0
ACKNOWLEDGEMENTS
I am profoundly indebted to the Zambia Centre of Accountancy – my part time employer – for the
opportunity of lecturing exposure and experience for the last eight years and the predominant source of
encouragement in my professional endeavour.
I am thankful to Dr Egret Lengwe, for having faith in me that I could write this module and having been
providing me with a flow of inspiration.
I am also greatly indebted to Mr. Sidney Kawimbe for having assisted me abundantly in editing this
module. He possesses rich Banking and Finance knowledge besides having sharp and innovative credit
assessment mind. Finally I would like to express my appreciation to Bornwell Mwewa and all my friends
who have always encouraged me.
1
MODULE – OVERVIEW
Module introduction
The Financial Services degree programme is very demanding of students’
ability to master the wide range of financial, commercial and legal knowledge
required for one to work in the financial services sector. A major motivation
for writing this module has been to fill the gap by providing a basic knowledge
of financial markets, institutions and services.
The framework through which dealers conduct their activities and
functions in the financial markets is considered in detail. This module gives
valuable grounding in the management of financial risks involved in the
financial markets. Thus the Reader with a desire to have a general knowledge
of financial markets institutions and services will find his or her wants
satisfied by this module but, primarily, it is intended for the financial services
student following a Bachelor’s Degree in Financial Services (BAFS)
Module structure
The module is organized into four [4] parts and each part contains a number
of units. Each Part has a general introduction, an activity and a concluding
summary.
Part 1 Introduction to Financial Systems
Part 2 Financial Markets
Part 3 Financial Institutions
Part 4 Other Financial Services
Module aim
To provide a comprehensive knowledge and understanding of the
development, operation and organization of the Zambian financial
environment.
2
Module objectives
By the end of this course, students should be able to:
1)
Understand the history and current status of financial systems
2)
Explain the role and importance of the Regulatory Bodies - Bank of
Zambia, Securities Exchange Commission and Pensions and Insurance
Agency and others.
3)
Describe the institutions and instruments
4)
Give detailed account of the Primary and Secondary Markets, their
history, organizational role, market participants and trading methods.
5)
Understand the financial services that are offered in Zambia and
abroad
Module assessment details
In all courses listed (except for the dissertation) the distribution of marks
shall be as follows:
Continuous assessment
50%
2 test s of equal weight
30%
2 assignments of equal weight
20%
Final examination
50%
Total
100%
Module time frame
Your preparation should be minimum 5-6 months and you must not wait for the
few weeks or days before the examination since that creates a situation of panic,
uncertainty and leaves little time for proper preparation. Under each Unit a
proposed time allocation has been suggested.
3
Module method of study
You are advised to work through each Unit of the module in strict sequence.
Read quickly through the notes to get a broad picture of the contents and then,
on reading a second time, do so in more detail, making sure that you understand
each paragraph before passing on to the next. You should then read the notes a
third time and memories the essential facts.
Progress tests are tests meant for self-examination. They are placed at the
end of each unit and should not be attempted until the unit has been thoroughly
learnt. Try to answer each question in full and then check your answer with the
text [by means of the paragraph number reference printed after each question].
Make frequent use of these tests, as they are the best way of memorizing the
subject.
Give yourself a chance to pass your examination by ensuring that your
preparation covers the whole syllabus and includes practice in answering
questions. Remember also that ”Good examination technique may mean the
difference between a pass a fail.”
Need help with the Module?
If you need help on the module, please use the following contacts:
Course Tutor
Email: information@zcas.edu.zm
Zambia Centre for Accountancy Studies (ZCAS)
Dedan Kimathi Road,
P O Box 35243, Lusaka, Zambia
Tel: +260 1 232093/5, Fax: +260 1 222542
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Module prescribed reading
1.
Gupta, N. K. and Chopra, M. (2010) Financial Markets,
Institutions & Services, 2nd edition. Ane Books Pvt Ltd: City
required
2.
Singh, P. (2009) Dynamics of Indian Financial System. Ane Books
Pvt Ltd: City required
3.
Anthony Saunders & Marcia Million Cornett (2012) Financial
Markets and Institutions : Mc Graw Hill: Delhi
Module recommended reading
1.
Ministry of Finance and National Planning (2004-2009) Financial
Sector Development Plan (FSDP) Report.
2.
Indian Institute of Banking (2007) Laws of Cooperative Banking.
1st Edition. Macmillan.
3.
Indian Institute of Banking (2007) Securities Market and Products
2nd Edition , Taxman
4.
Webster Twaambo Jr (2012) Basics of Insurance – the Zambian
Experience
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PART I – INTRODUCTION TO FINANCIAL SYSTEMS
Part I Introduction
This part of the module provides an introduction to the nature and role of financial system, covering its
role in an economy and elaboration of its functions. The part also covers the structure of a financial system
which includes an explanation or description of the main components of a financial system. The last unit
under this part gives a snap shot into the financial reforms which have taken place in Zambia
Part I
Aim
The aim of Part 1 is to familiarize students with the financial system, its nature, role and
composition, the reforms it has undergone in Zambia. This section provides the reader with
relevant knowledge of a financial system and should also heighten awareness of contemporary
issues that put the following parts into context.
Part I
Objectives
After studying this Part of the module you will be able to:
1st
Know the nature and role of a financial system in an economy;
2nd
Know and be able to explain the structure of a financial system
3rd
Know and understand the various reforms that have taken place and are envisioned
to take place in the financial sector
Part I
Time required
Spend a minimum of eight [8] days on this Part.
Part I structure
Part I is organized into three [3] units. Each Unit has syllabus requirement, aim, objective, time
required, reflection, introduction content addressing a particular topic, a unit summary and a
progress test. The Units are: Unit 1 Nature and Role of a Financial System, Unit 2The Structure
of the Financial System, and Unit 3Financial System Reform in Zambia
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Unit 1 Nature and Role of a Financial System
Unit 1
Syllabus requirements - What is a financial system; Functions of the Financial
System; definitions of basic financial system concepts?
Unit 1
Aim: - To outline the nature and role of a financial system in an economy.
Unit 1
1st
Objectives - After studying this Unit you will be able to;
Understand the role of a financial system in the economy;
2nd
Understand lenders and borrowers’ different requirements and how the
financial system helps to bridge such difference;
3rd
Understand the importance of the payment system.
Unit 1 Time required - It’s estimated that you should spend two [2] days on this Unit.
Unit 1 Reflection -List the functions of a financial system according to Preeti
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Unit 1 Introduction
1.1
An economy or economic system consists of the production, distribution or trade, and
consumption of limited goods and services by different agents in a given geographical location. In
other words the economic system involves Production, allocation of economic inputs, distribution
of economic outputs, Landlords and land availability, households (earnings and expenditure
consumption of goods and services in an economy), Capitalists, Banks (finance institutions) and
Government.
1.2
In the past, economic activity was theorized to be bounded by natural resources, labor, and capital.
This view ignores the value of technology (automation, accelerator of process, reduction of cost
functions), and innovation (new products, services, processes, new markets, expands markets,
diversification of markets, niche markets, increases revenue functions), especially that which
produces intellectual property.
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1.3
A given economy is the result of a set of processes that involves its culture, values, education,
technological evolution, history, social organization, political structure and legal systems, as well
as its geography, natural resource endowment, and ecology, as main factors. These factors give
context, content, and set the conditions and parameters in which an economy functions.
1.4
A quick overview of an economy will assist in understanding the nature and role of a financial
system as shown in figure 1.1.
Figure 1.1
Imports
HOUSEHOLDS
Savings
Government
Taxation
Spend
World
Financial
GOVERNMENT
Economy
Markets
Goods & services
Government
Taxation
Spend
FIRMS
Exports
Capital Investment
1.5
A command-based economy is where a central political agent commands what is produced and
how it is sold and distributed. Shortages are common problems with a command-based economy,
as there is no mechanism to manage the information (prices) about the systems natural supply and
demand dynamics.
8
1.6
A market-based economy is where goods and services are produced without obstruction or
interference, and exchanged according to demand and supply between participants (economic
agents) by barter or a medium of exchange with a credit or debit value accepted within the network,
such as a unit of currency and at some free market or market clearing price. Capital and labor can
move freely to any area of emerging shortage, signaled by rising price, and thus dynamically and
automatically relieve any such threat. Market based economies require transparency on
information, such as true prices, to work, and may include various kinds of immaterial production,
such as affective labor that describes work carried out that is intended to produce or modify
emotional experiences in people, but does not have a tangible, physical product as a result.
1.7
So an economy is basically divided into four sectors: (1), Households, (2) Firms, (3) Government
and (4) External sector. The combination and interaction [transactions] of these various sectors
provide the economic structure that defines the social community called the economic system.
Transactions occur when two economic agents or parties agree to the value or price of the
transacted good or service, commonly expressed in a certain currency. The economic agents can
be individuals, businesses, organizations, or governments.
1.8
These economic agents perform various activities due to which they may be facing surplus of
deficit situations. N.K Gupta and M Chopra (2006) writing in Financial Markets, Institutions and
Services say that:

Firms or industry sector may be able to generate funds from their activities and use them
for various investment decisions like expansion, diversification, modernization,
replacement etc.

Government needs funds for financing public expenditure. It requires them mainly for
developmental purposes and as the expenditure involved is quite high, it generally is in
deficit budgetary situations;

Individuals or households require funds for meeting basic necessities as well as for
expenditure on luxury items. They however may have been surplus funds in the form of
savings
Gupta and Chopra conclude that at any point of time some units may have excess funds while some may
be in deficit and some may need extra funds to grow', Idle money does not yield any value while
shortage may hinder growth and development Surplus funds may be coming from household sector
while shortage may be faced by government industry. Thus, there should be some mechanism to
9
ensure to ensure that savings move
household to government and corporate,
which would ensure proper utilization of
Intermediation – The word ‘intermediary’ means
someone who carries messages between people who
are unwilling or unable to meet personally’
(Cambridge International Dictionary of England).
those and enhance their value.
1.9
There exists of surplus and deficit units in an economy gives rise to the need of a system that shall
act as a channel through which funds move from surplus units to deficit ones.
1.10
The financial system provides intermediary in the economic system as illustrated in figure 1.2
When financial intermediaries facilitate transfer of funds between savers and borrowers this is
called indirect financing.
Fig 1.2
1.11
When borrowers obtain funds directly from lenders in financial markets this is called direct
financing as shown in figure 1.2
1.12
In the real world both indirect and direct
financing exist together as illustrated in
figure 1.3:
1.13
Direct financing however has two barriers:

The difficulty and expense of matching the
Fig 1.3
complex needs of deficit units and surplus
units;

The incompatibility of the financial needs
of deficit units and surplus units.
10
1.14
Lenders are looking for safety and liquidity.
Borrowers may find it difficult to promise either.
Barbara Casu, Claudia Girardone and Philip
Molyneux in their book “Introduction to Banking”
summaries these opposite needs of surplus and
deficit units as:
Lender’s [surplus units] requirements:

The minimization of risk. This includes the
minimization of the risk of default [the
borrower not meeting its repayment
obligations] and the risk of the assets
dropping in value.

The minimization of costs; Lenders aim to
minimize their costs

Liquidity. Lenders value the ease of
converting a financial claim into cash
Financial claim – is a claim to the payment
of a future sum of money and/or a periodic
payment of money. More generally, a
financial claim carries an obligation on
the issuer to pay interest and to redeem the
claim at a stated value in one of three
ways:
a. On demand
b. After giving a stated period of notice
c. On a definite date or within a range of
debt.
Financial claims can take the form of any
financial asset, such as money, bank
deposit accounts, bonds, shares, insurance
policies etc.
The lender of funds holds the borrower’s
financial claim and is said to hold a
financial asset. The issuer of the claim
(borrower) is said to have a financial
liability.
without loss of capital value; therefore
they prefer holding assets that are more
easily converted into cash. One reason for
this is the lack of knowledge of future events, which results in lenders preferring shortterm lending to long term.
Borrower’s [deficit units] requirements:

Funds at a particular specified date

Funds for a specific period of time; preferably long term [think of the case without loss of
company borrowing to purchase capital equipment which will only achieve positive returns
in the longer run or of an individual borrowing to purchase a house]

1.15
Funds at the lowest price
The Financial System through its various components bridge the gap between the needs of
lenders and borrowers by performing a transformation function: Barbara Casu, Claudia
Girardone and Philip Molyneux (2010) explain this ‘transformation’ process under three headers:
11
i.
Size transformation; Generally, savers/depositors are willing to lend smaller amounts of
money than the amounts required by borrowers. For example, think about the difference
between your savings account and the money you would need to buy a house! Banks collect
funds from savers in the form of small-size deposits and repackage them into larger size
loans.
ii.
Banks perform this size transformation function exploiting economies of scale associated
with the lending/borrowing function, because they have access to a larger number of
depositors than any individual borrower
iii.
Maturity transformation; Banks transform funds lent for a short period of time into
medium-and long-term loans. For example, they convert demand deposits (i.e. funds
deposited that can be withdrawn on demand) into 25-year residential mortgages. Banks’
liabilities (i.e., the funds collected from savers) are mainly repayable on demand or at
relatively short notice. On the other hand, banks’ assets (funds lent to borrowers) are
normally repayable in the medium to long term. Banks are said to be ‘borrowing short and
lending long’ and in this process they are said to ‘mismatch’ their assets and liabilities.
This mismatch can create problems in terms of liquidity risk, which is the risk of not
having enough liquid funds to meet one’s liabilities.
iv.
Risk transformation-Individual borrowers carry a risk of default (known as credit risk)
that is the risk that they might not be able to repay the amount of money they borrowed.
Savers, on the other hand, wish to minimize risk and prefer their money to be safe. Banks
are able to minimize the risk of individual loans by diversifying their investments, pooling
risks, screening and monitoring borrowers and holding capital and reserves as a buffer for
unexpected losses.
1.16
Contributing to the function of the financial system Preeti Singh writing in his book “Dynamics of
Indian Financial System” says they can be summarized into three main functions of savings,
transfer process and investments.

Savings: The main function of financial system is to mobilize savings in a country for the
development process to take place. Low level of savings hinders development as funds are
important for making development successful.

Transfer process: The efficiency in which finance is converted is through a transfer
process into investments which will begin an earnings for the economy.
12

Investment: These are resources used for production to take place. All types of securities
and bonds which earn interest or dividends and help in the activity of development are
called investments.
1.17
Preeti (2010) further writes that the functions of the financial system can be elaborated with a
detailed description of the three main functions of savings, transfer process and investments: The
financial system performs the following functions.
i.
Efficient Transformation of Funds - One of the most important functions of the financial
system is to make the transformation of savings into investments in an efficient manner.
There are five important parameters of achieving efficiency which the financial sector must
achieve. These are:
a.
Funds can be allocated efficiently or inefficiently. When investments are made in
productive assets and their marginal efficiency is high after adjusting the risk
difference, then funds have been allocated efficiently in the economy. The financial
sector aims to make the process of transformation of funds in the most productive
and profitable manner.
b.
The market is efficient when information is wide-spread. Perfect capital markets
are those where equal information is provided to all the investors and there are less
chances of making a high gain by an individual because the prices of securities
reflect all known information.
c.
The market must be efficient in valuing its securities. This possibility arises when
the intrinsic value of an asset is the present value of the future stream of its cash
flows in competitive markets.
d.
Market is efficient when risk is reduced to a minimum. This can be ensured through
hedging against future contingencies.
e.
Funds should be channelized by minimum expenditure in administrative costs and
maximum returns for providing efficiency. Hence it is the function of the financial
sector to bring about maximum efficiency through financial market, attractive
instruments and good services to provide efficiency in mobilizing savings and
making productive investments.
ii.
Creating Innovation Schemes for savings and investment - The financial sector has the
role of creating innovative schemes and features to make financial instruments attractive
13
to investors. They should also take steps to create savings in tax, reduce costs of transaction,
costs of intermediaries and agency costs.
iii.
Innovations should help in streamlining administrative procedures and bringing about
technological changes and suggestions to help the economy to grow.
iv.
Globalization - The financial sector has the function of extending its services not only in
its own country but also in international arenas. Extending beyond the home countries
boundaries integrates business in different markets. This has the advantage of convergence
of interest rates in different markets. Financial instruments become varied and greater
choices can be offered to investors. New foreign financial instruments can be used in the
domestic front and the country can also float its securities outside its own country. The
advantage of certain foreign bonds and global depository receipts can be utilised. Different
currencies can be interlinked with each other. Hence the financial sector should perform
the role of internationalizing itself.
v.
Diversification - The financial sector has the important function of diversifying the savings
of the people by purchasing different kinds of securities to provide the maximum benefit
to an investor. This will achieve the purpose of minimizing risk in the portfolio of an
investor and he will benefit in his return from the investments.
vi.
Financial Engineering -Financial innovation can be performed only if the financial sector
develops it by creating value to the instruments. By engineering the instruments it can
skillfully make changes and develop new techniques for hedging, speculation and
arbitrage.
vii.
Reforms - The financial sector has the functions of making reforms to add value to savings
and investments. New regulations and guidelines and discipline is important to function.
The financial sector has to constantly make reforms like regulating certain sectors or by
liberalizing them. It has to make reforms for streamlining and bringing about good
administrative and operational practices.
1.18
Preeti (year) finally summarizes the functions of the financial system as:

Creating Efficiency in transformation of funds from savings into investments by
information efficiency, allocation efficiency, valuation of securities, and
operational efficiency.
14

Planning Innovative Schemes for savings and investment for creating an
environment of sound and speedy transactions.

Globalizing for making gains by integrating with markets, institutions, instruments
and services of other countries.

Diversifying the funds into different investment outlets for maximum returns and
minimum risk.

To engineer new and innovative instruments to add value to them for providing
choices to the savers and investors.

To make reforms for providing value to financial instruments for creating
conference amongst the investors in the working of the financial system.
1.19
Other functions according to Nishu Sharma (2006) in reply to the question - what are functions
of financial system? on the website Answers.Com include:
i.
Saving function: Public saving find their way into the hands of those in production through
the financial system. Financial claims are issued in the money and capital markets which
promise future income flows. The funds with the producers result in production of goods
and services thereby increasing society living standards.
ii.
Liquidity function: The financial markets provide the investor with the opportunity to
liquidate investments like stocks bonds debentures whenever they need the fund.
iii.
Payment function: The financial system offers a very convenient mode for payment of
goods and services. Cheque system, credit card system etc are the easiest methods of
payments. The cost and time of transactions are drastically reduced.
iv.
Risk function: The financial markets provide protection against life, health and income
risks. These are accomplished through the sale of life and health insurance and property
insurance policies. The financial markets provide immense opportunities for the investor
to hedge himself against or reduce the possible risks involved in various investments.
v.
Policy function: The government intervenes in the financial system to influence
macroeconomic variables like interest rates or inflation so if country needs more money
government would cut rate of interest through various financial instruments and if inflation
is high and too much money is there in the system then government would increase rate of
interest
15
Unit 1 Lesson Summary
This Unit has outlined the nature and role of the financial system. The financial system plays a vital role
in the economy channelling funds from units in surplus to units in deficit. The financial system reconciles
the different needs of deficit and surplus units by transforming small-size, low-risk and highly liquid
deposits into loans which are of larger size, higher risk and illiquid. The Financial System also performs
a number of other functions like saving, liquidity, payment, risk and policy
Unit 1 Progress Test
1.
What is an economy?
Hint
1.2
2.
What are the main factors in an economy?
1.4
3.
Define a command-based economy
1.5
4.
What is a market-based economy?
1.6
5.
List the four basic sectors of an economy
1.7
6.
Define : Intermediation
7.
Distinguish between Direct and Indirect Financing
1.10-11
8.
What is a financial claim?
1.14
9.
List three transformation functions of a financial system
10.
Describe five functions of a financial system
1.10
16
1.15
1.16 -19
Unit 2 The Structure of the Financial System
Unit
Syllabus requirements - What is a financial system; the structure of the financial
system; definitions of basic financial system concepts;
Unit 2
Unit 2
Aim:- To outline the basic structure of a financial system.
Objectives - After studying this Unit you will be able to:
1st
Understand what a financial system consists of;
2nd
Differentiate between the various components of the financial system’
Time required - It’s estimated that you should spend three [3] days on this Unit.
Reflection - Draw a diagram showing the various components of a financial
system
-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------Unit 2 Introduction –
2.1
In finance, the financial system is the system that allows the transfer of money between
Unit 2
Unit 2
savers (and investors) and borrowers.
2.2
Gurusamy (year), writing in “Financial Services and Systems “ has described it as comprising "a
set of complex and closely interconnected financial institutions, markets, instruments, services,
practices, and transactions."[2]
2.3
According to Franklin Allen and Douglas Gale in “Comparing Financial Systems: "Financial
systems are crucial to the allocation of resources in a modern economy. They channel household
savings to the corporate sector and allocate investment funds among firms; they allow inter
temporal smoothing of consumption by households and expenditures by firms; and they enable
households and firms to share risks. These functions are common to the financial systems of most
developed economies. Yet the form of these financial systems varies widely.
2.4
Preeti Singh (2001) writing in his book “Dynamics of Indian Financial System” says”the
Financial system of a country consists of a network of an interconnected system of markets,
institutions and services. This system contributes to the economic development of a country. It
connects the saving surplus and savings deficit institutions and establishes a regular flow of funds
in the capital market of a country. The role of the financial system is to make an efficient allocation
of the savings and investment through the transfer process.
2.4
A financial system can operate on a global, regional or firm specific level.
17
2.5
The Financial System consists of: [1] Financial institutions, [2 Regulators] [3], financial services
[4] financial instruments, and [5] financial markets
Institutions
Instruments
Regulators
Services
2.5.1
Markets
FINANCIAL INSTITUTIONS: - In Zambia financial institutions are further sub divided into
basically three sectors of: Financial Service Providers, Pension and Insurance and Securities
Exchange.
Financial
Service
Providers
Pensions &
Insurance
Authority
Financial Service Provider means a
bank, financial institution or
financial business - BFSA
Security &
Exchange
Commission
The financial service providers consist of the Central bank, Banks and Non-banks. Non-banks are
further subdivided into Financial Institutions and Financial businesses
18
Bank of
Zambia
Banks
Financial
Institutions
Building Societies
Savings & Credit
Institutions
NonBanks
Financial
Businesses i.e.
Leasing Companies,
Bureaus de change,
Microfinance
Institutions, Credit
Reference Bureau,
Development
Finance Institutions
Financial Institution means a
financial institution which
receives deposits from the public
does not include chequing
account and current account
deposits - BFSA
or financial business
Financial Business means a
person that conducts a financial
service business but does not
accept deposits - BFSA
AT the helm of the Financial Service Providers (banking industry) in Zambia is a special institution
known as the central bank - called the Bank of Zambia.
2.5.2
REGULATORS: There are three major principal supervisors namely Bank of Zambia [BOZ],
Pensions and Insurance Authority [PIA] and the Securities and Exchange Commission [SEC}.
Others include Patents and Companies Agency [PACRA] and Competition & Consumer
Protection. BOZ, PIZ and SEC administer, legislate, supervise, mentor, control and discipline the
entire financial system. The Regulators have laid down several policies, procedures and guidelines
which are changed from time to time so as to set the financial system in the right direction in order
to enable it to contribute towards a healthy functioning economy.
2.5.3
FINANCE SERVICES: The Banking and Financial Services ACT [BFSA] provides a
definition of financial services which include:
1.
commercial or consumer financing services
2.
credit reference services
3.
deposit brokering
4.
factoring, with or without recourse
19
5.
financial leasing or finance leasing
6.
financing of commercial transactions including forfeiting
7.
the issue and administration of credit cards, debit cards, travellers’ cheques or bankers’
drafts
8.
the issue of guarantees, performance bonds or letter of credit
9.
lending on the security of or dealing in mortgages or any interest in real property;
10.
merchant banking services
11.
money transfer or transmission services or payment of cheques or other demand payment
orders drawn or issued by customers and payable from deposits held by the payer
12.
purchase and sale of foreign exchange;
13.
issuance of debentures and money market instruments and the acceptance of six months
(or such period as prescribed by the Bank of Zambia) term deposits, other than current
accounts and chequing deposits;
14.
issuance of building society and mutual society shares, having characteristics similar or
identical to those of deposits
2.5.4
15.
venture capital funding
16.
secured or unsecured credit services
17.
development financing
18.
any other services as the Bank of Zambia may designate’
FINANCIAL INSTRUMENTS INCLUDE: Cash, Loan, Derivatives, Futures, Equity [shares],
Debt [Treasury bills, Bond- GRZ/Corporate, Commercial paper, Debentures] Units, Bank
Deposits Schemes and so on.
2.5.5
FINANCIAL MARKETS include:

Bond market

Over the counter

Commodity market

Private equity

Derivatives market

Real estate

Foreign exchange market

Spot market

Money market

Stock market
20
Unit 2 Lesson Summary
This Units focuses on the breakdown the statement - Financial System consists of: [1] Financial
institutions, [2 Regulators] [3], financial services [4] financial instruments, and [5] financial markets. It
highlights the fact that the financial system itself a complex system of various sectors and elements. The
Unit provides a foundational understanding into the various components of a financial system. It goes
further to breakdown the components of each sector of the financial system. Others course in the degree
programme elaborate on all the other sectors. This module focuses on financial markets.
Unit 2 Progress Test
1.
What is a financial system
Hint
2.1, 2.2
2.
What is the composition of a financial system?
2.5
3.
Define the term “Financial Service Provider”
2.5.1
4.
What is a financial institution?
2.5.1
5.
What is a financial business
2.5.2
6.
Name the three major regulators of the financial system
2.5.2
7.
List six one-word functions of Regulators
2.5.2
8.
How many services does the BFSA Act define as financial services?
2.5.3
9.
Name five financial instruments
2.5.4
10.
Name five financial markets
2.5.5
21
Unit 3 Financial System Reform in Zambia
Unit 3
Syllabus requirements - What is the FSDP? Background to the FSDP;
Weaknesses of the financial System in Zambia; Developments in the Zambian
Financial System? Future Vision
Unit 3
Aim:- To outline the basic financial system reforms in Zambia.
Unit 3
Objectives - After studying this Unit you will be able to:
1st
Understand what the FSDP was all about?
2nd
Understand the weaknesses identified and the remedies provided
3rd
Understand the various developments in the Zambian Financial System
4th
Understand the future vision
Unit 3
Time required - It’s estimated that you should spend three [3] days on this Unit.
Unit 3
Reflection - List ten [10] weaknesses identified at the start of the FSDP
-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------Unit 3 Introduction
3.1
a)
[This Unit is adopted from FSDP I & II Reports on the BOZ website]
OVERVIEW
At the time of independence in 1964, Zambia was relatively wealthy, as judged by the standards
of other countries on the African continent. This was mainly due to a large mining sector, which
produced copper accounting for more than 80 percent of total export earnings.
b)
The situation changed drastically in the early 1970s as a result of the oil price shocks and a
substantial fall in the price of copper in 1974. The mono-commodity nature of Zambia’s
economy meant that the impact of lower copper prices severely affected overall economic
performance.
c)
The situation has not improved ever since and the country remains predominantly a copper
dependent economy and faces a number of challenges including high levels of indebtedness
relative to national output and exports, the need to diversify the economy and addressing wide
spread poverty. One of the major impediments to addressing these challenges is the state of the
financial sector, which is characterized by low intermediation.
3.2 WEAKNESSES IN THE FINANCIAL SECTOR
a)
Concerned with the limited contribution of the financial sector to economic development, the
22
Government devised and formulated policy mechanisms for addressing the identified obstacles
within the framework of the Poverty Reduction Strategy Paper (PRSP) whose implementation
started in 2002. In line with the PRSP framework, the World Bank and the International
Monetary Fund undertook an assessment of the financial system through the Financial Sector
Assessment Programme (FSAP) which identified the following weaknesses in the Zambian
financial sector
b)
Financial intermediation is low and the existing highly segmented financial system plays a limited
role in the economy. The ratio of private sector credit to GDP in 2001 was one of the lowest in
Sub- Saharan Africa at 6% whilst that of public sector credit, at 14%, was one of the highest. Access
to financial services is very limited for low-income consumers while there are a handful of micro finance
institutions that are expected to fill in the gap in the provision of financial services.
c)
Public financial institutions that were established to provide various financial services to the
majority of the people in the country are insolvent, and therefore ineffective, or have closed
down. Examples include ZNBS (mortgages); LIMA Bank and Cooperative Bank (agriculture
lending), EXIM Bank (export and import finance), DBZ (long term finance) and NSCB (banking
services for the rural populace).
d)
The financial system is dominated by commercial banks, which are expected to cater for all the
credit needs of the economy. As such, there is a financial intermediary gap in the formal financial
sector.
e)
Net interest margin and the ratio of fee income to average assets in banks are among the highest in
Africa. The operating costs of commercial banks are high by international standards, especially
given moderate lending and depository services. This makes the provision of financial services
unaffordable. In addition, commercial banks are increasingly relying on income from treasury
bills and foreign exchange operations. This makes them vulnerable to adverse changes in the
financial markets and could threaten their long-term solvency.
f)
Banks are highly exposed to an array of potential risks specific to structural weaknesses of the
economy such as the dependence on the copper sector, non-performance of public sector
borrowings and adverse movements in interest and exchange rates.
g)
There are no formal structures for a financial safety net in Zambia, thereby leaving the public
exposed to suffer losses every time there is a bank failure, although an explicit pay out of
K500,000 is in place through Act No. 28 of 1995 and the establishment of a deposit insurance
23
scheme is under consideration for implementation.
h)
Despite compliance to most international standards, problems still exist in the supervisory
process, such as low minimum capital requirements, lack of independence from the Government,
non-implementation of consolidated supervision, and lack of adequate procedures for the orderly
liquidation of banks and other financial institutions.
i)
Several weaknesses in the regulation and supervision of contractual savings exist. Specifically the
Insurance Act does not adequately provide for effective prudential regulations, the Securities and
Exchange Commission and the Pensions and Insurance Authority are under-funded and lack
requisite supervisory skills to effectively carry out their duties. Further, NAPSA is not supervised by
an independent regulatory body.
j)
There exists weak responsiveness of the Labour market to the skill and knowledge needs of the
financial sector
k)
There are limited resources to train supervisory staff. While market activities of some banks and
non-bank financial institutions are becoming more complex in line with developments in the
international financial systems, the supervisory skills gap continues to lag behind.
l)
Poor credit culture. The credit rating of customers who default in liquidated or existing banks is
not affected by their previous record.
m)
The government has multiple and potentially conflicting roles in the financial sector. It is the
regulator, supervisor, owner of several large financial institutions, the main borrower from the
financial system, client and major depositor and user of financial services. These roles create
problems of lack of transparency and potential conflict of interest.
n)
Administrative weaknesses in the payment system cause delays and inefficiencies in the process
of remitting tax revenue to BoZ, thereby creating some float in the financial system.
o)
While certain improvements have been registered in primary market activity for government securities,
secondary market activity remains extremely low. The commercial banks’ holding of
securities to maturity has stifled secondary market activity.
p)
Fiscal and monetary policy implementation are not well coordinated, such that liquidity shocks that
emanate from unanticipated Government spending are not sufficiently smoothened out, causing
volatility in the inter-bank money market. A complicating factor in BoZ’s liquidity management
is the uncertainty in the government’s financing operations. The difficulty in reliably projecting
Government’s cash flow and absorbing liquidity through open market operations (OMO) and
24
Treasury bills auctions hamper BoZ’s control of liquidity. These unanticipated upsurges in liquidity
are the primary cause of volatility in the inter-bank money market interest rates.
q)
Direct instruments of monetary policy implementation, such as statutory reserve ratios, are still
prominent in Zambia’s monetary framework. The relatively high statutory reserve ratios tend to
raise the cost of funds for banks. The final incidence of this cost is often passed over by the
banks to the public by offering lower deposit and or higher lending rates.
r)
The financing of persistent fiscal deficits has created distortions in the financial markets.
Government borrowing through issuance of government securities to finance large fiscal deficit
has significantly reduced the amount of loanable funds in the financial sector and contributed to
the high cost of credit and the subsequent crowding-out of private investment. Furthermore,
Government borrowing from the BoZ, to supplement deficit financing has often left BoZ with a
daunting task of keeping the growth of money supply within the desired realm.
s)
Despite having a potentially unsustainable stock of domestic debt, there is no deliberate
programme in place to manage this debt stock. With a domestic debt to GDP ratio of 9.8% in 2002,
Zambia has one of the highest debt ratios in Sub-Saharan Africa.
3.3 FINANCIAL SECTOR DEVELOPMENT PLAN [FSDP]
a)
In light of the above, the FSDP was prepared in order to address the weaknesses identified above
and to provide for a systematic and coherent approach for the realization of the vision for the financial
system.
b)
This FSDP represented a comprehensive strategy that had been formulated to address the
weaknesses in the Zambian financial system as well as guide efforts aimed at realizing the vision
of a financial system that is stable, sound and market-based and that would support efficient
resource mobilization necessary for economic diversification and sustainable growth. It was
also meant to serve as a coordinating framework for a number of parallel sub-sector strategies and
efforts aimed at modernizing and deepening the Zambian financial system such as the law review
programme, the rural banking strategy and the Poverty Reduction Strategy Paper (PRSP).
c)
A National Committee to develop a FSDP was constituted on 9th October 2002 to identify and
analyse the factors that have led to the current state of the financial system and make
recommendations on the nature of institutional, legal and regulatory arrangements that will
ensure attainment of the vision. The National Committee, whose members were selected based on
their significance and overall impact to the financial sector comprises the following:
25
i.
ii.
iii.
iv.
v.
vi.
vii.
viii.
ix.
x.
Bank of Zambia
Pensions and Insurance Authority (PIA)
Securities and Exchange Commission (SEC)
National Pension Scheme Authority (NAPSA)
Development Bank of Zambia (DBZ)
Bankers Association of Zambia (BAZ)
Association of Micro Finance Institutions in Zambia (AMIZ)
Building societies
Ministry of Finance and National Planning (MoFNP)
International Monetary Fund (IMF) and World Bank in an advisory capacity.
In addition to the FSDP National Committee members, a number of organisations were identified as key
stakeholders in the drafting of the FSDP and are also expected to play a supportive role in the smooth
implementation of the FSDP. These are:
i.
Patents and Companies Registration Agency (PACRA)
ii.
Zambia Revenue Authority (ZRA)
iii.
Zambia Association of Manufacturers (ZAM)
iv.
Zambia National Farmers Union (ZNFU)
v.
Zambia Association of Chambers of Commerce & Industry (ZACCI)
vi.
Economics Association of Zambia (EAZ)
vii.
Ministry of Commerce, Trade and Industry (MCTI)
viii.
Ministry of Legal affairs (MoLA)
3.4 VISION AND OBJECTIVES of the FSDP
It is envisioned that the Zambian financial system would develop to become a stable, sound and marketbased financial system that would support efficient mobilization and allocation of resources necessary for
economic diversification, sustainable growth and poverty reduction. In this regard, key objectives that
should be achieved in pursuance of the vision for the financial system include the following:
a)
To restore sustained economic growth and macroeconomic stability;
b)
Have an effective and efficient legal and regulatory framework that promotes a vibrant,
competitive and well-functioning financial system in Zambia by harmonizing the legal
infrastructure relating to the financial sector;
c)
Deepen the financial market to enable banks, companies and households with the means for
effective liquidity management, price discovery, cost reduction and enhance capital formation;
d)
Have a viable pro-poor and effective rural finance system for providing affordable financial
services to enable the poor to enhance income and reduce poverty;
e)
Have an insurance sector that adequately protects business and individuals from catastrophic
events and a pension system that provides a secure retirement and to enable these institutions
provide capital for long term investment in the real sector;
26
f)
Deepen and broaden the non-banking financial sector that will create a more balanced
financial structure and promote competition.
g)
Contain deterioration in the financial condition of public financial institutions and implement a
problem resolution strategy.
h)
Enhance legal, accounting and auditing systems that promote the rule of law in commercial and
financial transactions and support good governance by promoting transparency, accountability and
predictability.
i)
Establish a transparent government relationship with the financial system and address all
sources of potential conflict of interest.
j)
Strengthen the credit culture.
k)
Create a support structure for imparting training to the various players in the financial sector.
l)
Strengthen the BoZ and other financial sector regulators in such a manner that they would be able
to play their roles more independently and effectively.
m)
Raise the level of investments and strengthen the role of the private sector in the financial sector.
n)
Ascertain whether the establishment of a single regulatory body is suitable for the financial sector
in Zambian.
o)
Put in place ways and means of ensuring that proper mechanism is put in place to prevent and
detect money-laundering activities through market discipline and transparency in the conduct of
financial services business.
p)
To manage regulations governing public borrowing to bring about greater openness and
accountability in public debt management thereby facilitate more growth and poverty reduction.
3.5
THE ROLE OF GOVERNMENT AND BOZ
As advisor to the Government, BOZ’s role on the FSDP National Committee was to coordinate the
drafting of the FSDP. Government’s role will be to ensure implementation of the plan.
3.6
OTHER FINANCIAL SECTOR STRATEGIES
Apart from the FSDP, there are other already existing strategies in which financial sector issues are being
addressed. These include the Poverty Reduction Strategy Paper (PRSP), the Domestic Debt Strategy
Paper, the Capital Market Development Strategy and the Rural Finance Programme sponsored by the
International Fund for Agricultural Development (IFAD) and other cooperating partners.
Unit 3 Lesson Summary
27
At independence the Zambian financial system was rudimentary stage though it was better than most
countries on the continent.
Characterized by low mediation, the financial sector possessed many other weaknesses.
The FSDP set to address the identified weaknesses. In a nutshell Government through the FSDP sought
to modernize the local financial sector and its framework.
Unit 3 Progress Test
1
Hint
List the two major factors which worked together to affect the economy negatively in 1970s
3.1
2
Name the financial service provider which dominates the financial sector in Zambia
3.2b
3
Give an example of a “financial safety net”
3.2.f
4
What do the acronyms FSDP stand for?
3.3
5
Briefly what is the role of the FSDP?
3.5
PART I –Summary
The main function of the financial system is to promote savings and intermediation between surplus and
deficit units in the economy. An economy or economic system consists of the production, distribution or
trade, and consumption of limited goods and services by different agents in a given geographical location.
So an economy is basically divided into four sectors: (1), Households, (2) Firms, (3) Government and (4)
External sector
The financial system is a sub-set of an economy. The Financial System consists of:
[1] Financial institutions,
[2 Regulators]
[3] Financial services
[4] Financial instruments, and
[5] Financial markets.
Through its various components bridge the gap between the needs of lenders and borrowers.
28
Faced with a number of financial system weaknesses the Government started the Financial Services
Development Programme. The FSDP’s vision was to become a stable, sound and market-based financial
system that would support efficient mobilization and allocation of resources necessary for economic
diversification, sustainable growth and poverty reduction.
29
PART II – FINANCIAL MARKETS
Part II
Introduction - This part of the module provides an introduction to the nature and
role of financial markets. , covering its role in an economy and elaboration of its functions. The
part also covers the structure of a financial system which includes an explanation or description of the
main components of a financial system. The last unit under this part gives a snap shot into the financial
reforms which have taken place in Zambia
4.1
A market is one of the many varieties of systems, institutions, procedures, social relations and
infrastructures whereby parties engage in exchange.
a) While parties may exchange goods and services by barter, most markets rely on sellers offering
their goods or services (including labor) in exchange for money from buyers.
b) It can be said that a market is the process by which the prices of goods and services are
established.
4.2
For a market to be competitive, there must be more than a single buyer or seller. It has been
suggested that two people may trade, but it takes at least three persons to have a market, so that
there is competition in at least one of its two sides. However, competitive markets, as understood
in formal economic theory, rely on much larger numbers of both buyers and sellers. A market with
a single seller and multiple buyers is a monopoly. A market with a single buyer and multiple sellers
is a monopsony. These are the extremes of imperfect competition.
4.3
Markets vary in form, scale (volume and geographic reach), location, and types of participants, as
well as the types of goods and services traded. Examples include:

Physical retail markets, such as local public markets, farmers' markets, street markets, flea
markets, bazaars, and other public marketplaces; shopping centers and shopping malls

Physical wholesale markets

(Non-physical) internet markets (see electronic commerce)

Ad hoc auction markets

Markets for intermediate goods used in production of other goods and services

Labor markets

International currency and commodity markets

Stock markets, for the exchange of shares in corporations

Artificial markets created by regulation to exchange rights for derivatives that have been
designed to ameliorate externalities, such as pollution permits (see carbon trading)

Illegal markets such as the market for illicit drugs, arms or pirated products.
30
4.4
In mainstream economics, the concept of a market is any structure that allows buyers and sellers
to exchange any type of goods, services and information.
a) The exchange of goods or services for money is a transaction.
b) Market participants consist of all the buyers and sellers of a good who influence its price.
c) This influence is a major study of economics and has given rise to several theories and
models concerning the basic market forces of supply and demand.
d) There are two roles in markets, buyers and sellers.
e) The market facilitates trade and enables the distribution and allocation of resources in a
society.
f) Markets allow any tradable item to be evaluated and priced.
g) A market emerges more or less spontaneously or may be constructed deliberately by human
interaction in order to enable the exchange of rights (cf. ownership) of services and goods
4.5
Financial Markets are part of the Financial System which in turn is a sub-sector of the Economy.
Financial markets are structures through which money flow. Examples of sub-sets of the financial
markets refer to point 2.5.5
4.6
Securities (also called financial instruments) are financial claims on the issuer’s future income
or assets. They represent financial liabilities for the individual or firm that sells them (borrower or
issuer of the financial claim) in return for money, and financial assets for the buyer (lender or
investor in the financial claim). By definition, therefore, the sum of financial assets in existence
will exactly equal the sum of liabilities.
4.7
Financial instruments (known as securities) can be classified into two broad groups: debt
instruments and equity instruments. Note that there are also derivative instruments (such as futures,
options and swaps), which are financial instruments that derive their value from the value of some
other undelying financial assests or variables.
4.8
Debt and equity instruments - Debt instruments are instruments that promise the payment of
given sums to the investor. Examples of debt instruments are bills, notes and bonds (described in
Unit 14). Bonds represent debt owed by the issuer to the investor. They are claims that normally
pay periodic interest (coupon payments) until the maturity date, and pay back the par value (face
value) to the investor at the maturity date. The coupon payments are usually based on a fixed
interest rate. The interest rate is the cost of borrowing or the price paid for the rental of funds
(usually expressed as a percentage).
31
4.9
Financial markets are markets in which funds are moved from people who have an excess of
available funds (and lack of investment opportunities) to people who have investment
opportunities (and lack of funds). They also have direct effects on personal wealth, and the
behaviours of businesses and consumers. Therefore, they contribute to increase the production and
the efficiency in the overall economy. Financial markets (such as bond and stock markets) are
markets in which securities are traded.
Part II Aim - The aim of Part 1 is to familiarize students with the financial system, its nature, role
and composition, the reforms it has undergone in Zambia. This section provides the reader with
relevant knowledge of a financial system and should also heighten awareness of contemporary issues that
put the following parts into context.
Part II
Objectives - After studying this Part of the module you will be able to:
1st Know the nature and role of a financial system in an economy;
2nd
Know and be able to explain the structure of a financial system
3rd
Know and understand the various reforms that have taken place and are envisioned
to take place in the financial sector
Part I I
Time required - Spend a minimum of twelve [12] days on this Part.
Part II structure - Part II is organized into two sections; Section 1: Money Market & Money
Market Instruments and Section 2: Capital Markets
Each Unit has syllabus requirement, / aim, /objective, / time required, /reflection, / introduction / content
addressing a particular topic, / unit summary and / progress test.
Section 1 has six [6] units which are:
Section 2 has five [5] units which are:

Unit 4
Introduction to Money Market;

Unit 10
Primary Markets

Unit 5
Call Money Market;

Unit 11
Secondary Markets

Unit 6
Commercial Paper;

Unit 12
Dematerialization

Unit 7
Certificate of deposits;

Unit 13
Lusaka Stock Exchange

Unit 8
Treasury Bills and

Unit 14
Bond Market

Unit 9
Repos [Repurchase Agreements]
32
Unit 4 Introduction to Money Markets
Unit 4
Syllabus requirements - Definition of Money Market; need for money market;
players in money market; money market instruments; evolution of money markets
in Zambia
Unit 4
Aim: - To outline the basic definition of a money market and outline the varies
parts of a money market
Unit 4
1st)
Objectives - After studying this Unit you will be able to:
Define money market
2nd)
Identify players in the money market
3rd)
List the main money market instruments
4th)
Know the constitutes of the money market
Unit 4 Time required - It’s estimated that you should spend one [1] day on this Unit.
Unit 4
Reflection - List the main constitutes of the money market
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------Unit 4 Money Markets

4.1
What is a money market?
A market in which banks and other financial institutions
buy and sell short-term financial instruments, such as
bills of exchange, commercial paper, among themselves
– [Pocket Finance –Tim Hindle]

By short-term capital, is meant capital
that is lent or borrowed for a period
which might range from as short as
overnight up to about one year, and
sometimes longer
Markets for buying and selling short-term loans or
financial instruments such as treasury bills and certificates of deposit, which can be easily be
converted to cask – [Dictionary of Banking and Finance]

The money markets are the wholesale financial markets for lending and borrowing short term
capital, as distinct from the capital markets, which are financial markets for raising and investing
long-term capital. [BPP]
33
4.2
Need for money market; - Money markets provide opportunity to transfer short-term funds from
surplus units in an economy to deficit one. So need exists on both sides:
a)
Individuals, Businesses and Governments units with excess funds risk their money laying idle and
yield no interest. So avoid keeping ‘idle’ money they search out deficit units.
Other the other hand because immediate cash need of Individuals, Businesses and Governments
units does not usually match with receipts, these deficit units also are in search for funds.
4.3
Players in money market; - Participants in a money market include: The Government;/The Bank
of Zambia;/Commercial Banks;/Pensions / Insurance Companies/ Companies;/ Unit Trusts
4.4
The money markets - The money markets consist of:
a)
The discount market. This is a market where some banks buy and sell treasury bills. The
Bank of Zambia uses this trading, known as open market operations, to control or influence the
level of short term interest rates. This referred to as Open market operations. The functions of the
discount market; and the way in which open market operations by the Bank of Zambia in the
discount market is a means by which the Bank of Zambia can:

Supply cash to the banking system when there is a cash shortage in the system. The Bank
does this by buying eligible bills from the discount houses;

Mop up a cash surplus in the banking system, when the system has cash in excess of its
short-term needs. The Bank does this by selling Treasury bills or eligible bills through its
discount window ;
b)
The interbank market – this is the ‘market’ in which banks lend short term funds to one another;
c)
The foreign-currency market – this is the market operated by banks for lending and borrowing
in foreign currencies. Most of the trading is done by banks. Firms wishing to borrow in a foreign
currency will usually do so from a bank, and will not become directly involved in the foreigncurrency markets. A very small market in Zambia.
d)
The Certificate of Deposit market. This is a market for trading in Certificates of Deposits;
e)
The local authority market. This is a market in which local authorities borrow short term funds
from banks and other investors, by issuing and selling short term ‘debt instrument’;
f)
The inter-company market. This refers to direct short term lending between companies, without
any financial intermediary. This market is very small, and restricted to the treasury departments of
large companies.
34
4.5
Money market instruments; - Money market involves a number of instruments such as :Deposits
/ Loans / Treasury Bills / REPO [Repurchase Order] / Bankers Acceptances/ Commercial Paper /
Certificate of Deposits / Call and Notice Money / Commercial Bills of Exchange.
The money markets – other concepts;
A distinction is sometimes made between the discount market and all the other money markets
4.6
a)
(4.4b) to (4.4f) which are referred to collectively as the parallel markets or wholesale markets.
b)
The terms retail lending and wholesale lending are used to distinguish the size of transactions.
Retail lending refers to lending in small amounts, and is associated with the ‘retail banks’
i.
or ‘High Street banks’. Lending is to personal customers and smaller companies. Interest
rates on lending are often set at a margin above the bank’s base rate, and loans are made
through the customer’s current account (overdrafts) or loan account.
ii.
Wholesale lending refers to lending in large amounts. Unlike retail lending, it does not
require a large branch network. The transactions may take the form of special financial
instruments, such as bills of exchange and Certificates of Deposit. Interest rates on lending
are lower than in the retail lending market, and are usually linked to the Inter-Bank Rate.
iii.
c)
Wholesale lending of short term funds takes place in the money markets.
The money markets are the wholesale financial markets for lending and borrowing short term
capital, as distinct from the capital markets, which are financial markets for raising and investing
long-term capital.
4.7
Evolution of money markets in Zambia - The ‘money markets’ in Zambia are operated by the
Bank of Zambia, banks and other financial institutions. Although the money markets largely
involve borrowing and lending by banks, some large companies, as well as the government, are
involved in money market operations.
Unit 4 Lesson Summary
In this unit we have reviewed money markets. In this market short term borrowing and leading take place.
Short term being a period less than one year. The mis-match between receipts and expenditure give rise
for the need for money markets. The money markets are the wholesale financial markets for lending and
borrowing short term capital. There is a distinction between the capital and money markets.
The money markets consists of a number of markets.
Unit 4 Progress Test
35
1.
What is meant by the term ‘money market?
4.1
2
What are ‘open market operations’?
4.4
3
List the major instruments used in of the money markets.
4.5
4.
What are the ‘parallel markets’?
4.6a
36
Unit 5 Call Money Markets
Unit 5
Syllabus requirements - Features, functions of call market; mechanism of
operations in call money market; location of call money market; growth and
development of call money market in Zambia. Guidelines for call/notice money
market
Unit 5
Aim: - To outline the basic definition of a money market and outline the varies
parts of a money market
Unit 5
1st)
Objectives - After studying this Unit you will be able to:
Define call market
2nd)
Distinguish between ‘call’ and ‘notice’ money
3rd)
Understand the functions of call market.
4th)
Appreciate why call markets exist
Unit 5 Time required - It’s estimated that you should spend one [1] day on this Unit.
Unit 5
Reflection
briefly outline the mechanism employed in a call market
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------5.1
Call Money market concepts:

Call deposit is a deposit accepted by a bank from other bankers and are repayable on
demand.

Call loan is bank loan repayable at call – [Dictionary of Banking & Finance]

Money at call or money on call or call money is money lent or borrowed for which repayment
can be demanded without notice.
37

Call market is a short term market in which instruments traded have a maturity period of up to
one year.
5.2
a)
Features,
Short term funds market
b)
Useful to Banks and other institutions to sort out their day to day deficit or surplus closing positions
c)
This market is used to borrow and lend.
d)
Borrowing and lending in the call money market involves high risk as most placements are
unsecured.
e)
Call rates are usually market determined.
f)
Some markets like inter-bank markets are exclusive to banks only
g)
If the period is more than a day, it is called “ Notice” otherwise it’s called “Call”
h)
The main instruments in this market are call money, certificate of deposits, repurchase agreements
[repos], commercial bills of exchange, commercial papers, and inter corporate funds.
i)
Call market interest rates are very sensitive to the demand for funds. The interest rates can shift
hourly, daily, or weekly.
5.3
a)
Functions of call market;
To provide a short-term system of equilibrium in the demand and supply of money and to even out
any surplus or deficiency.
b)
To be a central point for the Bank of Zambia to influence liquidity in the economy.
c)
To provide short-term money at a reasonable interest rate
5.4
Mechanism of operations in call money market - A call market is not situated at a
specific geographical or physical place. Its ‘floorless’. Deficit and surplus units contact each other
over the phone or through other electronic means and arrive at a deal. The deal will specify the
amount and interest rate agreed. After the deal the lender will transfer the amount in favour of the
borrower. The borrower will receipt the amount and after repayment this will be returned.
5.5
Location of call money market; - In Zambia most transaction are carried out in Lusaka. Call
markets are usually located in places/towns where there is a high volume of business.
38
5.6
Growth and development of call money market in Zambia. - The call/notice market is
predominantly an inter-bank market. Growth and development of the call market in Zambia has
been closely related to the growth and development of the banking sector.
5.7
Guidelines for call/notice money market - The Bank of Zambia issues guidelines to participants
from time to time. It is the primary regulator of this market.
Unit 5 Lesson Summary
The call money market I for short-term funds which have a maturity up to 1 year. The main instruments
in this market are call money, certificate of deposits, repurchase agreements [repos], commercial bills of
exchange, commercial papers, and inter corporate funds. This market provides liquidity and influences
the level of interest rates in the economy.
Unit 5 Progress Test
1
What is a call market?
5.1
2
Distinguish between ‘notice’ and ‘call’ money
5.2
3
List two features of a call market?
5.2
4
Name three instruments traded in a call market
5.2
5
List two functions of a call market
5.3
39
Unit 6 Commercial paper
Unit 6
Syllabus requirements - Issuers of commercial paper; investors in commercial
paper; process of issuing commercial paper; cost involved for issuing commercial
paper; Rating requirements for issue of commercial paper; steps taken to develop
the commercial paper market further.
Unit 6 Aim:-To understand the of commercial paper
Unit 6
Objectives- After studying this Unit you will be able to:
1st)
Define what commercial paper is
2nd)
Know issuers of commercial paper
3rd)
Understand the process of issuing commercial paper
Unit 6 Time required - It’s estimated that you should spend one [1] day on this Unit.
Unit 6
Reflection - Outline the process of issuing commercial paper
-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------Unit 6 Commercial paper

6.1
Definition:
A short term unsecured promissory note issued by companies;

Unsecured, short-term debt instrument issued by a company, typically for the financing of
account receivable, inventories and meeting short-term liabilities [www.investopedia.com]
6.2
Issuers of commercial paper; - Companies with high rate of creditworthiness and completely
adhere to and fulfill the Securities and Exchange Commission requirement may issue commercial
paper. When a company need to borrow a substantial amount to meet short term financial needs it
issue commercial paper.
Commercial paper is a type of an I.O.U. issued to those willingly to invest in the debt. The debt is
usually for a period of 270 days.
6.3
Investors in commercial paper; - Investors in commercial paper may include: individuals, banks,
other companies, foreign institutions, etc.
40
6.4
a)
Process of issuing commercial paper [CP]; - It begins with the need for a company to
source and raise short term liquidity.
Board of Directors of the eligible company wishing to issue commercial paper passing a
resolution to that effect.
b)
The company decides how much ‘paper’ they will issue
c)
The denomination of the CP is decided. i.e K10,000, K50,000, K1,000,000 etc
d)
Maturity of the CP must be decided too
e)
Discount on the face value is provided with the issue of CPs
f)
An issuer can directly issue CPs to investors. The CP so issued is called ‘direct paper’ or issue
through a broker or a dealer – this is called ‘dealer paper’. The dealer buys at a lower price and
sells at a higher price and gets a commission.
g)
The CP is rated by a Credit Rating Agency.
6.5
Cost involved for issuing commercial paper; - When commercial paper is issued directly to the
investor, the issuer saves the cost of the dealer and or underwriting services but must then go in
the market and find appropriate buyers.
6.6
Rating requirements for issue of commercial paper; - Most jurisdictions require that CPs are
rated by a Credit Rating Agency. The issuer should satisfy the minimum eligibility standards for
the issue of commercial paper. Inclusive in the standards is the need to satisfy the relevant
provision of the Income Tax Act, Companies Act, Bills of Exchange Act.
6.7
Steps taken to develop the commercial paper market further.- Very little has been done to
develop the commercial paper market in Zambia.
Unit 6 Lesson Summary
Commercial paper is short term, highly liquid, unsecured and negotiable in nature. The interest rate is
market determined. This instrument and market is under developed in Zambia.
Unit 6 Progress Test
1
What is commercial paper?
6.1
2
What are the features of commercial paper?
6.4
3
Distinguish between ‘direct’ and ‘dealer’ paper
4
Describe the two ways CPs can be issued
5
What costs are likely to be incurred in an issue of CPs
6.4
6.5
41
6.5
Unit 7 Certificate of deposit
Unit 7
Syllabus requirements - Definition, Issuers of certificate of deposit; investors in
certificate of deposit; features of certificate of deposits; steps taken to develop the
certificate of deposit market further.
Unit 7 Aim:-To explain the certificate of deposit.
Unit 7
Objectives - After studying this Unit you will be able to:
1st)
Define certificate of deposits
2nd)
Understand features of certificates of deposits
Unit 7 Time required - It’s estimated that you should spend one [1] day on this Unit.
Reflection - Explain the statement ‘A certificate of deposit is a negotiable
instrument’
Unit 7
---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------Definition:

Receipt for a time deposit issued for a stated time period and normally paying a fixed rate
of interest. [Dictionary of Banking Terms]

A bank-issued, fixed maturity, interest bearing time deposit that specifies an interest rate and
maturity date and is negotiable. [Financial Markets & Institutions]

Certificates of Deposits [CDs} are negotiable money market instruments issued in dematerialised
form or as usance promissory note, for funds deposited st a bank or other financial institutions
for a specified period of time. [Financial Markets , Institutions and Services]
7.1
Issuers of certificate of deposit [CD] ; -A certificate of deposit is a type of promissory note issued
by a bank. It is a fixed deposit that restricts holders from withdrawing the money on demand.
Withdrawal though possible attracts a penalty. CDs are issued in varies denominations. CD have
maturities as short as seven [7] days to seven years. They can be issued as a negotiable instrument.
7.2
7.3

Investors in certificate of deposit; -Investors in CDS may include: individuals, banks, other
companies, foreign institutions, etc.
Features of certificate of deposit; Short-term kwacha denominated deposits made at Banks

CDs may or may not be rated;
42

Issued with specified maturity dates

May issued at a fixed or variable interest rate

May be issued at a discount of the face value

Negotiable – Freely transferable by endorsement and delivery
7.4
Steps taken to develop the certificate of deposit market further-Very little has been done to
develop the certificate of deposit market in Zambia. The secondary market is less developed too.
Unit 7 Lesson Summary
A certificate of deposit is a marketable receipt of funds deposited in a bank for a specified period of time
at a specified rate of interest. It is a negotiable certificate issued by a bank as an evidence of an interest
bearing time deposit.
Unit 7 Progress Test
1
Define a certificate of deposit
7.1
2
Who may invest in a CD?
7.3
3
List three features of a CD
7.4
43
Unit 8 Treasury Bills
Unit 8
Syllabus requirements- Features; issuers of T-Bills; Investors in T-Bills; Types of
T-Bills; Process of Issuance; Yields of T-Bills; Trading; Clearing and settlement;
Treasury Bills Market abroad; Yield curve and Interest Rate analysis; Types of
Yield curves; Theories of Yield Curve.
Unit 8 Aim- To explain aspects of treasury bills
Unit 8
Objectives-After studying this Unit you will be able to:
1st
Define a treasury bill
2nd
Describe the varies types of treasury bills
3rd
Identify the characteristics of the varies types of treasury bills
Unit 8 Time required-It’s estimated that you should spend one [1] day on this Unit.
Unit 8
Reflection - What is the mechanism of trading, clearing and settlement of
Treasury-Bills
-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------Definition:

Treasury bills are short-term debt instruments issued by Government to raise funds to
overcome short-term liquidity problems

A treasury bill market deals with short-term borrowing instruments issued by government
8.1

Features; issuers of T-Bills;
Government issued

Issued at discount of the face value

Zero risk investment

No tax deduction at source

Available in both primary and secondary

Attractive returns
markets
44
8.2
Investors in T-Bills; - Banks are the major investors in T-bills. Others include individuals,
organisations and groups of investors such Pension Funds, Insurance Companies, and Mutual
Funds
8.3
Types of T-Bills;- Currently, the Bank of Zambia issues Treasury bills in four maturity categories
namely, 91 days, 182 days, 273 days and 364 days.
8.4
a.
Process of Issuance;
Tender Invitation - Treasury bills tenders are held fortnightly on Thursdays at 10:00 hours. In the
event that Thursday is a public holiday, participants shall be informed accordingly. The
announcement of the tender amount shall be made through the website, and national press.
b.
Lodging of Applications - All applications on Treasury bills should be submitted electrically
through commercial banks.
c.
Participants shall be allowed to submit bids on their own account, for domestic clients and on
behalf of foreign investors. All participants shall be allowed to submit noncompetitive bids that
meet the noncompetitive bid limit on behalf of their clients.
d.
Individuals may be allowed to bid through the Bank of Zambia as long as they obtain a letter of
Guarantee from their commercial banks and applications submitted at least a day before the
auction.
8.5
8.6
a)
Yields of T-Bills; - T-bills do not carry any coupon rate. They are issued at a discount and
redeemed at par.
Trading;
The Bank of Zambia shall use the single price auction In a single-price auction also known as
system to price Treasury bills. This means that each
successful bidder is allocated Treasury bills at the
marginal price. However, the Bank of Zambia
reserves the right to exclude bids that are not
Dutch auction, all successful competitive
bidders and all noncompetitive bidders
are awarded securities at the price
equivalent to the highest rate or yield of
accepted competitive tenders.
consistent with market fundamentals.
b)
The Bank of Zambia shall pro-rate bids at the cut-off price. This means that the Bank of Zambia
will issue Treasury bills up to the amount advertised on each maturity category. If bids at the cutoff price exhausting the amount on offer exceed the value on offer, the Bank of Zambia will
proportionally allocate amounts of Treasury bills at the cut-off price to exhaust the amount on
offer. The cut off price will be the price at the margin.
45
c)
The Bank of Zambia reserves the right to change the pricing mechanism as and when deemed
necessary. Adequate notice will be given to all participants for any change in the pricing
mechanism.
d)
Announcement of Results - Individual results of the tender shall be announced to participants on
Thursdays (the auction date) through issuance of award notices to successful bidders and rejection
notices to unsuccessful bidders. In the event that Thursday is a public holiday, participants shall
be informed accordingly.
e)
A consolidated summary of the tender results is published on the Bank of Zambia website and
other electronic media shortly after the tender is finalized as well as in the national press on
Mondays.
f)
Award and rejection notices including current holding statements for individual investors are
obtained from the respective commercial banks
8.7
a)
Clearing and settlement;
Settlement Procedure - Settlement of all Treasury bills awarded is on Monday (T + 4 i.e. - four
days from the auction date). Settlement will be based on Delivery Verse Payment (DVP) model
one
b)
Any changes to settlement date shall be advised to all participants. Settlement of Treasury bills
awarded shall be through commercial bank’s current accounts at Bank of Zambia
c)
Maturity Proceeds - On maturity date, the Bank of
Zambia shall credit the maturity proceeds to the
current accounts of commercial banks held at the
Bank of Zambia. For participants without clearing
accounts at the Bank of Zambia, the maturity
Maturity is the period of time for which a
financial instrument remains outstanding.
Maturity refers to a finite time period at
the end of which the financial instrument
will cease to exist and the principal is
repaid with interest. [Investopedia]
proceeds will be credited according to the
settlement details indicated in the Central Securities Depository system rules.
d)
At maturity, the investor will be paid the face value less withholding tax.
8.8
Treasury Bills Market abroad; - In the USA the
T-bills are issued in a minimum denomination of
$10,000 and usually having maturities of 13, 26
and 52 weeks. In India they have two kinds of Tbills 91 days and 364 days.
46
'Denomination'-is a classification for the
stated or face value of financial
instruments, including currency notes and
coins, as well as bonds and other fixedincome investments. [Investopedia]
8.9
a)
Yield curve and Interest Rate analysis; Types of Yield curves; Theories of Yield Curve.
A yield curve is a diagram, which shows the relationship of short term rates of a security to the
long term rates.
b)
If the long term rates are above the short term, the curve is said to be positive or upward sloping;
if they are lower, the curve is said to be negative or inverted.
c)
There four main economic theories which explain how yields vary with maturity
i.
Market expectations hypothesis assumes that the various maturities are perfect substitutes
and suggests that the shape of the yield curve depends on market participant’s’ expectations
of future interest rates.
ii.
Liquid preference theory states that long-tern interest rates not only reflect investors
assumptions about future interest rates but also include a premium for holding long-term
security
iii.
Market segmentation theory states that financial instruments of different terms are
substitutable
iv.
Preferred habitat theory states that in addition to interest rate expectations, investors have
different investment horizons and require a meaningful premium to buy securities with
maturities outside their preferred maturity, which is called habitat.
Unit 8 Lesson Summary
Treasury bills are short-term government debt obligation backed by the government with a maturity of
less than one year. T-bills are sold in denominations and commonly have maturities of 91, 182, 273 and
364 days in Zambia. T-bills are issued through a competitive bidding process at a discount from par, which
means that rather than paying fixed interest payments like conventional bonds, the appreciation of the
bond provides the return to the holder.
Unit 8 Progress Test
1
Define a Treasury Bill
8.1
2
What are the current maturity of T-bills in Zambia
8.4
3
Discuss the yield of T-Bills and how it is calculated
8.6
4
What’s a yield curve
8.10
5
Describe two types of yield curves
8.10
47
Unit 9 REPO [Repurchase Order]
Unit 9
Syllabus requirements - Introduction, how does it work, Securities treated in
REPO; secondary market in REPO; Changes in the REPO market
Unit 9 Aim: - To describe what a repo is and how its conducted
Unit 9
Objectives - After studying this Unit you will be able to:
1st
Define a repo
2nd
Understand the varies aspects of a repo market
Unit 9 Time required - It’s estimated that you should spend one [1] day on this Unit.
Unit 9
Reflection - How does a REPO WORK?
----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------Introduction: - A repurchase agreement is the sale of a security combined with an agreement
to repurchase the same security at a higher price at a future date. It is also referred to as a "repo."
A Repo transaction is defined as a transaction wherein the securities are sold at a particular price
by one party (Seller) to the other (Buyer) with commitments on the Seller’s part to repurchase the
equivalent securities from the buyer (and a corresponding commitment on the part of the Buyer to sell the
equivalent securities back to seller) on a certain date and at a certain price, both such date and price being
fixed as a part of the same transaction. Securities are equivalent to other securities for the purpose of this
framework, if they are (i ) of the same issuer; (ii) part of the same issue; and (iii) are of identical type,
nominal value, description as those other securities.
Reverse Repo Transaction is defined as a transaction wherein the securities are bought at a
particular price by one party (Buyer) from the one (seller) with a commitment on the Buyer’s part to sell
the Equivalent Securities back to the Seller (and to corresponding commitment on the part of the Seller to
repurchase the Equivalent Securities from the Buyer) on a certain date and at a certain price both such
date and price being fixed as a part of the same transaction. Securities are equivalent to other securities
for the purpose of this accounting framework, if they are ( (ii) part of the same issue; and (iii)
48
9.1
How it works/Example: For example, trader A may sell a specific security to trader B for a set
price and agree to buy back the security for a specified amount at a later date. In actuality, however,
the sale is not a real sale, but rather a loan, secured by the security. As with collateralized loans, the
security being used as collateral is "held" by trader B (in case trader A defaults and does not
repayment the amount to trader A.) The incremental amount to be repaid by trader A to repurchase
the security is the amount of "interest" earned on the loan by trader B.
Repos are usually very short term transactions, mostly with overnight terms although some
extend for a period of years. For short term repos, the risks are very low. For longer long repos,
with the possibility of fluctuations in the market, collateral risk is much higher. They are mostly
used to meet short term liquidity requirements.
9.2
Securities treated in REPO; All Government securities and all listed debt securities in
dematerialised form can be reposed.
9.3
Secondary market in REPO; Secondary market transactions in REPOS are settled through the
Bank of Zambia.
9.4
Changes in the REPO market The Zambian Repo Market players operated without a code of
conduct and transactions were undertaken without any formal regulation. However, with the
deepening of the financial markets, the need for a code of conduct is inevitable to guide players in
the Repo market on the regulatory regime and ethics. The code of conduct for Zambian government
securities (zgs) repos transactions was introduced in 2010.
Unit 9 Lesson Summary
REPOs are a sale of securities coupled with an agreement to repurchase the securities at a higher price on
a later date. A repurchase agreement is similar to a secured loan. Most repos are overnight transactions,
with the sale taking place one day and repurchase the next.
Unit 9 Progress Test
1
Define a REPO
9.1
2
What two transactions comprise a REPO?
3
What is a reverse repo?
4
Where are secondary REPO transactions settled?
9.4
5
What is the need for REPOs?
9.2
6
Name the guideline adopted for the uniform conduct in the REPO market
9.5
9.1
9.1
49
Unit 10
Primary Markets
Unit 10
Syllabus requirements- Introduction, Primary market processes; Methods of
Issuing Securities in the Primary Market unlisted companies; book building
process; types of investors; role of SEC in primary markets; intermediaries
involved and their roles in primary market; issue of prospectus
Unit 10
Unit 10
Aim:-To explain the primary markets
Objectives-After studying this Unit you will be able to:
1st
Define a primary market
2nd
Understand the varies aspects of a call market
3rd
Understand the various instruments used in a call market.
Unit 10
Time required-It’s estimated that you should spend one [1] day on this Unit.
Unit 10
Reflection-What are the three methods through which securities can be issued in
the primary market?
----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------10.1
Definitions

Primary Market, also called the New Issue Market, is the market for issuing new
securities. Public Limited Companies sale their securities to the public through an Initial Public
Offering (IPO). The securities can be directly bought from the shareholders, which is not the case
for the secondary market. The primary market is a market for new capital that will be traded over
a longer period. Here the securities are issued on an exchange basis.

Equity represents claims to shares in the net income and assets of a firm, and they do not have a
maturity date. In terms of economic rights, equity claims differ from debt instruments for several
reasons.
• First, firms are not contractually obliged to make periodic payments to equity holders:
the payment of dividends is a discretionary decision of the firm.
50
• Second, firms must pay all their debt holders before they make any payment to equity
holders: therefore equity holders are residual claimants.
As a result, equity claims are riskier than debt instruments. In addition to economic rights,
equity claims confer ownership rights to equity holders.
The presence of ownership rights is in contrast with bondholders, who have no ownership
interest but are rather creditors of the firm.

Ownership rights have two main implications.
• First, equity holders can benefit from any increase in the income or asset value of the company.
In the case of stock price increases (decreases) on the financial market, equity holders can
obtain high capital gains (losses), whereas this is very unlikely by investing in bonds.
•
Second, equity holders have the right to vote for directors or on certain issues. The proportion
of economic and ownership rights is different between common stocks and preferred stocks.
10.2
a)
Primary Market Processes;
Normally, the entire process of buying a primary market security involves several rules and
regulations that have to be properly adhered to before a security can change hands.
b)
IPO or Initial Public Offering is one of the integral procedures of the primary markets. Through
an IPO an organization announces the sale of its securities at a certain starting price.
c)
Investors can obtain news of upcoming shares only in the primary market. The issuing firm collects
money, which is then used to finance its operations or expand business, by selling its shares. Before
selling a security on the primary market, the firm must fulfill all the requirements regarding the
Securities Exchange Commission.
d)
After trading in the primary market, the security will then enter the secondary market, where
numerous trades happen every day. The primary market accelerates the process of capital
formation in a country’s economy.
4.10
Methods of Issuing Securities in the Primary Market: The main players of these markets are
the private companies which later have to go public and public companies that offer equity or debt
based securities such as shares and debt in order to raise money for their operations such as
business expansion, modernization and so on.
Primary markets are basically the platform where an investor gets the first opportunity to
purchase a new security. The group or company that issues the security gets the money by selling
a certain amount of securities.
51
There are three methods through which securities can be issued in the primary market;

Rights Issue - Rights Issue (RI) is when a listed company which proposes to issue
fresh securities to its existing shareholders as on a record date. The rights are
normally offered in a particular ratio to the number of securities held prior to the issue.
This route is best suited for companies who would like to raise capital without diluting
stake of its existing shareholders unless they do not intend to subscribe to their entitlements,

Initial Public Offer (IPO),- Initial Public Offering (IPO) is when an unlisted company
makes either a fresh issue of securities or an offer for sale of its existing securities or both
for the first time to the public. This paves way for listing and trading of the issuer's
securities. and

Preferential issue- A preferential issue is an issue of shares or of convertible securities by
listed companies to a select group of persons which is neither a rights issue nor a public
issue but in keeping with the Law.
4.11
4.12
Unlisted companies; these are companies which are quoted but not listed on a stock exchange.
Book building process; Book building is a process of price discovery. Hence, the Red Herring
prospectus does not contain a price. Instead, the red herring prospectus contains either the floor
price of the securities offered through it or a price band along with the range within which the bids
can move. The applicants bid for the shares quoting the price and the quantity that they would like
to bid at. Only the retail investors have the option of bidding at 'cut-off'. After the bidding process
is complete, the 'cut-off' price is arrived at on the lines of Dutch auction. The basis of Allotment is
then finalized and letters allotment/refund is undertaken. The final prospectus with all the details
including the final issue price and the issue size is filed with ROC, thus completing the issue
process.
4.13
Types of investors; Include individuals, organisations and groups of investors such Pension
Funds, Insurance Companies, and Mutual Funds
4.14
Role of SEC in primary markets; Any company making a public issue or a listed company
making a rights issue is required to file a draft offer document with Securities Exchange
Commission [SEC] for its observations. The company can proceed further on the issue only after
getting observations from SEC.
52
10.7
a)
Intermediaries involved and their roles in primary market; issue of prospectus
Bankers to the issue, as the name suggests, carries out all the activities of ensuring that the funds
are collected and transferred to the Escrow accounts. The Lead Merchant Banker [LM] shall ensure
that Bankers to the Issue are appointed in all the mandatory collection centers. The LM also ensures
follow-up with bankers to the issue to get quick estimates of collection and advising the issuer
about closure of the issue, based on the correct figures.
b)
Underwriter - Underwriting is when an underwriter agrees to buy shares which are not subscribed
by investors, the issue is devolved on underwriters and they have to bring in the amount by
subscribing to the shares. The underwriter bears a risk.
c)
Brokers – are intermediaries between a buyer and seller who through their contacts sources invite
the public for subscribing for which they get a commission.[refer to 11.9]
d)
Central depository – an agent authorised to place funds or securities in safe keeping in a
Depository Institution. A depository institution is usually a bank.
e)
Prospectus – informational document stating the intent to issue securities, required by the SEC.
Unit 10
Lesson Summary
Primary Market, also called the New Issue Market, is the market for issuing new securities. The main
players of these markets are the private and public companies that offer equity or debt based securities
such as stocks and bonds in order to raise money for their operations such as business expansion,
modernization and so on.
They sell their securities to the public through an Initial Public Offering (IPO). The securities can
be directly bought from the shareholders, which is not the case for the secondary market. The primary
market is a market for new capital that will be traded over a longer period. Here the securities are issued
on an exchange basis. The new shares are listed on the stock exchange market and then traded in the
secondary market.
Unit 10
Progress Test
1
Define Primary Market
10.1
2
List the Intermediaries involved in primary market;
10.7
3
What is a prospectus
10.7
4
What is the role of a Lead Merchant Bank?
10.7
5
What is the role of a Broker?
10.7
6
What is a Red Herring prospectus?
10.4
53
Unit 11
Secondary Markets
Unit 11
Syllabus requirements: Definitions, History and growth of Stock Market in
Zambia; Stock Market Index; determinants of a stock index; methods of index
construction; popular world indexes; major African indexes; Advantages of stock
exchanges; types of brokers in a stock exchange; trading mechanism on a stock
exchange; insider trading; insider defined
Unit 11
Aim:- To identify the major characteristics of a secondary market and discuss the
workings of the same
Unit 11
Objectives - After studying this Unit you will be able to:
1st
Define a secondary market
2nd
Understand the workings of a secondary market
3rd
Distinguish between a primary and secondary market.
Unit 11
Time required - It’s estimated that you should spend two [2] day on this Unit.
Unit 11
Reflection - Outline briefly the Trading mechanism on a stock exchange
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------11.1
Definitions,

A 'Secondary Market' is a market where investors purchase securities or assets from other
investors, rather than from issuing companies themselves. The national exchanges - such as the
Lusaka Stock Exchange and the NASDAQ are secondary markets

The market for all investors in a security, except for the first ones to whom a new issue of a security
is sold. The secondary market consists of all sellers and buyers, except for the issuer and the first
group of investors who bought the issue. [Financial Dictionary]
11.2
History and growth of Stock Market in Zambia; The Lusaka Stock Exchange being the first
stock market in Zambia opened its doors on 21st February 1994. The first company to list was
Chilanga Cement Plc (now Lafarge Cement Zambia Plc), whose initial share price was ZMK65
(ZMW0.065 ~ ZMW0.07) in May 1995, Almost 22 years later, its share price is now ZMW23.98,
reflecting an credible and significant 40,000% growth.
54
This growth does not even factor in dividends paid by the company over this period.
Further, companies like Zambeef Products Plc and Standard Chartered Bank Zambia Plc are also
amongst the earliest listed in their sectors, with the latter being the first bank to list on the
Exchange, and the former being the first dual-listed. Zambeef has its first (primary listing) listing
on the LuSE. And a secondary listing on the London Stock Exchange Alternative Investment
Market (AIM).
The Government in 2008 designated the LuSE the sole market for secondary trading of
Government bonds. The secondary Government bond market in Zambia grew very well in 2012
in response to the Government's new policy of conducting primary bond tenders once a quarter
rather than every two weeks. According to the World Federation of Stock Exchanges, globally the
performance of the bond markets continued their fall, falling by 15%. However, activity on the
LuSE has shown some growth though at a slow pace. The LuSE automated its trading system and
upgraded its CSD in the last quarter of 2008 with the deployment of the Millenium IT ATS/CSD
system. It is now possible for information vendors and brokers to have a direct feed into the ATS,
enabling them access to real time market data.
11.3
Stock Market Index; A stock index or stock market index is a measurement of the value of a
section of the stock market. It is computed from the prices of selected stocks (typically a weighted
average). It is a tool used by investors and financial managers to describe the market, and to
compare the return on specific investments
11.4
a)
Determinants of a stock index;
Macroeconomic stability –The higher the macroeconomic stability the more incentive companies
and investors have to participate in the stock market
b)
Income Level – Real income has been found to be highly correlated with the size of the stock
market.
c)
Savings and Investment – Usually the larger the savings, the higher the amount of cash flows
into investment projects like a stock market.
d)
Liquidity – liquidity shows the ease and speed at which economic agents can buy and sell
securities. So more liquid markets ease investment and therefore development.
e)
Private Capital flows – foreign investors have emerged as major participants in emerging stock
markets,
55
f)
Institutional Quality – Existence of good quality institutions attracts foreign investors. So issues
of governance, corruption, political rights, public sector efficiency and regulatory burdens come
to bear. [Determinants adopted from Read further IMF Working Paper – The determinants of
Stock Market Development in Emerging Economies: Is South Africa Different?]
11.5
Methods of index construction; An index may be classified according to the method used to
determine its price.
a)
Price Weighted Method. The price of each share is the only consideration when the value of the
index is calculated. E.g 2+4+67+8+9+10 / 6 = Index of 100/6 = 16.66
b)
Equal Weighted Index – all of the shares being assigned one value. For example an exchange of
400 companies assigns an equal value of 0.25% to each of the shares included in the index which
together add up to the 1005
There are other methods.
11.6
Popular world indexes; Dow 30, S&P 500, Nasdaq, DAX, FTSE 100, Nikkei 225, S&P/ASX
200, China A50, and Hang Seng
11.7 Some African indexes;
Economy
Exchange
Location
Founded
Listings
Botswana Stock Exchange*
Gaborone
1989
44
Botswana
Cairo,
Egyptian Exchange*
1883
833
Egypt
Alexandria
Ghana Stock Exchange*
Accra
1990
34
Ghana
Nairobi Securities Exchange* Nairobi
1954
64
Kenya
Malawi Stock Exchange*
Blantyre
1995
14
Malawi
Nigeria
Nigerian Stock Exchange*
Lagos
1960
223
Johannesburg 1887
402 (as of May 30, 2014)
South Africa JSE Limited*
Dar es Salaam Stock
Dar es Salaam 1998
17
Tanzania
Exchange*
Zambia
Agricultural Commodities
Exchange of Zambia
Lusaka Stock Exchange*
Zambia
Zimbabwe
Zimbabwe Stock Exchange*
Source : Wikipedia
11.8
Lusaka
2007
Lusaka
Harare
1994
1948
23
64
Advantages of stock exchanges; Even if your business is suited to flotation, it may not be the
right choice for you. Being a public company can present a range of benefits to your business, but
there are also issues that might require careful consideration.
56
a)
The benefits of stock market flotation could include:
i.
giving access to new capital to develop the business
ii.
making it easier for you and other investors - including venture capitalists - to realise their
investment allowing you to offer employees extra incentives by granting share options this can encourage and motivate your employees to work towards long-term goals
iii.
placing a value on your business
iv.
increasing your public profile, and providing reassurance to your customers and suppliers
allowing you to do business - eg acquisitions - by using quoted shares as currency
v.
creating a market for the company's shares
b.
However, you should also consider the following potential problems:
i.
Market fluctuations - your business may become vulnerable to market fluctuations
beyond your control - including market sentiment, economic conditions or developments
in your sector.
ii.
Cost - the costs of flotation can be substantial and there are also ongoing costs of being a
public company, such as higher professional fees.
iii.
Responsibilities to shareholders - in return for their capital, you will have to consider
shareholders' interests when running the company - which may differ from your own
objectives.
iv.
The need for transparency - public companies must comply with a wide range of
additional regulatory requirements and meet accepted standards of corporate governance
including transparency, and needing to make announcements about new developments.
v.
Demands on the management team - managers could be distracted from running the
business during the flotation process and through needing to deal with investors afterwards.
vi.
Investor relations - to maximize the benefits of being a public company and attract further
investor interest in shares, you will need to keep investors informed
11.9
Types of brokers in a stock exchange; Main role of a stock broker who is a regulated professional
individual is to trade stocks on behalf of his clients through a brokerage account, these stocks are
the mutual funds and bonds. Stock brokers usually charge a commission per trade. There are also
two kinds of stock brokers, and these are; Discount brokers and full-service brokers.
11.10 Trading mechanism on a stock exchange;
57
a)
The Trading procedure involves the following steps:
b)
Selection of a Stocker broker: - The buying and selling of securities can only be done through
SEC registered brokers who are members of the Stock Exchange. So the first step is to select a
broker who will buy/sell securities on behalf of the investor or speculator.
c)
Opening Demat Account with Depository: Demat (Dematerialized) account refer to an account
which an Investor must open with the depository participant (banks or stock brokers) to trade in
listed securities in electronic form. Second step in trading procedure is to open a Demat account.
The securities are held in the electronic form by a depository
d)
Placing the Order: After opening the Demat Account, the investor can place the order.
e)
Executing the Order: As per the Instructions of the investor, the broker executes the order i.e. he
buys or sells the securities. Broker prepares a contract note for the order executed. The contract
note contains the name and the price of securities, name of parties and brokerage (commission)
charged by him. Contract note is signed by the broker.
f)
Settlement: This means actual transfer of securities. This is the last stage in the trading of
securities done by the broker on behalf of their clients. There can be two types of settlement.
i.
On the spot settlement: -It means settlement is done immediately and on spot settlement
follows. T + 2 rolling settlement. This means any trade taking place on Monday gets
settled by Wednesday.
ii.
Forward settlement: -It means settlement will take place on some future date. It can be T
+ 5 or T + 7, etc. All trading in stock exchanges takes place between 9.55 am and 3.30
pm. Monday to Friday. [ source: www.youracrticlelibrary.com/stock exchange]
11.11 Insider trading; insider defined - Insider trading is dealing in company securities on a recognized
stock exchange, with a view to making a profit or avoiding a loss, by a person who has confidential
information about the securities that, if generally known, would affect their price. Its practice by
those connected with a company is illegal
58
Unit 11
Lesson Summary
Secondary market trading takes place after primary markets. The trading takes place through stock
brokers. In Zambia we have one stock exchange market called Lusaka Stock Exchange. Two type of
securities traded are shares and equity stocks. Shares cannot be traded unless they are listed on a stock
exchange. SEC is the overall regulator of this market.
Unit 11
Progress Test
1
Define a secondary market
11.1
2
Distinguish between a primary and a secondary market
11.1
3
Which is the oldest stock market in Africa?
11.7
4
What is Demat Account?
11.10
5
What is a forward settlement?
11.10
59
Unit 12
Dematerialization
Unit 12
Syllabus requirements - Concept of dematerialization; dematerialization;
depository; depository participant; operation of the depository system; preferences
of brokers to deal in demat shares; process of dematerialization; dividend on
dematted shares; conversion of dematted shares back into physical shares ; multiple
accounts; security of holdings
Unit 12
Unit 12
Aim: - To define a call market and outline varies aspects of it
Objectives - After studying this Unit you will be able to:
1st
Understand what a call market is all about?
2nd
Understand the varies aspects of a call market
3rd
Understand the various instruments used in a call market.
Unit 12
Time required - It’s estimated that you should spend one [1] day on this Unit.
Unit 12
Reflection - What is the advantage of dematerialization of shares over holding
them in physical form?
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------12.1 Concept of dematerialization; -Dematerialization [Demat in short term] signifies
conversion of a share certificate from its physical form to electronic form for the same number
of holdings which is credited to the demat account which the investor opens with the Central
Depository.
1.22
Depository; A Depository is an organisation like a Bank where the securities of a shareholder
are held in the electronic form at the request of the shareholder through the medium of a
Depository Participant
12.3
Depository participant; - Like Stock broker who intermediates between investor in and outside
the Stock Exchange, a Depository Participant [DP] is the representative [agent] of the investor in
the depository system providing a link between the Companies, investor through to the Depository.
60
While the Depository can be compared to a Bank, the DP is the branch. Banks, Stock
Brokers and other financial institutions can become depository participants
12.4
Operation of the depository system; - The Depository system functions very much like the
Banking system. A bank holds accounts, a depository holds securities. A bank transfers funds
between accounts, a depository transfers securities. In both systems actual cash or securities are
not handle they are electronic entries. Both perform their tasks with professionalism,
confidentiality and efficiency.
12.5
Process of dematerialization - The process of opening a demat account is similar to that of
opening a bank account. The DP needs to know his customer. So Know Your Customer [KYC]
principles will apply and there is a form to fill in. Expect to pay charges by way of account
opening fee, transaction fees, custody fees, and so on.
12.6
Preferences of brokers to deal in demat shares; - Keeping in mind the risks associated with
paper trials like forgeries, / forged certificates, bad delivery and delays the DP has lesser worries.
12.7
Dividend on dematted shares; - The Depository will give the list of demat account holders and
the number of shares held by them in electronic form on the Record date to the Company
Secretaries. The Company will issue dividend warrants in favour of the demat account holders.
12.8
Conversion of dematted shares back into physical shares;- If the investor wish to get their
securities in the physical form all they have to do is:
a)
Submit a re-materialization request form through the DP
b)
The DP will forward their request to the Depository after verification.
c)
The Depository will in turn intimate the Company Secretary who will print and despatch
to them the share certificates for the number of shares so rematerialized and the investor’s
account will be debited by the Depository and credited with the Company
d)
The Company Secretary will print new certificates with a new range of certificate numbers
and provide them to the investor.
12.9
Multiple accounts; - Like Bank accounts an investor may have multiple demat accounts with
different DPs. The SEC will provide guidance on this from time to time.
12.10 Security of holdings - When an investor open a demat account with a DP, an agreement is signed
by the investor with the DP, in which the DP indemnifies the investor for any misuse of his
holdings. The depository will also ensure that the interests of the investors are protected so that
the grievances, if any, against the DP will be resolved by the Depository. Moreover every
61
transaction in investor’s account will be authorised by him. He can authorise any transaction either
by affixing a signature or by using smart card similar to the ATM cards. There is a facility by
which the investor can lock his account so that the DP will not be able to carry out any transaction
in his absence without the investor’s authorisation.
Unit 12
Lesson Summary
For getting the shares dematerialised an investor has to open a demat account with a DP. While opening
an account the investor should expect to provide much detail and pay fees. Opening a demat account is
similar to opening a bank account.
Unit 12
Progress Test
1
Define dematerialization
12.1
2
Discuss the process of dematerialization
12.5
3
What is a DP?
12.3
4
What is a depository?
12.2
5
What is ‘know your customer’?
12.5
62
Unit 13
Lusaka Stock Exchange
Unit 13
Syllabus requirements - Lusaka Stock Exchange; Over the counter Exchange;
Continuous Listing requirements; participants on the OTC Market.
Unit 13
Unit 13
Unit 13
Aim: - To define a call market and outline varies aspects of it
Objectives - After studying this Unit you will be able to:
1st
Understand what a call market is all about?
2nd
Understand the varies aspects of a call market
3rd
Understand the various instruments used in a call market.
Time required - It’s estimated that you should spend one [1] day on this Unit.
Unit 13
Reflection - List five features of the LUSE
---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------13.1 Introduction - The Lusaka Stock Exchange was established in 1994. The formation of
the Exchange was a response to part of the Government's economic reform program aimed at
developing the financial and capital market in order to support and enhance private sector initiative. The
LuSE has operated a unified market (both equity and debt) for 20 years now.
It has facilitated the raising of relatively cheaper long-term capital and in so doing
complemented the financial sector product offering of short-term capital that is common place in
the money market.
13.2
Organisation - The LuSE is
currently
owned
by
10
shareholders, 6 of which are
actively
stock
corporate
members
broking
and
is
incorporated as a private nonprofit limited liability company and currently the products listed on the Exchange include several
Government and corporate bonds and 24 equities. Above is the Organisational Structure
63
13.3
Some Lusaka Stock Exchange Details
TRADING DAYS:
Mon – Fri
TRADING HOURS
10:00 - 12:00
INSTRUMENTS TRADED:
Equities, Collective Investment Units, Government
Bonds
EXCHANGE MEMBERSHIP:
Corporate
CLEARING:
Same day
SETTLEMENT:
Per transaction for stock, money is net.
T+3 Rolling basis
All members contribute to settlement guarantee fund.
DEPOSITORY:
Use is mandatory
TAXES:
Dividend/Withholding: 15% withholding and treated as
income, Capital Gains: None Property transfer tax:
2.5% by Seller on unlisted Securities
EXCHANGE CONTROLS:
Nil
OWNERSHIP RESTRICTIONS:
Nil
FOREIGN OWNERSHIP LIMITS:
Nil
13.4
List of Stock Brokers

Madison Assets Management Company Limited / Stockbrokers Zambia Limited /
Pangaea Securities Ltd / African Alliance Securities Ltd / Equity Capital Resources /
Intermarket Securities limited / Finance Securities Zambia
13.5
Fund Managers - The list of fund managers who manage various investment portfolios such as;
unit trust funds, collective investment schemes include : Madison Assets Management / InterMarket Securities / Equity Capital Resources / Lawrence Paul / ABC Securities / Kukula Capital
/ African Life
13.6
a)
LUSE Highlights - The LUSE is a modern stock exchange with the following features:
Use of a central share depository system
b)
Trade-for-trade netting clearing and settlement process
c)
Rolling settlement 3 days after the trade (T+3)
64
d)
Meets G30 recommendations for clearing and settlements system design and operation.
e)
No exchange controls
f)
No restrictions on shareholding levels
g)
No restrictions on foreign ownership
h)
No capital gains tax
i)
Corporate income tax reduced to 30% for companies listed on the LUSE.
j)
No property transfer tax on listed securities
13.7
Market - The LUSE is a central market also called "unified market" in which both unlisted and
listed securities trade on exchange. This is in contrast to the "dual market" system in which only
selected stocks are listed and traded on exchange (sometimes referred to as the organised exchange
or exchange market ) - and the balance traded off exchange as unlisted stocks (usually referred to
as traded over - the - counter or OTC and sometimes called a decentralized market).
There are several advantages to the "unified market" system.
a)
It channels all trading activity through one market. This enhances liquidity and market depth.

Liquidity is the ability to buy or sell both quickly and without substantially moving prices.

Market depth refers to the ability to transact at the current market price and is particularly
important when large volumes are involved.

Both liquidity and market depth ultimately dictate the success or failure of a market.
b)
It avoids duplication and makes more efficient use of natural resources.
c)
It gives maximum transparency in securities dealing and this reduces the opportunity for
malpractice and improves the reliability of pricing.
13.8
Publicly Traded Securities
a)
The Securities Act No 38 of 1993 defines publicly traded Securities as those of a public company
that has more than 50 shareholders or those that the SEC has by notice declared to be publicly
traded.
b)
Under the Act, all such companies are required to, register their securities with the Securities and
Exchange Commission (SEC) and are required to submit annual reports and accounts to the
Commission. They are also obliged to report to the SEC any facts concerning the company which
may affect the value of the shares.
Unit 13
Lesson Summary
65
The Lusaka Stock Exchange (LuSE) is the principal stock exchange in Zambia. The LuSE is a legally
mandated company or corporate entity whose main activity is the operation of a securities exchange for
dealing in shares, bonds, and other securities in accordance with the Securities Act No. 38 of 1993. It was
founded in 1993 in Lusaka. The Exchange opened on 21st February 1994.
The LuSE’s core mandate is to provide a fair and efficient platform through transparent and
equitable trading of the listed securities. LuSE contributes to wealth development, financial services and
a platform for investment for foreign and local investors. It provides a platform where companies can raise
long term capital and secondary trading of shares. LuSE also provides facilities for the listing of securities
and provides users with an orderly, transparent and regulated platform to trade.
Unit 13
1
Progress Test
What do the letters “ LuSE” stand for?
13.1
2
What does ‘T+3” stand for
13.3
3
Distinguish between "unified market" and a "dual market"
13.7
4
What are ‘public traded securities’
13.8
66
Unit 14
Bond Market
Unit 14
Syllabus requirements - Definition, Purpose of issue, participants, process of
issue; secondary market for Government securities
Unit 14
Unit 14
Unit 14
Unit 14
Aim:- To explain the bond market
Objectives - After studying this Unit you will be able to:
1st
Explain a bond market
2nd
Understand the process of issuing bonds
3rd
Describe the types of securities traded in the Bond Market.
Time required - It’s estimated that you should spend one [1] day on this Unit.
Reflection - Why are bonds issued - discuss
-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------Definition:

An interest-bearing or discounted certificate of indebtedness, paying a fixed rate of interest
over the life of the obligation,

When Government or a company gives a promise in writing and under seal, undertaking to pay
the bearer a specified sum of money. Such a written instrument is called a bond. It is an interest
bearing certificate of debt.

Government securities are commonly referred to as gilt edged securities, ‘Gilt’ refers to ‘gold’. Its
assumed that government securities are risk free as good as ‘gold’

Debt instruments can be classified into two main categories: zero coupon bonds and coupon bonds.

Zero coupon bonds are instruments under which a borrower promises, at the current time, to pay
one specified nominal sum (face value) to the lender at one specified future date. In return, at the
current date the borrower receives the bond price. Zeros are also known as discount bonds. Clearly,
with positive interest rates, the price of a zero coupon bond must be lower than the face value.
67
o An example of a zero coupon bond: an 8-year zero issued today and with face value of
$1,000 would require the borrower to repay this amount to the lender after this period of
time. At the current date, the borrower receives an amount of cash which must be less than
$1,000 given the positive time value of money.

Coupon bonds are contractual agreements by the borrowers to make regular payments (known as
coupons or interest) until a specified date (the maturity date), when the amount borrowed
(principal) is repaid. The maturity is the time to the expiration date of the debt instrument. Coupon
bonds deliver two different types of cash flow to the bondholder: • Face value: at the end of the
bond’s lifetime, the issuer repays the face value of the bond to the holder. Face value is also known
as par value or principal.
14.1
Purpose of issue, - Government Securities are issued to raise funds required to overcome
fiscal deficits and to enable the Bank of Zambia conduct open market operations.
14.2
Participants,- Participants divide into two categories – issuers and investors
a)
Issuers include Government is the major issuer. Local Governments and Companies may do so too
b)
Investors include Banks, Insurance Companies, Pension Funds, Mutual Funds, Societies
c)
Individuals and corporate institutions are eligible to participate in the primary auctions of
Government Bonds. The minimum bid amount is Thirty Thousand Kwacha (K30,000.00) for
competitive auctions and thereafter bids should be submitted in multiples of Five Thousand
Kwacha (K5,000.00). Similarly, the maximum bid amount for non-competitive bids is Twenty
Nine Thousand Kwacha (K 29,000.00) and the minimum is One Thousand Kwacha (K1, 000.00).
Non-competitive bids should be invested in multiples of K One Thousand Kwacha (K1, 000.00)
d)
All competitive and non-competitive bids will be submitted electronically through Commercial
banks. The Bank of Zambia reserves the right to change the number of bids and minimum amount
required and multiples as and when deemed necessary. Advance notice will be provided for any
such changes.
e)
The Bank of Zambia maintains and processes all Government bond transactions through the
Central Securities Depository (CSD). All Government bond records are stored and processed
electronically. All bonds are dematerialized and which means that these are not kept in physical
certificate form.
f)
Currently, the Bank of Zambia issues Government bonds in six maturity categories namely, 2
years, 3 years, 5 years, 7 years, 10 years and 15 years.
68
14.3
a.
Process of issue;
Government securities are issued through an auction process [refer to 8.7]
b.
Tender Invitation –Government bond tenders are held quarterly on Fridays at 10:00hrs. The
specific dates of the bond tender are announced on the Bank of Zambia..
Submission of Application’s -
b)
i.
All Government bond bids are submitted electronically through commercial banks.
ii.
Individuals are allowed to bid through the Bank of Zambia as long as they obtain a letter
of Guarantee from their commercial banks and applications submitted at least a day
before the auction.
b.
Pricing Mechanism and Allotment - The Bank of Zambia shall use the single price auction
system to price Government bonds
c.
Announcement of Results - Award and rejection notices for participants on auction shall be
collected at commercial banks from which bids were submitted.
d.
Settlement Procedure - Settlement for all Government bond awarded is on Monday (T + 3 three days from the auction date) through commercial banks’ current accounts at the Bank of
Zambia.
e.
Interest/maturity Proceeds - On maturity or interest payment date, the Bank of Zambia shall
credit the maturity or interest proceeds to the current accounts of commercial banks held at the
Bank of Zambia. At maturity, the investor shall be paid the face value and the last coupon.
Currently, the coupon payments are made semi-annually (i.e. every six months
14.4
Secondary market for Government securities - Government Securities are traded on the Lusaka
Stock Exchange [refer to 11.2]
Unit 12
Lesson Summary
Government bonds are issued to meet long term fiscal deficits. They are issued in six maturities. They
traded on the Lusaka stock Exchange.
Unit 12
Progress Test
1
What is a bond?
12.1
2
What is a ‘gilt-edged security’
12.1
3
List the participants in a bond market
4
Name the six maturity categories of bonds in Zambia
12.3
69
12.3
5
Describe the auction process used in the auction of bonds
12.4
PART II –Summary
The term ‘financial markets’ is sometimes used to refer to all markets that may exist in a financial sector
such as Commodity markets; Derivatives markets; Futures Markets; Insurance Markets; Foreign
Exchange Markets, Mooney Markets and Capital Markets. In this chapter- Part II Money and Capital
Markets have been explored.
Money markets trade in short term instruments. This market allows for short term financing and
investment. The Money Market include the Call Money, Interbank; Commercial Paper; Certificate of
Deposit; Treasury Bills; REPO markets; to mention most.
Capital Markets can be further subdivided into primary and secondary markets. In these markets
debt and equity instruments are traded. Primary markets deal in newly issued securities as in initial public
offering so it’s a trading place for issuers of security and investors, whilst secondary markets allow for
investors to buy and sell securities between themselves.
On the whole and in summary the main functions of Financial Markets is to determine prices,
allocate resources and transmit information.
70
PART III - FINANCIAL INSTITUTIONS
Part III
Introduction - There are three primary institutions that regulate the financial sector
in Zambia. These are the Bank of Zambia [BOZ], the Securities and Exchange Commission (SEC)
and the Pensions and Insurance Agency. Other regulators include the Patents and Companies Registry
Agency [PACRA], Competition and Consumer Protection Commission [CCPC] and the Financial
Intelligence Centre [FIC]
Part III
Aim - The aim of Part 1II is to familiarize students with the financial
Institution’s regulatory bodies, their nature, role and composition, the reforms they have undergone
if any. This section provides the reader with relevant knowledge of a financial regulators and should also
heighten awareness of contemporary issues that put the following parts into context.
Part III
Objectives - After studying this Part of the module you will be able to:
1st Know the nature and role of a financial regulators in an economy;
2nd
Know and be able to explain the structure of each financial regulator ;
3rd
Know and understand the various reforms that have taken place and are envisioned
to take place in the financial regulators
Part III
Time required - Spend a minimum of twelve [12] days on this Part.
Part III
Structure
Part III is organized into twelve [12] units. Each Unit as syllabus requirement, aim, objective, time
required, reflection, introduction content addressing a particular topic, a unit summary and a progress test.
The Units are:
Unit 15
Bank of Zambia,
Unit 21
Commercial Banking System in Zambia
Unit 16
Securities Exchange Commission,
Unit 22
Bon-Banking Financial Institutions
Unit 17
Pensions & Insurance Agency,
Unit 23
Development Bank of Zambia
Unit 18
Patents & Companies Registry,
Unit 24
Citizens Economic Empowerment
Unit 19
Competition & Consumer Protection
Unit 20
Commission
Commission;
Unit 25
Insurance Institutions
Financial Intelligence Centre.
Unit 26
Pensions Institutions
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Unit 15
Bank of Zambia
Unit 15
Syllabus requirements - Historical background; organizational structure;
Objectives and Functions of BOZ; Monetary Policy, Credit Policy, Regulatory
environment; Reform measures;
Unit 15
Aim: - To provide a brief outline of the composition and functions of the BOZ
Unit 15
Objectives - After studying this Unit you will be able to:
1st)
Understand the composition of Bank of Zambia
2nd) Explain the role and importance of Bank of Zambia;
3rd) Understand some of its regulatory tools.
Unit 15
Time required - It’s estimated that you should spend one [1] day on this Unit.
Unit 15
Reflection - List 6 legal functions of the BOZ
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------15.1 Historical background; The BoZ was established in 1964 as the central bank of Zambia.
It is charged with the responsibility of formulating and executing monetary and supervisory
policies, with the ultimate objective of achieving price and financial systems stability. Apart from serving
as a banker, fiscal agent and adviser to the Government, the BoZ is also a banker for all commercial banks.
The BoZ currently derives its mandate from the BoZ Act of 1996 and the Banking and Financial Services
Act, 1994 as amended.
15.2
a)
Organizational structure;
In the Board of Directors of the Bank vests all the powers of the Bank and is responsible for the
formulation of policy of the Bank. The Board consist of, the following directors of Board (a) the
Governor, who shall be the Chairman of the Board; and (b) not more than six other persons
appointed by the Minister from amongst individuals with professional or academic experience in
business or financial matters and who are not officials or employees of the Bank. The Board
chooses one of its members to be the Vice Chairman. The Secretary to the Treasury in the ministry
responsible for finance, is an ex-officio director of the Board.
b)
The day to day management of the Bank is carried out by the Governor, two deputy Governors
and several Heads of Departments.
15.3
Objectives and Functions of BOZ; Six specific functions are given to the Bank of Zambia.
These are:
72
a)
licence, supervise and regulate the activities of banks and financial institutions so as to promote
the safe, sound and efficient operations and development of the financial system;
b)
promote efficient payment mechanisms;
c)
issue notes and coins to be legal tender in the Republic and regulate all matters relating to the
currency of the Republic;
d)
act as banker and fiscal age nt to the Republic;
e)
support the efficient operation of the exchange system; and
f)
act as adviser to the Government on matters relating to economic and monetary management.
15.4
a)
Monetary Policy
The core functions of central banks in any countries are: [1] to manage monetary policy with the
aim of achieving price stability; [2] to prevent liquidity crises, situations of money market
disorders and financial crises; and [3] to ensure the smooth functioning of the payments system
b)
This is achievement through the effective working of the Monetary Policy. Monetary policy is
the process by which the BOZ controls (i) the supply of money, (ii) availability of money, and (iii)
cost of money or rate of interest, in order to attain a set of objectives oriented towards the growth
and stability of the economy.
c)
The indirect instruments used by BOZ in monetary operations are generally classified into the
following: Open market operations (OMOs);/ Discount windows (also known as ‘standing
facilities’); and Reserve requirements.
d)
Open market operations - Debt securities are mainly represented by term deposits (i.e., government
debt) that BOZ use in open market operations. In general, if the central bank sells government debt
the money supply falls (all other things being equal) because money is taken out of bank accounts
and other sources to purchase government securities. This leads to an increase in short-term interest
rates. If the government purchases (buys-back) government debt this results in an injection of
money into the system and short-term interest rates fall.
e)
The discount window - The second most important monetary policy tool is the so-called ‘discount
window’. It is an instrument that allows eligible banking institutions to borrow money from the
central bank, usually to meet short-term liquidity needs. By changing the discount rate, that is, the
interest rate that BOZ is prepared to lend to the banking system, the central bank can control the
supply of money in the system. If, for example the central bank is increasing the discount rate,
it will be more expensive for banks to borrow from the central bank so they will borrow less
73
thereby causing the money supply to decline. Vice versa, if the central bank is decreasing the
discount rate, it will be cheaper for banks to borrow from it so they will borrow more money.
Direct lending to banks can also occur through the central bank’s lender-of-last-resort (LOLR)
function. By acting as a lender-of-last-resort the central bank provides liquidity support directly to
individual financial institutions if they cannot obtain finance from other sources. Therefore it can
help to prevent financial panics.
f)
Reserve requirements - Banks need to hold a quantity of reserve assets for prudential purposes.
If a bank falls to its minimum desired level of reserve assets it will have to turn away requests for
loans or else seek to acquire additional reserve assets from which to expand its lending. The result
in either case will generally be a rise in interest rates that will serve to reduce the demand for loans.
By changing the fraction of deposits that banks are obliged to keep as reserves, the central
bank can control the money supply. This fraction is generally expressed in percentage terms and
thus is called the required reserve ratio: the higher the required reserve ratio, the lower the amount
of funds available to the banks. Vice versa, the lower the reserve ratio required by the monetary
authorities, the higher the amount of funds available to the banks for alternative investments.
Reserve requirements are often referred to as instruments of portfolio constraint. It
means that they may be imposed by the authorities on the portfolio structure of financial
institutions, with the purpose of influencing credit creation and, possibly, the type of lending taking
place. Other instruments of portfolio constraint that are potentially available for use include:
special deposits, moral suasion and direct controls.
g)
Other instruments of portfolio constraint include:

Special deposits - special deposits are deposits that the Bank of Zambia may require from certain
banking institutions. These deposits, equal to a specified proportion of certain elements of bank’s
deposit liabilities, are then ‘frozen’ at the Bank of Zambia and may not be used as part of the
reserve asset base for lending purposes. While they are particularly discriminatory as regards the
institutions to which they apply, they do have a very rapid impact upon the ability of these
institutions to create credit and are useful for drawing off any excess reserve assets within the
system. At present, they are not used for monetary policy purposes.

Moral suasion - Moral suasion refers to the range of informal requests and pressure that the
authorities may exert over banking institutions.
74

Direct controls - Direct controls involve the authorities issuing directives in order to attain
particular intermediate targets. For example, the monetary authorities might impose controls on
interest rates payable on deposits, may limit the volume of credit creation or direct banks to
priorities lending according to various types of customer.
15.5
Credit Policy - Credit Policy refers to the policy adopted by a central bank in regard to changes
in the availability and cost of bank credit to the various sectors of the economy. Credit Policy is an adjunct
to Monetary Policy. One tool introduced in this regard was the “Policy Rate”.
15.6
Regulatory environment; - The supervisory role of central banks has evolved over more than
40 years. Influenced by bank failures and financial sector crisis. The routine business of supervision is
built around an understanding of each bank derived from prudential and statistical returns, budgets and
management accounts, from records of previous meetings and a continuing dialogue with the directors
and management. Routine prudential discussion will cover such matters as: Strategy and business
development and objectives / Current levels of performance and profitability / Capital
Liquidity / Condition of the loan book, large exposures and non-performing assets; / Trading positions
and performance; / Organisation and staff changes ; and General market conditions.
15.7
Reform measures; - After reviewing the operations of BOZ including the law governing it, the
Financial Sector Development Plan [FSDP] Committee made the following observations on the
Governance Structure and Potential Conflict of Interest
a)
The Chief Executive Officer of the BoZ is the Governor. By powers given in the BoZ Act, the
Governor is also the Chairman of the BoZ Board of Directors. The Governor and two Deputy
Governors constitute the executive of the BoZ. The three officers are appointed by the Republican
President for periods of not more than five years. The President also has the power to re-appoint
them to office upon expiry of their term of office.
b)
The Board of Directors of the BoZ is responsible for the formulation of policy and constitutes the
Governor and no more than six other persons appointed by the Minister of Finance and National
Planning. The Secretary to the Treasury in the Ministry of Finance and National Planning, who is
an ex-officio member of the Board with no voting powers, represents the Government.
c)
Under the current legal framework, the independence of the BoZ in executing its duties may be
compromised. Section 5 of the BoZ Act provides that “The Minister may convey to the Governor
such general or particular Government policies as may affect the conduct of the affairs of the Bank
and the Bank shall implement or give effect to such policies.” The mandatory tenor in which this
75
provision is couched leaves little doubt of the overriding influence that the minister may wield
over the BoZ on some policy matters.
The Financial Sector Development Plan [FSDP] has made the following recommendations:
a) The Governor should be appointed by the President on the recommendation of an independent body
subject to ratification by Parliament.
b) The Governor should be removed only with the concurrence of an appropriate independent body.
c) The tenure of the Governor’s term of office must not run concurrently with the term of office of a
particular Government. This will guarantee the Governor’s continuity in office, enhance
professionalism and diminish the latitude for patronage.
d) The Board of Directors should comprise members from key financial and economic associations and
stakeholders in the economy. The directors should be Zambian nationals with recognised and
appropriate qualifications and experience in economic and financial affairs.
e) There is need to amend the BoZ Act and any other relevant law to enhance and protect the
independence of BoZ in carrying out its central bank functions.
Unit 15
Lesson Summary
A central bank can generally be defined as a financial institution responsible for overseeing the monetary
system for a nation, with the goal of fostering economic growth without inflation. The core functions of
central banks in any country are:

to manage monetary policy with the aim of achieving price stability;

to prevent liquidity crises, situations of money market disorders and financial crises; and

to ensure the smooth functioning of the payments system.
Unit 15
Progress Test
1
When was Bank of Zambia established?
15.1
2
What is Monetary Policy
15.3
3
What is Credit Policy
15.5
4
What is meant by ‘moral suasion’?
15.4
76
Unit 16
Securities Exchange Commission [SEC]
Unit 16
Syllabus requirements - Historical background; organizational structure;
Objectives and Functions of SEC; Investor protection; model code of conduct;
investor grievances; SEC in the primary securities market; SEC in the secondary
market.
Unit 16
Unit 16
Unit 16
Aim: - To provide a brief outline of the composition and functions of the SEC
Objectives - After studying this Unit you will be able to:
1st
Understand the composition of SEC
2nd
Explain the role and importance of SEC
3rd
Understand some of its regulatory tools
Time required - It’s estimated that you should spend one [1] day on this Unit.
Unit 16
Reflection – what is SEC’s primarily three-fold concern in the capital
markets
----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------16.1 Historical background; - The SEC was established by the Securities Act, 1993. Its
constitutive Act charges it with the responsibility of, among other functions, regulating,
supervising and developing the securities industry in Zambia.
The Securities and Exchange Commission, is a body corporate with a common seal, capable of
suing and being sued and subject to the provisions of this Act, capable of performing all such acts as a
body corporate may by law do or perform.
Principle Act of Parliament is the Securities Act Cap 354 of 1993.
16.2
Organizational structure;- According to the SEC’s Capital Markets bulletin volume 1/2014, the
functions of the SEC vests in the Commissioners nominated and then are appointed by the Minister of
77
Finance in accordance with the provisions of the Securities Act. The institutions that nominate
commissioners include the Law Association of Zambia[LAZ]; Ministry of Justice, Bank of Zambia[BOZ];
Zambia Chamber of Commerce [ZACCI]; NGOCC and the Zambia Chartered Accountants [ZICA]. This
broad representation of various stakeholders on the Commission ensures that a diverse skills set would be
ideal in delivering an effective investor protection as envisaged by the Securities Act. The Board appoints
a Chief Executive who helps discharge their mandate, a management structure that suits the delivery of
the Commissions mandate as depicted below:
16.3
a.
Objectives and Functions of SEC; - The Commission has the following functions:
to take all available steps to ensure that this Act and any rules made under this Act are complied
with;
b.
to supervise and monitor the activities of any securities exchange and the settlement of transactions
in securities;
c.
to license and monitor the activities of securities exchanges, dealers, investment advisers and their
respective representatives and of persons who, within the meaning of rules made under this Act,
are non-bank custodians or service registrars;
78
d.
to approve the constitutions, charters, articles, by-laws, rules and regulations governing and
pertaining to any securities exchange;
e.
to make, issue, monitor and enforce rules for the conduct of participants in the securities industry
and for the supervision and investigation of that conduct, including rules relating to licensing and
for the revocation and suspension of licenses;
f.
to promote and encourage high standards of investor protection and integrity among members of
any securities exchange;
g.
to support the operation of a free, orderly, fair, secure and properly informed securities market;
h.
to regulate the manner and scope of securities on any securities exchange, the exchange rules,
listing requirements, margin requirements, capital adequacy requirements, disclosure and periodic
reporting requirements, trade settlement and clearing requirements;
i.
to take all reasonable steps to safeguard the interest of persons who invest in securities and to
suppress illegal, dishonourable and improper practices in relation to dealings in securities, whether
on the securities exchange or otherwise;
j.
to take all reasonable steps to promote and maintain the integrity of persons licensed under Part
IV and encourage the promulgation by such persons of balanced and informed advice to their
clients and to the public generally;
k.
to consider and suggest proposals for the reform of the law relating to the securities industry;
l.
to encourage the development of securities markets in Zambia and the increased use of such
markets by investors in Zambia and elsewhere;
m.
to promote and develop self-regulation by securities exchange;
n.
to co-operate, by the sharing of information and otherwise, with other supervisory bodies in
Zambia and elsewhere;
o.
to exercise and perform such other powers, authorities, duties and functions as may be conferred
or imposed upon it by or under this or any other Act.
16.4
Investor protection; - The SEC Act section 29 states that a licensee who has custody of a
customer's securities in connection with or with a view to securities business shall-
a.
keep safe, or arrange for the safekeeping of, any documents of title, or documents evidencing title,
relating to them; and
b.
ensure that any securities that he buys or holds for a customer are properly registered in his name
or, with the consent of the customer, in the name of an appropriate nominee.
79
16.5
Model code of conduct; - The SEC Act section 40 (1) states that the Commission may by statutory
instrument make rules prescribing a code of conduct for the securities business. The SEC Act section 40
(2) Where any contract for the sale of securities is entered into in contravention of the code of conduct,
the contravention is actionable at the suit of any person who suffers loss as a result of the contravention.
16.6
Investor grievances;
16.7
SEC in the primary securities market; - SEC says ‘before a company can issue securities [ i.e
shares, bonds, etc] on the capital market, the securities must be registered by the SEC. The registration
process starts with the potential issuer making an application to the SEC for the registration of securities
through the filing of a registration statement. This is a disclosure document which provides pertinent
information about the company’s nature of business, capital structure, financial performance, management
and any other material information useful for investor’s decision making. If the company is a private
limited liability, it must first convert to a Public Limited Company [PLC] before applying for registration
of its shares. As regards the registration of Debt Securities such as Bonds and Medium Term Note
Programmes etc conversion to a PLC is not necessary and any entity can register their debt instruments
with SEC’[Capital Markets news bulletin volume 1/2014 page 9]
16.8 SEC in the secondary market. - The SEC oversees the key players in Capital Markets, who
include securities exchanges, securities brokers and dealers, investment advisors, fund managers,
collective investment securities and issuers. Here the SEC is concerned primarily with promoting the
disclosure of important market-related information, maintaining fair dealing, and protecting against fraud.
– [Capital Markets Bulletin volume 1/2014 page 8]
16.9
Reforms - Similarly, the SEC is faced with constraints arising from its governing legislation, from
where the possibility of conflict of interest is also present. The Securities Act provides that the LuSE shall
be one of the seven prescribed institutions that are entitled to be represented on the Board of
Commissioners. The Commission regulates and supervises the LuSE.
Under this structure, the possibility of a conflict of interest is apparent in having a regulated
institution sitting on the Board of its regulator. This undermines the objectivity of the Board especially in
matters such as the supervision, regulation and disciplining of the LuSE by the Commission.
There is a serious under-funding of the Commission with the result that it cannot fully meet its
statutory function of supervision and oversight alongside its other mandate of developing the securities
market. For example, the Commission cannot engage in any well coordinated awareness campaigns for
80
the development and sustenance of the sub sector, neither can it implement its approved staff
establishment.
The Securities and Exchange Commission
i. The Securities Amendment Bill must speedily be enacted into law.
ii. The capacity of the SEC must immediately be boosted by establishing viable funding arrangements,
including the raising of supervisory fees to enable it to discharge its statutory mandate.
Unit 16
Lesson Summary
The Securities Exchange Commission is the regulator of the capital markets in Zambia. The Securities
Exchange Act grants it many powers and functions. The summary of the functions include licensing,
registration and authorization for financial intermediaries, issuers of debt and equity instruments and
collective investment schemes. It also covers promotion of high standards of Investor Protection, integrity
of industry, operation of free, orderly, informed market.
Unit 16
Progress Test
1
What do the acronym SEC stand for?
16.1
2
State the guarding ACT
16.2
3
List the Institutions which contribute “Commissioners’ to the SEC
16.3
4
Outline the Investor’s grievance procedure
16.6
5
What important information about a company is required at registration?
16.7
81
Unit 17
Pension and Insurance [PIA]
Unit 17
Syllabus requirements - Historical background; organizational structure;
Objectives and Functions of PIA; legal framework -model code of conduct;
grievances procedures; Pension schemes; registered bodies
Unit 17
Unit 17
Unit 17
Aim: - To provide a brief outline of the composition and functions of the PIA
Objectives - After studying this Unit you will be able to:
1st
Understand the composition of PIA
2nd
Explain the role and importance of PIA
3rd
Understand some of its regulatory tools
Time required - It’s estimated that you should spend one [1] day on this Unit.
Unit 17
Reflection – Distinguish between Pensions and Insurance
-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------17.1
Historical background; The office of the Registrar of Pensions and Insurance (generally
known as the PIA) was established in 1997 with the mandate of enforcing two pieces of legislation,
namely, the Pension Scheme Regulation Act No. 28 of 1996 and the Insurance Act no 27 of 1998 (formerly
Chapter 392 of the laws of Zambia). The office was a semi-autonomous entity without distinct legal
personality under the Ministry of Finance and National Planning.
When Regulation Act No. 28 of 1996 was amended by Act No. 27 of 2005 the Authority became
a body corporate. This is Act together with the Insurance Act 1997 give the PIA regulatory and supervisory
authority over Pension Schemes and the Insurance industry.
The Pensions and Insurance Authority is the regulatory and supervisory authority for the pensions and
insurance industry in Zambia.
A pension is simply a form of saving for retirement. It is a stream of income that is paid
usually when one attains retirement, but it can also be paid to children. Widows and widowers may
also receive the late spouses’ pension [PIA]
82

A pension scheme is an arrangement under which persons are entitled to benefits upon retirement
or upon death or termination of employment or upon the occurrence of such events as specified in
law or the document establishing a pension scheme.[PIA]

Insurance is a contract between two parties [the insurer and the insured] in the which the insurer
[usually an insurance company] agrees to reimburse the insured for clearly defined losses. [ Pocket
Finance – Tim Hindle]
17.2
1.
Organizational structure;
Board - The Authority is governed by a 9 member Board of Directors drawn from the public
service and private sector. These are:
1. a representative of the Ministry responsible for finance;
2. a representative of the Ministry responsible for labour and social security;
3. a representative of the Bank of Zambia;
4. a representative of Zambia association of Chambers of Commerce and industry;
5. a representative of the Attorney General;
6. a representative of Zambia Institute of Certified Accountants;
7. a representative of Zambia Federation of Employers;
8. a representative of a trade union representing workers in the insurance and pensions industries
; and
9. one other person who shall have expertise in the administration of pension funds, insurance or
actuarial matters
2.
Management - The Management team is headed by a Registrar and deputized by two Deputy
Registrars in charge of Pensions and Insurance departments respectively. The team is
complemented by a Director of Corporate Services who is in charge of directorate of corporate
services.
17.3
Objectives and Functions of PIA; - As the Regulatory Authority for the pensions and insurance
industry the Authority’s core functions are:

Licensing and registration;

Prudential regulation and supervision;

Formulation and enforcement of standards of conduct for the industry;

Protection of pension members and policy holders;

Advising Government on insurance of national assets and properties.
83
17.4
Model code of conduct; The PIA launched its Code of ethics on 30th May 2014. This was a public
declaration to uphold high ethical values in carrying out of duties among its employees. It’s a central guide
and reference for employees in the day-to –day decision making and operations.
17.5
Grievances procedures; - The PIA says a person has a right to compliant and have their complaint
taken seriously. If a person is unhappy with the way their claim was handed, they must speak to their
pension scheme or insurer first. And follow the grievance handling procedure that the scheme or insurer
provides. The problem must be resolved in the best interest of both parties. After exhausting all channels
available in the scheme or insurer and the matter is not resolved the complainant may contact PIA. The
complaint must make sure to provide all the relevant information and documents pertaining to the case
and send them PIA
17.6
Types of Pensions – In Zambia there are two types of pensions; the government [statutory
pensions] which are Local Superannuation Fund [LASF], Public Service Pension Fund [PSPF, Worker
Compensation Fund Control Board [WCFCB],and National Pension Scheme Authority [NAPSA]. And
occupational pension schemes or company pension schemes.
Another classification is [1] mandatory national pension schemes run by NAPSA, [2] voluntary
which are occupational pension schemes usually set up by employers and in rare cases trade unions and
[3] individual pension which can be bought from Insurance Companies
A pension scheme has two stages namely accumulation and de-accumulation. In the accumulation stage
contributions from members are paid into the fund or scheme and these funds invested. De-accumulation
is when the member starts receiving a pension.
A pension scheme is managed by a Board of Trustees who then appoints fund managers and
administrators. A fund manager is a company that has the duty of investing funds of the scheme on behalf
of the trustees. An administrator is the one who does the administration part of the scheme such as paying
out benefits, keeping scheme records and organizing meetings for the trustees.
Pension funds are invested in various markets and different instruments. Currently the law
prohibits the use of pensions as security for a loan
17.7
Registered Bodies - PIA registers three categories of Pension Companies – [1] Pension Schemes,
[2] Pension Fund Managers and [3] Pension Scheme Administrators. There are now 5 Fund managers and
6 Fund Administrators. The following are the current authorized service providers for the pension industry
in Zambia for the year ended 1st January 2014. In the Insurance Industry they register [1] re-insurance
84
companies, [2] insurance companies, [3] insurance agencies , [ 4] insurance brokers , [5] motor assessors,
[7] loss adjustors and [8] claim agents.
17.8
Reforms – The Financial Sector Development Plan upon review of the PIA made the following
observations” [1] The PIA is not set up as statutory body corporate and, as a result, it has no distinct legal
personality and no governing board. The Registrar reports to the Minister of Finance and National
Planning through the Secretary to the Treasury. [2] As a consequence there has been slow progress made
in attending to issues such as improving conditions of service for staff with a view to retain qualified and
competent personnel. [3] The office has not been adequately funded to meet its operational needs, which
include training and consumer education. The office is wholly dependent on monthly grants from the
Government. [4] Not all pension schemes where under its supervision.
Achievement include [1] The PIA is now an autonomous supervisory authority; [2] Amendments
to the Pension Scheme Regulation Act to expedite the strengthening of the supervisory capacity has been
done.[3] Review the funding policy of the PIA and imposition of a levy on pension fund contributions
and insurance premiums to sustain the operations of the PIA done.
Outstanding is National Pensions and Savings Authority (NAPSA) is still under PIA supervision.
Unit 17
Lesson Summary
The Pensions and Insurance Authority is the regulatory and supervisory authority for the pensions and
insurance industry in Zambia. The Authority is created by the Pension Scheme Regulation Act No. 28 of
1996 (as amended by Act No. 27 of 2005). Prior to the enactment of ACT N0. 27 of 2005, PIA existed as
Office of the Registrar of Pensions and Insurance under the Ministry of Finance and Planning. Following
the enactment of Act No. 27 of 2005 the Authority became a body corporate. Its mission is to “regulate
the conduct of pensions and insurance industry through prudential supervision in order to protect the
interest of pension scheme members and insurance policyholders and to foster the industry’s growth,
development and stability.”
Unit 17
Progress Test
1
What does the acronym PIA stand for?
17.1
2
What is a pension?
17.1
3
What is a pension scheme?
17.1
4
List two functions of the PIA
17.3
5
What are the three main classifications of pension schemes?
85
17.6
Unit 18
Patents and Companies Registry Agency [PACRA]
Unit 18
Syllabus requirements - Historical background; organizational structure;
Objectives and Functions of PIA; legal framework
Unit 18
Unit 18
Unit 18
Aim: - To provide a brief outline of the composition and functions of the PACRA
Objectives - After studying this Unit you will be able to:
1st)
Understand the composition of PACRA
2nd) Explain the role and importance of PACRA
3rd) Understand some of its regulatory tools
Time required - It’s estimated that you should spend one [1] day on this Unit.
Unit 18
Reflection – List the Laws which PACRA administers?
---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------18.1
Historical background;
The Patents and Companies Registration Agency (PACRA) is a semi-autonomous executive
agency of the Zambian Ministry of Commerce, Trade and Industry. Its principal functions are to operate
a legal system for registration and protection of commercial and industrial property and to serve as a legal
depository of the information tendered for registration. It comprises two core departments – Industrial
Property and Commercial. Others are Accounts, Human Resources and Administration, and Information
Technology (IT).
18.2
Organizational structure;
PACRA is governed through a Board which exercises and performs the powers and functions of the
Agency. The Board shall consist of the following part-time members appointed by the Minister of
Commerce: The appointees are specified in the PACRA ACT as follows:

a representative of the Ministry responsible for commerce;

a representative of the Attorney- General;

an accountant registered with the Zambia Institute of Chartered Accountants;

a representative of the Zambia Association of Chambers of Commerce and Industry;

one person with expertise in matters of intellectual property; and

two other persons.
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The Board then appoints, on such terms and conditions Registrar as it may, with the approval of the
Minister of Commerce, determine, a Registrar who shall be the chief executive officer of the Agency.
18.3
Objectives and Functions of PACRA [Agency] ; - [1] The functions of the Agency are to—
a)
administer the Companies Act, the Registration of Business Names Act, the Patents Act, the
Trade Marks Act, the Registered Designs Act, and the Companies (Certificates Validation) Act;
b)
receive and investigate any complaint of alleged or suspected breach of this Act or the Acts referred
to in paragraph (a) and, subject to the directives of the Director of Public Prosecutions, prosecute
offences under those Acts;
c)
collect, collate and disseminate information on the law relating to the Acts referred to in paragraph
(a);
d)
advise Government on all matters pertaining to the Acts referred to in paragraph (a); and
e)
do all such other things as are necessary or incidental to the performance of its functions under this
Act.
[2]
The Agency may—

determine and levy fees that the Agency considers necessary to finance its activities under this
Act; and

Determine what portion of any fee is payable in respect of any part of a year and the date on
which the fee or portion thereof is payable.
[3]
Because all Financial Service Providers, Pensions and Insurance, Capital markets participant are
Companies, PACRA is included as a regulator here.
Unit 18
Lesson Summary
Patents and Companies Registration Agency is a body corporate with perpetual succession and a common
seal, capable of suing and of being sued in its corporate name, and with the power, subject to the provisions
of the PACRA Act, and can do all such acts and things as a body corporate may, by law, do or perform.
Unit 18
1
2
3
Progress Test
What does the acronym “PACRA” stand for?
Under which Ministry does PACRA fall?
State one function of PACRA
87
18.1
18.2
18.3
Unit 19
Competition and Consumer Protection Commission [CCPC]
Unit 19
Syllabus requirements - Historical background; organizational structure;
Objectives and Functions of CCPC; grievances procedure; Governing legal
framework.
Unit 19
Unit 19
Unit 19
Aim: - To provide a brief outline of the composition and functions of the CCPC
Objectives - After studying this Unit you will be able to:
1st)
Understand the composition of CCPC
2nd)
Explain the role and importance of CCPC
3rd)
Understand some of its regulatory tools
Time required - It’s estimated that you should spend one [1] day on this Unit.
Unit 19
Reflection – Briefly outline the grievance procedure?
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------19.1
Historical background;
The Competition and Consumer Protection Commission (CCPC) on its website says it is a
statutory body established with a unique dual mandate to protect the competition process in the Zambian
Economy and also to protect consumers.
The CCPC was established in 1997 under the name Zambia Competition Commission (ZCC). The
name was then changed in 2010 to Competition and Consumer Protection Commission (CCPC) following
the enactment of the new Act called the Competition and Consumer Protection Act (CCPA) No. 24 of
2010 and repeal of the old Act.
The mandate of the Commission cuts across all economic sectors. CCPC regulates the Zambian
economy to avoid restrictive business practices, abuse of dominant position of market power, anticompetitive mergers and acquisitions and cartels as these erode consumer welfare. The Commission is
also mandated to enhance consumer welfare. In general terms therefore, the principle aim of the
Commission is to safeguard competition and ensure consumer protection
19.2
Organizational structure; - CCPC is governed through a Board which exercises and performs
the powers and functions of the Commission. The Board headed by the Chairperson and Secretariat headed
by the Executive Director.
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19.3
Objectives and Functions of CCPC; CCPC’s main functions are outlined in the Law, below is
their own interpretation of these lawful functions:
a)
Investigate and assess cartels that border on: Fixing of prices among competitors / Division of
markets by allocating customers, suppliers or territories / Setting of production volume/output /
Collusive tendering or bid rigging
b)
Review, Investigate and assess abuse of dominance conducts which take the form of: Applying
dissimilar conditions to equivalent transactions with other trading parties / Denying any person
access to an essential facility / Predatory pricing of goods and services / Excessive pricing of goods
and services / Imposing unfair trading conditions such as exclusive dealing and tying/bundling of
products and services
c)
Review, assess and investigate mergers that take place due to: Investigating and analyzing
consumer rights violations as stipulated in the Act / Educating and sensitizing the public on
consumer protection provisions in the Act as well as their rights as enshrined in other various
pieces of legislation / Carrying out advocacy between the business entities and the consumers and
mediating between them
d)
Ensuring that consumers are protected from unfair trading practices by: Sale or lease of assets of
an enterprise to an independent enterprise / Amalgamation or combination of independent
enterprises / Occurrence of a joint venture that involves two or more independent enterprises
19.4
Grievances procedure; Any person who alleges that a person or an enterprise is engaged in any
practice prohibited under the Act, may lodge a complaint with the Secretariat through any of the
following modes:

Verbally: telephonically or by a physical visit to the Commission offices,

In writing or

by whatever means: by whatever means of communication whether email, letter or any other mode
reasonably understood by the Commission.

Complaint form may be signed by the Complainant if complaint is by physical visit. A complaint
received verbally or by any other means will be duly lodged even if the complaint form is not
signed.
Once a complaint is lodged with Secretariat and there are reasonable grounds to believe that there
is, or is likely to be, a contravention of any provisions of the Act, the Executive Director may authorize
the investigation and assign a reference number thereto.
89
The Respondent shall be notified of the investigation in writing by notice. The purpose of such
notice is to inform the party being investigated on the specific allegations raised against them and also to
provide them with an opportunity to respond to the said allegations.
The Complainant (provided it is not the Commission) and Respondent shall be notified of
Secretariat’s findings and its proposed recommendation to the Board, following a complete investigation
through a report pursuant to section 55(10) of the Act.
The Respondent and Complainant have the right to respond to the Secretariat’s findings and shall
be given seven (7) working days to respond to Secretariat’s findings, in relation to part VII cases while14
working days will be given as regards cases contained in any other part of the Act.
Upon the expiry of the 7 working days within which parties are to respond to the Secretariat’s
findings, the Secretariat shall submit its recommendations to the Board.
The Complainant or Respondent may within 7 working days of receiving a report on the
Secretariat’s findings request to make written or oral submissions to the Board following investigations
by the Secretariat prior to a decision being made by the Board.
The request by either party to make submission to the Board shall be in triplicate and shall be
availed to the other party, the Board and Secretariat.
Where submissions are made to the Board by either party, they shall be made at no cost and such
submissions will be availed to the other party for purposes of being given an opportunity to respond to
them.
Unit 19
Lesson Summary
It started as the Zambia Competition Commission but re-named the Competition and Consumer Protection
Commission. The Commission is a body corporate with perpetual succession and a common seal, capable
of suing and being sued in its corporate name and with power, subject to the provisions of the Act, to do
all such acts and things as a body corporate may, by law, do or perform. In short the Commission’s
mandate is to safeguard competition and ensure consumer protection.
Unit 19
Progress Test
1
What do acronyms CCPC stand for?
19.1
2
What is the former name of the CCPC?
19.1
3
State two functions of the CCPC
19.3
4
Who is allowed to take up grievance with the CCPC?
19.4
90
Unit 20
Financial Intelligence Centre [FIC]
Unit 20
Syllabus requirements - Historical background; organizational structure;
Objectives and Functions of FIC; Prohibition and prevention of money launderingdefinition, steps, offences, obligation of institutions and their staff.
Unit 20
Aim: - To provide a brief outline of the composition and functions of the FIC
Unit 20
Objectives - After studying this Unit you will be able to:
1st)
Understand the composition of FIC
2nd) Explain the role and importance of FIC
3rd) Understand some of its regulatory tools
Unit 20
Time required - It’s estimated that you should spend one [1] day on this Unit.
Unit 20
Laundering
Reflection – Compare and contrast Terrorism financing with Money
-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------20.1
Historical background; The Financial Intelligence Centre (the Centre) is the Financial
Intelligence Unit (FIU) of the Government of the Republic of Zambia which was established in
November, 2010 by an Act of Parliament, hereafter called, ‘‘the Financial Intelligence Centre Act, No. 46
of 2010.’’
The Centre is the sole designated National Agency mandated to receive, request, analyze and
disseminate disclosure of information concerning suspected Money Laundering (ML), Terrorist Financing
(TF) and other serious offences to competent authorities for investigations with the view of assisting with
combatting ML, TF and other serious offences.
20.2
Organizational structure; The Financial Intelligence Centre is administered by the Board of
Directors appointed by the Republican President.
The Board consists of a Chairperson and four other members. To be appointed as a member of the
Board, a person should not have less than 10 years of experience in a field connected with financial
analysis, law, accounting, forensic auditing, financial investigation or law enforcement.
The overall function of the Board is to provide an oversight policy direction regarding the
operations of the Centre.
The Financial Intelligence Centre (the Centre) is headed by the Director who is, subject to the
approval of the Minister, appointed by the Board as Chief Executive Officer of the Centre, as provided
91
under section 9 of the Financial Intelligence Centre Act No 46 of 2010 (the Act). On appointment, the
Director is required to take an oath or affirmation before the Chief Justice prior to assuming
responsibilities.
To be appointed to the position of the Director of the Centre, an individual should not have less
than 10 years of experience in financial analysis, law, accounting, forensic auditing, financial
investigations or law enforcement. The Director is responsible for the overall management, administration
and operation of the Centre
20.3
Objectives and Functions of FIC; - The Centre is the sole designated Agency responsible for the
receipt, requesting, analyzing and disseminating disclosure of suspicious transactions reports.
Notwithstanding the generality of the foregoing, the functions of the Centre are to:
a)
receive, request and analyse suspicious transaction reports required to be made under the Financial
Intelligence Centre Act, No. 46 of 2010 or any other written aw, including information from any
foreign designated authority
b)
analyse and evaluate suspicious transaction reports and information so as to determine whether
there is sufficient basis to transmit reports for investigation by the law enforcement agencies or a
foreign designated authority
c)
disseminate information to law enforcement agencies, where there are reasonable grounds to
suspect money laundering or financing of terrorism
d)
provide information relating to suspicious transactions in accordance with the Act to any foreign
designated authority, subject to such conditions as the Director may determine
e)
provide information, advice and assistance to law enforcement agencies in furtherance of an
investigation
f)
enter into any agreement or arrangement, in writing, with a foreign designated authority which the
Centre considers necessary or desirable for the discharge or performance of its functions
g)
conduct inquiries on behalf of foreign designated authorities and notify them of the outcome;.
h)
inform the public and reporting entities of their obligations and measures that have been or might
be taken to detect, prevent and deter money laundering and financing of terrorism;
i)
access directly or indirectly, on a timely basis financial, administrative or law enforcement
information, required for the better carrying out of its functions under the Act ;
j)
perform such other functions as are necessary to give effect to the Act.
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20.4

Prohibition and prevention of money laundering-definition,
Terrorist financing is the process of financing terrorist acts. One of the main differences
between this and money laundering is that the source of the money used in terrorist financing
may be perfectly legitimate. The source of money in money laundering is always an illegal
source.

“money laundering” means, where a reasonable inference may be drawn, having regard to the
objective factual circumstances, any activity by a person
a.
who knows or has reason to believe that the property is the proceeds of a crime; or
b.
without reasonable excuse, fails to take reasonable steps to ascertain whether or realised
directly or indirectly, by any person from the commission of a crime; where the person—
i.
engages, directly or indirectly, in a transaction that involves proceeds of a crime;
ii.
acquires, receives, possesses, disguises, transfers, converts, exchanges, carries,
disposes, uses, removes from or brings into Zambia proceeds of a crime; or
iii.
conceals, disguises or impedes the establishment of the true nature, origin, location,
movement, disposition, title of, rights with respect to, or ownership of, proceeds of
any illegal activity
20.5
Steps in money laundering-the initial - or placementstage of money laundering, the launderer
introduces his/her illegal profits into the financial system. After the funds have entered the
financial system, the second - or layering - stage takes place. In this phase, the launderer engages
in a series of conversions or movements of the funds to distance them from their source. Having
successfully processed his criminal profits through the first two phases, the launderer then moves
them to the third stage - integration - in which the funds re-enter the legitimate economy.
20.6
Offences, - Offences or unlawful activities under Money Laundering include: Participation in an
organized criminal group and racketeering;/ Terrorism, including terrorist financing;/ Trafficking
in human beings and migrant smuggling; / Sexual exploitation, including sexual exploitation of
children;/ Illicit trafficking in narcotic drugs and psychotropic substances; / Illicit arms trafficking;
/ Illicit trafficking in stolen and other goods;/ Corruption and bribery;/ Fraud; / Counterfeiting
currency; / Counterfeiting and piracy of products; / Environmental crime; / Murder, / grievous
bodily injury;/ Kidnapping, illegal restraint and hostage-taking; / Robbery or theft;/ Smuggling; /
Extortion; / Forgery; / Piracy; and Insider trading and market manipulation
93
20.7
a)
Obligation of institutions and their staff.
The major role of the Organisation in curbing money laundering is to police financial dealings
and report any suspicious transactions. In addition other obligations placed on the Organisation by
legislation are:
•
Keep an identification and a business transaction record for a period of 10 years after the
termination of the business transaction so recorded.
•
Report to the FIC where the identity of the persons involved, the circumstances of any business
transaction or where any cash transaction, gives any officer or employees of the Organisation
reasonable grounds to believe that a money laundering offence is being, has been or is about to be
committed.
•
Comply with the directives issued to it by the Supervisory Authority with respect to money
laundering activities.
•
Permit any authorised officer with a warrant, upon request to enter into any premises of the
Organisation during the working hours and inspect records suspected of containing information
relating to money laundering
•
Permit an authorised officer with a warrant to make notes or take any copies of the whole or any
part of the record referred to in paragraph 4.
•
Designate an Officer in each branch or local office to be responsible for reporting all transactions
suspected of being related to money laundering
•
The Organisation shall not obstruct any investigations into money laundering that may be
instituted by the Anti-Money Laundering Unit
•
The Organisation shall, provide staff with training.
b)
The Law, however imposes an obligation on people personally and they must take this
responsibility seriously. Responsibilities and accountabilities of each individual shall include the
following :
•
Obtain proper identification
•
Develop a customer profile
•
Monitor and review accounts and transactions
•
Report suspicious conduct and transactions
•
Keep records
94
•
Train staff
Unit 20
Lesson Summary
“Money laundering” means concealing the true amount and source of income and disguising it as a
legitimate source of funds. It can range from the simple technique of exchanging smaller bills (5’s 10’s,
20’s into K100 bills, to the wiring of funds to offshore foreign banks through layers of fictitious entities.
Professional money laundering is big business and does not always involve DRUG MONEY.
Persons involved in money laundering may include: / Drug dealers attempting to disguise large amounts
of cash in fraudulent business concerns; seemingly legitimate business persons trying to evade paying
taxes; and Ordinary people trying to hide their assets due to a divorce or lawsuit.
Occasionally, even “good customer” launder money, with the bank unknowingly assisting them.
Be cautious of customers who are too friendly, since the key to successful money laundering is to conduct
business at a bank that doesn’t ask too many questions and appears to look the other way.
Money laundering is a crime after a crime.
Unit 20
Progress Test
1.
What is the definition of Money Laundering?
20.3
2.
The main objective of money laundering is:
3.
If you are a Money launderer, what would you consider to be the most difficult stage in money
laundering?
20.54. Role of the frontline staff in respect of KYC guidelines is:
20.7b
5.
If money laundering is a crime after a crime, what could be the primary crime?
20.6
Summary
95
Unit 21
Commercial Banking System in Zambia
Unit 21
Syllabus requirements - History and Growth of Banking system in Zambia;
Types of Banks in Zambia; Banking Products and Services in Zambia
Unit 21
Unit 21
Unit 21
Unit 21
Aim: - To provide a brief overview of the commercial banking system in Zambia
Objectives - After studying this Unit you will be able to:
1st)
Understand the brief history of commercial banking in Zambia?
2nd) Understand the varies function of commercial banking
3rd) Understand the various products and services offered.
Time required - It’s estimated that you should spend one [1] day on this Unit.
Reflection – Distinguish between a commercial bank and corporate bank
-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------21.1 History and Growth of Banking system in Zambia; -The Zambian banking system
traces back to 1906 when the first bank in Zambia was established. From that year till today the
banking journey of growth can be divided into two phases:
Phase 1 – This during the colonial days: Standard Chartered was the first bank to be established
in 1906 followed by Barclays Bank in 1918. Later Grindlays Bank opened. At Independence these where
the dominant banks serving the settlors mostly.
Phase II – Post Independence up to 1991. – According the FSDP Phase Report “since
independence in 1964, the financial sector in Zambia has undergone two notable phases in its
development. First, during the early 1970s when the Government’s nationalization program had an important
impact upon the sector. Although commercial banks were not nationalized, all other major financial
institutions were nationalized and merged to form government owned institutions such as the Zambia State
Insurance Corporation (ZSIC) and the Zambia National Building Society (ZNBS). Entry of non-bank
financial institutions into the financial sector became restrictive. However, Government established
financial, institutions such as the DBZ, the Local Authority Superannuation Fund (LASF) and the Zambia
Export and Import Bank, through Acts of Parliament.
The state owned Zambia National Commercial Bank (ZNCB) and foreign owned banks dominate
the financial sector. Commercial banks hold about 90 percent of financial system assets and foreign equity
96
participation is significant, accounting for three quarters of the banking system capitalization. The banking
system was comprised of 13 commercial banks. There are five large banks (Barclays Bank, Standard
Chartered Bank, City Bank, Stanbic Bank and Zambia National Commercial Bank) four of which are
subsidiaries of multinational banks (SMBs). In terms of assets, Barclays is the largest bank followed by the
Government bank, Zambia National Commercial Bank (ZNCB), which is in the process of being privatized.
The second phase of notable change in the financial sector in Zambia has been the liberalization of
the sector, and the economy generally, since 1991. The liberalization led to the entry of new financial
institutions into the industry.
The financial sector has grown and now comprises the Central Bank, commercial banks, non-bank
financial institutions (comprising the three building societies, some micro finance institutions, the
National Savings and Credit Bank (NSCB), the DBZ, the Bureau de changes, leasing companies, insurance
companies, pension funds and the capital markets.
21.2 Types of Banks in Zambia;
Banks registered as at December 2015 include the following:AB Bank Zambia Limited, / Access Bank
Zambia Limited, / BancABC Zambia Limited, / Bank of China (Zambia) Limited, / Barclays Bank
Zambia Plc., / Cavmont Bank , / Citibank Zambia Limited , / Ecobank Zambia Limited , / Finance Bank
Zambia Limited , / First Alliance Bank Zambia Limited , First Capital / / First National Bank of Zambia
Limited, / Indo-Zambia Bank Limited, / Intermarket Bank ,/ Investrust Bank Plc., / Stanbic Bank Zambia
Limited , / Standard Chartered Bank Zambia Plc. / United Bank for Africa Zambia Limited,, / Zambia
National Commercial Bank Plc.
Commercial banks account for the largest type of banking in Zambia. They account for over 95%
of the total bank credit. Commercial banks are broadly divided into three groups:[1] Retail Banksprovision of multiple banking services to multiple customer groups through multiple delivery channels.[2]
Corporate banks - a system of banking under which the bank provides banking services to corporates and
high profile individuals.[3] Bancassurance banks – the distribution of financial products particularly the
insurance policies by banks as corporate agents, through their branches located in different parts of the
country.
Other types of banks in Zambia include: [1] Industrial (Development) Banks - These banks
basically assist industries. They provide long term funds to industrial undertakings. The funds are raised
by issue of shares and debentures and also by accepting long term deposits from public. Eg. Development
97
Bank of Zambia. [2] Saving Banks - There is only one bank in Zambia which functions as savings banks.
An example is the National Savings and Credit Bank.
21.3
Banking Products and Services in Zambia - the products and services offered by banks in
Zambia include:
1
Accept deposits
the bank collects deposits from the public. The deposits could be of different
types—such as:[1] (a) Savings deposits- This type of deposits encourages the habit of savings among the
public. The rate of interest is low. At present it is about 3-5% p.a. Withdrawals of deposits are allowed
subject to certain restrictions. This account is suitable for salary and wages earners. This account could be
opened in a single name or in joint names. [2] Fixed deposits-Lumpsum amount is deposited at one time
for a specific period. Higher rate of interest is paid, which varies with the period of deposits. Withdrawals
are generally not allowed before the expiry of the period. Interest rates accepted would not be applicable
if these deposits are withdrawn for emergency use of the depositors. [3] Current deposits-This types of
account is mostly operated by businessmen. Withdrawals are freely allowed. No interest is paid. In fact,
there are services charges. The account holders get the benefit of overdraft facility.
2
Granting advances - The bank advances loans to the business community and other members of
the public. The rate charged is higher than what it pays on deposits. The difference in the interest rates
(lending rate and the deposit rate) is its profit. Advances are given as: [1] Overdraft- This type of advance
is given to current account holders. No separate account is maintained. All entries are made in the current
account. A certain amount is sanctioned as overdraft which could be withdrawn within a certain period of
time, say three months or so. Interest is charged on the actual amount withdrawn. An overdraft facility is
granted against a collateral security. It is sanctioned to businessman and business firms.[2] Loans Lumpsum amounts are given. It is normally for short terms, a period of one year or medium terms, a
period upto five years. Repayment of money could be either in the form of installments over a period of
time or as a Lumpsum amount. The loans are granted to meet working capital needs. Interest is charged
on the actual amount sanctioned. The rate of interest depends on the amount of loan and period of loan.
Loans are normally issued against tangible assets. [3] Discounting of bills-Banks advance money by
discounting or purchasing bills of exchange, both domestic and foreign. It pays the bill amount to the
drawer or the beneficiary of the bill by deducting usual discount charges. On maturity, the bill is presented
to the drawee or acceptor of the bill and the amount is collected.
3
Agency functions
The commercial bank acts agents of its customers. It performs a number of
agency functions, which include: [1] Transfer of funds-The bank transfers fund from one branch to another
98
or from one place to another.[2] Collection of cheques-The bank collects money of the cheques through
clearing section of its customers. It also collects money of the bills of exchange.[3] Periodic payments-On
standing instructions of the client, the bank makes periodic payments in respect of electricity bills, rent,
etc.
In addition the business of receiving deposits from the public including chequing account and current
account deposits and the use of such deposits, either in whole or in part, for the account of and at the risk
of the person carrying on the business, to make loans, advances or investments, Banks in Zambia are
permitted through the Banking and Financial services Act section 8 to do the following:
a)
making loans and extending credit to any person on the security of property of any kind or
unsecured;
b)
dealing as a principal or as an agent ini.
bills of exchange, promissory notes, cheques, travelers’ cheques and like instruments;
ii.
the currency of Zambia and, subject to the guidelines, bulletins and regulatory statements
made under this Act, in the currency of any other country and foreign exchange
transactions; and
iii.
gold, silver or platinum bullion or coins;
c)
providing money transfer services and facilities;
d)
the issue and administration of payment, credit or debit cards and, in co-operation with others, the
operation of payment, credit card and debit card systems;
e)
providing guarantees, letters of credit and other assurances of payment:
f)
finance leasing;
g)
factoring, with or without recourse;
h)
acting as a trustee of any trust, executor or administrator of any estate or in any fiduciary capacity
for any person;
i)
acting as a financial agent for any person;
j)
providing safekeeping and custodial services for financial assets and securities;
k)
Providing merchant banking services including the arrangement and underwriting of shares trade
financing, corporate financing and the provision of financial advice; and
l)
Dealing as a principal or as an agent for its customers in financial futures and options and in
exchange, currency and interest rate swap agreements.
99
Unit 21
Lesson Summary
Zambia’s financial sector is at a rudimentary stage, with limited financial intermediation, financial
inclusion and low public confidence. Zambia has one of the lowest levels of financial intermediation in
sub-Saharan Africa:Since independence in 1964, the financial sector in Zambia has undergone two
notable phases in its development. First, during the early 1970s when the Government’s nationalization
program had an important impact upon the sector. The second phase of notable change in the financial sector
in Zambia has been the liberalization of the sector, and the economy generally, since 1991. The
liberalization led to the entry of new financial institutions into the industry.
The financial sector has grown and now comprises the Central Bank, 19 commercial banks, and
many non-bank financial institutions (comprising the four building societies, forty-five micro finance
institutions, the National Savings and Credit Bank (NSCB), the DBZ, the seventy Bureau de changes and
nine leasing companies), insurance companies, pension funds and the capital markets.
Despite entry of new financial institutions after the liberalization of the economy, the
Zambian financial system has remained relatively small. According to FSDP report the ratio of M2 to
GDP has been in the range of 15 –20 percent over the last five years, within the middle range for
monetization ratios of Sub-Saharan African Countries. In the early 1980’s, M2 was about 35 percent of
GDP. Bank credit- at 8 percent of GDP is-is among the lowest for Sub-Saharan countries and is exceeded
by credit to the public sector. Dollarization is high with about half of bank deposits and one third of loans
in foreign currency.
Unit 21
Progress Test
1
Name the first bank established in Zambia and when?
21.1
2
How many commercial banks are registered in Zambia
21.2
3
What are the features of a current account
21.3
4
Name the three common advances
21.3
5
List two agency functions of commercial banks
21.3
100
Unit 22
Non-banking Financial Services
Unit 22
Syllabus requirements - Definition; Requirements for registration with BOZ;
Acceptances of Public deposits By NBFC; Prudential regulations applicable to
NBFS
Unit 22
Unit 22
Aim: - To provide a brief overview of the non-banking system in Zambia
Objectives - After studying this Unit you will be able to:
1st)
Understand what non-banking market is all about?
2nd)
Understand the various instruments used in a non-banking market.
Unit 22
Time required - It’s estimated that you should spend one [1] day on this Unit.
Unit 22
Reflection – What is the difference between banks and NBFIs?
---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------22.1
In the Banking sector all organisations not identified as banks are classified as non-
banking. Non-Banking Financial Institutions [NBFI] are further sub-divided into two components:
financial businesses and financial institutions. [Refer to 2.5.1]
a)
Financial Institutions include:

National Savings and Credit Bank: -

Development Bank of Zambia – [Refer Unit 23]

Micro-finance Institutions – means a person who, as part of their business, advance micro
credit facilities. [BFSA SI 3 of 2006 Microfinance Regulations] These are further
subdivided into deposit takers and non-deposit taking. [Section 14 of SI 3 of 2006]

Building Societies -
b)
Financial Businesses include the following:

Leasing Companies -

Credit Reference Bureau -

Micro-Finance Institutions – [non deposit

Bureau de Change –
takers]

the money transfer services companies
101
22.2
Requirements for registration with BOZ; - The BOZ gets its authority to license, regulate and
supervise banks and non-banking institutions from the Banking and Financial Services ACT 1994. The
objective of the Bank of Zambia in this regard is to ensure and promote a safe and sound financial system.
Below is a summarized interpretations of the requirements to register a NBFI contained in the BOZ
regulations on “Requirements for setting up a non-bank financial institution in Zambia”

The Applicant must be a registered company;

The application must in writing addressed to the Registrar of Banks and Financial Institutions;

The proposed name of the NBFI must be cleared by the Registrar,

Declare to BOZ the source of funds invested; and provide evidence

Submit a three year business plans;

Submit Audited financial statements (where applicable) of the company for the year immediately
preceding the application;

Curriculum vitae, including details of nationality or residence, for the senior management (i.e.
proposed directors, senior executive officers) of the proposed non-bank financial institution

Any other documents in support of the application, as may be requested by the Bank of Zambia.

Pay a non-refundable application fee , payable at the time of making the application;
22.3
Prudential regulations applicable to NBFS - Bank of Zambia in its Regulations says that when
a licence is granted, it is subject to a number of conditions and is valid until revoked by the Bank of
Zambia or surrendered by the non-bank financial institution.
The further says that once a non-bank financial institution is registered, it becomes subject to the
supervisory powers of the Bank of Zambia as provided for in the Bank of Zambia Act and the BFSA. A
non-bank financial institution is also supposed to adhere to regulatory and prudential requirements
relating to, inter alia, reserves, capital adequacy, liquidity, restrictions on lending and exposures to
insiders.
All non-bank financial institutions operating in Zambia are supervised by the Non- Bank Financial
Institutions Supervision Department of the Bank of Zambia. The following are some of the key
requirements that non-bank financial institutions are supposed to take into account:

Once licensed, the non-bank financial institution shall be subjected to regular on-site and off-site
inspections;

The non-bank financial institution shall be expected, inter alia, to file monthly prudential returns;
102

A non-bank financial institution shall not close a branch without giving the Bank of Zambia notice,
as provided for under the Banking and Financial Services Act;

A non-bank financial institution shall not change its shareholders, directors, senior managers or its
name without prior written approval from the Bank of Zambia;

A non-bank financial institution shall ensure that it is compliant with sections 23 and 24 of the
BFSA at all times;

A non-bank financial institution shall ensure that it has a Compliance Officer who shall, inter alia,
ensure that a non-bank financial institution complies with the provisions of the BFSA the
Prohibition and Prevention of Money Laundering Act, Number 14 of 2001 and all other relevant
legislation. A nonbank financial institution shall also ensure that it has adequate internal anti
money laundering policies, guidelines and training programmes upon commencement of business;

A non-bank financial institution shall submit to the Bank of Zambia such other information as may
be required by the Bank of Zambia from time to time.
Unit 22
Lesson Summary
The Banking and Financial Services Act (BFSA), 1994, gives the Bank of Zambia the authority to license,
regulate and supervise banks and other financial institutions registered under the referred Act..
The non-bank financial institution sector includes leasing companies, bureau DE change, micro
finance institutions, building societies, as well as institutions like Development Bank of Zambia and
National Savings and Credit Bank The licensing requirements may vary slightly depending on the
category of financial institution.
Unit 22
Progress Test
1
What is a financial service provider?
2.5
2
What is a financial institution?
2.5
3
What is a financial business?
2.5
4
What do the acronym NBFI stand for?
22.1
5
List the prudential regulations a NBFI should observe?
22.3
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Unit 23
Development Bank of Zambia
Unit 23
Syllabus requirements - Historical background; organizational structure;
Objectives and Functions of DBZ; Products and services; Governing legal
framework
Unit 23
Unit 23
Aim
Objectives - After studying this Unit you will be able to:
1st)
Appreciate the role of DBZ
2nd)
Unit 23
Unit 23
To provide a brief overview of DBZ
Understand Development Financing
Time required - It’s estimated that you should spend one [1] day on this Unit.
Reflection – What’s the purpose of bonds and guarantees
-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------23.1
Historical background; The Development Bank of Zambia (DBZ) was established in
1972 pursuant to section 3 of the DBZ Act Chapter 363 of the Laws of Zambia as a joint venture
between the Government, Public Sector Financial Institutions, the local private sector and foreign
institutions. The purpose of its creation was to tackle poor and costly access to capital for investment and
removing micro-level structural rigidities that hinder public and private investment growth, productivity,
wealth, and employment creation.
It also included provision of short, medium and long term finance to support the Government of
the Republic of Zambia’s economic development strategies of growth, wealth and job creation, poverty
reduction, infrastructure development and improved service delivery.
In carrying out its business, the Bank would endeavour to provide capital and other resources for
investment in the following main areas:
Agriculture and agri-processing;

Manufacturing, tourism and hospitality;

Mining, Construction and Renewable
Energy; and
 Infrastructure and other economic activities
 Transport, Storage and Communications;
23.2 Organizational structure - There is a Board of Directors responsible for the policy and general
administration of the affairs and business of the Bank. The Board shall consist of a Chairman and nine
other members., shall, subject to the other provisions of this Act, hold office for a period of three years
and shall be eligible for reappointment. The Chairperson and three other members shall be appointed by
the Minister and the remaining six members shall be appointed by the holders of Class B shares: The
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Board shall appoint a Managing Director on such terms and conditions as the Board may determine; and
the Managing Director shall be the chief executive officer of the Bank who shall be responsible for the
management of the affairs of the Bank in accordance with the policies and directions of the Board.
23.3
a)
Objectives and Functions of DBZ; - The business of the Bank is to make available long, medium and short term finance and equity investment for economic
development;
b)
to provide technical assistance and advisory services for the purpose of promoting economic
development and, at the discretion of the Board, to charge fees for such services;
c)
to assist in obtaining and placing foreign investment for the purpose of promoting economic
development;
d)
to administer on such terms and conditions as may be approved by the Board such special funds
as may from time to time be placed at the disposal of the Bank;
e)
to borrow funds in Zambia and elsewhere;
f)
to buy and sell securities, including securities which the Bank has issued or guaranteed;
g)
to study and promote investment opportunities; and
h)
to do all other matters and things incidental to or connected with the foregoing.
23.4
Products and services;
a)
Trade Finance: A short term facility through which the Bank meets short term liquidity requirements
of importers and exporters.as such promote trade finance activities
b)
Bonds and Guarantees: This assist businesses in tendering and negotiating better contract terms
by providing such guarantees or bonds in favour of third parties, to support the trading
activities of businesses.
c)
Business Advisory Service: Firstly DBZ gives support to foreign based financial institutions lending
to Zambian businesses and secondly to provide ordinary businesses accessibility to financial
resources available outside DBZ.
d)
Rural Finance – Through this facility DBZ builds up the capacity of farmers and farmer groups and
associations, and links them to firms providing credit and access to markets.
e)
Leasing Finance - This is an asset financing facility allowing customers the use but not the ownership
of a wide range of assets where the full capital cost of the asset is amortized byway of lease rentals.
105
f)
Equity Finance - Equity Investment involves the Bank taking up an equity stake into other companies
/project companies as opposed to providing loan finance. The total investment in any individual
company which the Bank will take up is restricted to 25% of the total equity of a company
Other common issues include: [1] Security is required and the Bank usually prefers landed property of
good value with a minimum Loan: Security Ratio of (1:1.5 or more). [2] The Minimum Loan Amount is
K1,000. [3] DBZ loan tenures are classified as short term [12 months], medium term [1 to 5 years] or long
term [above 5 years] as follows:
23.5
Governing legal framework: DBZ is supervised and regulated by the Bank of Zambia under the
Non-Banking Financial Institutions. The principle act is Chapter 363 – The Development Bank of Zambia
Act.
Unit 23
Lesson Summary
DBZ is a development financing institution. It’s supervised by the Bank of Zambia. It finances projects in
all sectors of the Zambian economy which include, inter alia: Agriculture, Agro Processing,
Manufacturing, Construction, Mining, Services, Real Estate, Medical, Education, Transport and Energy
sectors. In carrying on its business, the Bank may, in accordance with its business and development plans,
provide borrowers with capital and other resources for investment in economic undertakings and activities
for, or relating to(a) the creation of infrastructure;
(b) the production of goods or services;
(c) the creation of employment; or
(d) such other economic undertakings or activities as Board may determine
Unit 23
Progress Test
1
DBZ stands For?
23.1
2
Why was DBZ created?
23.1
3
List the products and services provided by DBZ
23.4
4
What is the minimum Loan: Security Ratio
23.4
106
Unit 24
Citizens Economic Empowerment Commission
Unit 24
Syllabus requirements - Historical background; organizational structure;
Objectives and Functions of CEEC‘; products and services;
Unit 24
Unit 24
Aim – To provide a brief overview of CEEC
Objectives - After studying this Unit you will be able to:
1st)
Appreciate the role of CEEC
2nd)
Unit 24
Unit 24
Understand Development Financing
Time required - It’s estimated that you should spend one [1] day on this Unit.
Reflection – Why was CEEC established?
---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
24.1
Historical Background – The Citizens Economic Empowerment Commission [CEEC] on
its website gives the following message. “Since independence, the Zambian Government has
embraced economic empowerment of citizens as an integral part of its national economic transformation
program enshrined in its policies and strategies.
In the early years of independence, such economic transformational initiatives included the
1968/69 Mulungushi Economic Reforms, the Zambianisation program and the Matero Economic Reforms
of 1969. In the 1990s, the Government implemented the privatization program which was aimed at
transferring the majority of state assets to the private sector in which Zambian citizens were also to
participate.
Unfortunately, all these programs meant for citizens’ economic empowerment did not
achieve the Government’s intended outcomes due to various factors, such as limited absorptive business
and entrepreneurial capacity among Zambians. In order to ensure equity, ownership and control of the
means of production by citizens and to redress these imbalances in the economy, the Government decided
107
to be more deliberate by creating an economic empowerment policy which eventually led the enactment
of the Citizens Economic Empowerment Act (CEE) number 9 of 2006.
The Citizens Economic Empowerment Commission is a body corporate which was established by
the CEE Act whose mandate is to promote broad based and equitable economic empowerment of citizens
that are or have been marginalized or disadvantaged and whose access to economic resources and
development capacity has been constrained due to various factors such as race, sex, educational
background, status and disability.
CEEC is therefore the vehicle by which the Government would like to transform Zambia into a
nation where citizens are playing a key role in economic activities with greater participation of targeted
citizens, citizens influenced companies, citizens empowered companies, and citizens owned companies.
Targeted citizens are Zambians who historically have been either marginalized or disadvantaged
and have no access to economic resources or opportunities; Citizens Influenced Companies are companies
that have allowed between 5% and 25% citizens’ ownership participation; Citizens Empowered
Companies and those companies in which citizens’ ownership participation ranges from 25% to 50%; and
Citizens Owned Companies are companies in which citizens’ ownership participation is above 50%
[ww.ceec.org.zm/about-us}
24.2
Organizational structure - The Commission shall consist of the following part time
Commissioners who shall be appointed by the President;
a)
a Chairperson;
b)
the Secretary to the Treasury in the Ministry responsible for finance;
c)
the Permanent Secretary in the Ministry responsible for commerce, trade and industry;
d)
the Permanent Secretary in the Ministry responsible for Labour and social security;
e)
the Attorney-General or a representative of the Attorney-General;
f)
one person representing the youth;
g)
two persons representing the private sector
h)
and civil society organisations;
i)
three persons representing the university community, central statistical office and the
trade unions, respectively; and
(i)
one person representing the disabled
The Vice-Chairperson shall be elected by the members from among their number. The Commission
appoints a director-General who shall be the chief executive officer of the Commission
108
24.3
Objectives and Functions of CEEC [1] The functions of the Commission shall be to promote the
empowerment of citizens that are or have been marginalized or disadvantaged and whose access to
economic resources and development capacity has been constrained due to various factors including race,
sex, educational background, status and disability. [2] Without limiting (1), the functions of the
Commission are to—
a)
Advice on the necessary changes to various types of legislation for the effective delivery of
economic empowerment initiatives;
b)
Promote gender-equality in accessing, owning, controlling, managing and exploiting economic
resources;
c)
Encourage effective and meaningful participation of targeted citizens in the economy in order to
contribute to sustainable economic growth;
d)
Promote the employment of both gender by recommending to appropriate authorities the removal
of structural and discriminatory constraints and practices that hinder any particular gender from
employment opportunities;
e)
Ensure equal opportunities for, and where necessary, ensure preferential treatment to, targeted
citizens, citizen empowered companies, citizen influenced companies and citizen owned
companies in accessing procurement contracts and other services of any State institutions;
f)
Promote the subcontracting of service, materials and equipment from targeted citizens, citizen
empowered companies, citizen influenced companies and citizen owned companies;
g)
Mobilize resources for economic empowerment programmes;
h)
Review the framework for the provision of development services to micro and small businesses in
response to changing circumstances;
i)
Develop or facilitate the development of sector codes and codes of good practice for economic
empowerment;
j)
Commission and conduct research for economic empowerment;
k)
Develop innovative ways of creating business opportunities such as indentifying services which
State institutions need to outsource;
l)
Develop business ideas and import business ideas from other countries and disseminate such ideas
to targeted citizens in order to interest them in developing those ideas into business ventures;
109
m)
Undertake information, education and communication activities for targeted citizens, citizen
empowered companies, citizen influenced companies and citizen owned companies on various
empowerment schemes available;
n)
Promote a savings culture amongst citizens;
o)
Explore ways of fostering business linkages, such as joint ventures and partnerships in Greenfield
investments;
p)
Keep under review the economic empowerment policy;
q)
Propose changes to Zambia’s education curricula in order to inculcate an entrepreneurial culture
amongst citizens;
r)
Promote or undertake a civic education and awareness programme which will ensure an orientation
of all institutions and persons to the maintenance of a positive work culture;
s)
Encourage increased investments in education and training in the labour market;
t)
Encourage the use of the workplace as an active learning environment;
u)
Encourage public and private institutions to provide opportunities to targeted citizens to acquire
necessary skills training and work experience; and
v)
Monitor and evaluate economic empowerment initiatives.
In carrying out its functions, under subsection (2), the Commission shall take into account and be
consistent with—
a)
Any sectoral programmes developed by the Government in its national development plans;
b)
Any policies of the Government relating to decentralization, gender, youth, technical education
and vocational training, land, trade, commerce and investment; and
c)
Any initiative of the Government for the enhancement of partnerships and joint ventures between
local and foreign investors.
In the performance of the Commission’s functions under this Act, the Commission shall effectively liaise
and consult appropriate State institutions and shall have the power to give such instructions or directions
to any State institution or a company for the purposes of fulfilling the Commission’s mandate under this
Act.
110
24.4 Products and services
The Citizens Economic Empowerment Act N0.9 of 2006 defines
citizen’s economic empowerment as……” “An integrated broad
based and multifaceted strategy aimed at substantially increasing
Economic Empowerment is about
enhancing an individual or a group’s
capacity to make choices and transform
those choices into desired actions and
outcomes. (World Bank)
the meaningful participation of targeted citizens and companies
in the economy in order to decrease income inequalities …..”
a)
b)
Broad Based Economic Empowerment means economic empowerment of
Targeted citizens;

Cooperatives;

Groups of citizens;

Citizens empowered companies;

Citizens influenced companies
and

Citizens owned companies.
Targeted citizens are those that have been historically marginalized and whose access to economic
resources and developmental capacity has been constrained due to various factors including, race
sex, educational background, status and disability. These include youth, women, disabled and
people living with HIV/AIDS.
c)
Targeted citizens maybe involved in any of the following sectors:

Mining.

Transport.

Financial Services.

Energy.

Agriculture.

Information

Tourism.

Manufacturing.

Retail and Trade, and

Construction.

Services.
d)
The programmes of interest are areas of :

Skills development.

Capacity building.

Expansion projects.

Start up business.
e)
The funds disbursed by the Commission are for productive investments accessed at a cost. Interest
and
Communication
Technology; and
charged will be lower than the market rate and charged between the inflationary and Treasury bill
rate.
111
f)
Fronting is a risk identified. Fronting includes holding out as being the defacto director or
shareholder of a company in order to hide the true identity of the shareholder or director of that
company. The penalty is serve. Any director or shareholder of a company that engage in fronting
commits an offence and shall be liable on conviction to a fine not exceeding 200,000 penalty units.
Unit 24
Lesson Summary
Citizens economic Empowerment Fund was established under the CEEC Act to support the
development of broad economic empowerment programmes. The Commission is to:

Be responsible for the overall operations and implementation of economic empowerment on
behalf of government.

Review CEEC policy as and when necessary.

Encourage investments in education and training in the Labour market.

Encourage the use of the workplace as an active learning environment.

Encourage Private and Public Institutions to provide opportunities for skills training and work
experience.

Promote a savings culture—CEE observes that the rates of savings are too low to support the
developmental needs.
Unit 24
Progress Test
1
What does the acronym CEEC stand for
24.1
2
What is a Citizens empowered company?
24.1
3
Distinguish between Citizens influenced companies and Citizens owned companies 24.1
4
What is fronting?
24.4
112
Unit 25
Insurance
Unit 25
Syllabus requirements – Definitions, Historical background; registration,
organizational structure and types of the Insurance companies in Zambia;
objectives of insurance companies; types of insurance policies; reforms
Unit 25
Unit 25
Unit 25
Aim: - To provide a brief overview of Insurance and insurance companies
Objectives - After studying this Unit you will be able to:
1st)
Appreciate types of insurance companies
2nd)
Understand developments in the Insurance Industry
3rd)
Understand what Insurance is
Time required - It’s estimated that you should spend one [1] day on this Unit.
Unit 25
Reflection – Compare and Contrast Assurance with Insurance.
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------25.1

Definitions
Assurance – a type of insurance taken out against an event that will definitely occur [is
assured of occurring] but where the timing is uncertain. The term is applied in particular to life
assurance, where the risk that is being insured is not the event itself [the death of the assured is
assured], but the timing of it. [Tim Hindle – Pocket Finance]

A contract of insurance is a contract by which one party undertakes to make good the loss of
another, in consideration of sum of money, on the happening of a specified event, e.g. fire accident
or death.

Insurer and Insured: The person undertaking the risk is called the insurer or underwriter (in case
of marine insurance) and the person whose loss is to be compensated is called the insured.

“insurance business” means the business of issuing policies of insurance, and includes reinsurance business

“insurer” means a company that carries on insurance business;
113

“life insurer” means a company that carries on life insurance business;

“life policy” means a policy under which the insurer assumes a contingent obligation dependent
on human life, and includes any contract of insurance customarily regarded as a life insurance
contract, but does not includeo a funeral policy;
o a policy under which the contingent obligation dependent on human life forms a subordinate
part of the insurance effected by the policy;
o a policy for a period of less than two years; or
o a policy of a kind or description prescribed by regulations made under the Insurance Act;

Perils insured against: These are the risks, uncertain events or causalities e.g. destruction of or
damage to the property or accident of a person, the loss arising from which are insured.

Premium: The consideration for which the insurer undertakes to indemnify the insured against the
risk is called the premium. It may either be a single or a periodical payment.

Policy: The instrument in which the contract of insurance is generally embodied is called the
policy. The policy is not the contract; it is the evidence of the contract.

“policy” means an insurance contract of any kind;

“re-insurance” means the transfer, whether in whole or in part, of a risk assumed by an insurer, to
another insurer;

“Registrar” means the Registrar of Pensions and Insurance

Subject-matter of insurance and insurable interest: The thing or property insured is called the
subject-matter of insurance, and the interest of the insured in the subject-matter is called his
insurable interest.

Term of policy means the duration for which the policy will cover the risk. Except in case of life
insurance, a contract of insurance is from year to year only and the insurance automatically comes
to an end after the expiry of the year unless, of course, it is renewed.
25.2
Historical background; - The Mulungushi Reforms of April 1968, brings a major switch in the
structure of the country’s economy. The government declared its intention to acquire an equity holding
(usually 51 percent or more) in a number of key foreign-owned firms, to be controlled by the Industrial
Development Corporation (INDECO). By January 1970 a majority holding had been acquired in the
Zambian operations of the two major foreign mining corporations, the Anglo American Corporation and
114
the Rhodesia Selection Trust (RST), which became the Nchanga Consolidated Copper Mines (NCCM)
and Roan Consolidated Mines (RCM), respectively. A new Parastatals body, the Mining Development
Corporation (MINDECO), was created. .
In 1973 management contracts under which the day-to-day operations of the mines had been
carried out by Anglo American and RST were ended. In 1982 NCCM and RCM were merged into the
giant Zambia Consolidated Copper Mines Ltd.
Government control was later extended to insurance companies and building societies, which were
placed within a new parastatal body, the Finance and Development Corporation (FINDECO). The banks
successfully resisted takeover. Insurance Companies taken over included Old Mutual, Southampton, and
Prudential. Zambia State Insurance Corporation incorporated was established in 1968 and it took the assets
of the nationalized private insurance company. ZSIC become the ‘sole’ insurance company until 1991
when the government liberalized the economy to allow for new entrants.
INDECO, MINDECO, and FINDECO were brought together in 1971 under an omnibus parastatal,
the Zambia Industrial and Mining Corporation (ZIMCO), to create one of the largest companies in subSaharan Africa Zambia
25.3
Registration, - The Insurance Act no 27 of 1997 (formerly Chapter 392 of the laws of Zambia)
section 10. Prescribes the requirements of establishing an Insurance Company as
(1) A company having share capital may apply for an insurer’s licence
(2)An application under subsection (1) shall be in a form Approved by the Registrar and shall specify(a) the name and address of the company;
(b) the class or classes of insurance business for which the applicant seeks authorisation under the
licence;
(c) such other matters, including any matters relating to the assets and liabilities of the company
and its ability to meet its obligations, as may be required to complete the form
(3) The application shall be accompanied by copies of –
(a) the certificate of incorporation of the company;
(b) the certificate of share capital of the company;
(c) the articles of the company;
(d) each proposal and policy form that is to be used by the company;
(e) a detailed statement of assets and liabilities of the company, and their locations if not located
in Zambia;
115
(f) such other documents as to the manner in which the applicant proposes to carry on business,
and such financial forecasts and other documents and information the Registrar may require.
25.4
Organizational structure and types of the Insurance companies in Zambia;
The Pensions and Insurance Authority, is the regulatory and supervisory authority for the pensions and
insurance industry in the country. The Authority was established under the Pension Scheme Regulation
Act no. 28 of 1996 and the Insurance Act No.27 of 1997.
As at January 1st 2015 the PIA had registered the following insurance market players: 2 Reinsurer,
21 General Insurance Companies, 11 Long Term Insurance Companies, 2 Reinsurance Brokers, 30
Insurance Brokers, 222 Insurance Agents, 6 Claim Agents, 8 Assessors, 6 Loss Adjustors and 1 Risk
Assessor.
a)
Reinsurer – company takes the assumed risk by an insurer.
b)
General Insurance Companies - means insurance business other than life insurance business
c)
Long Term Insurance Companies - means a company that carries on life insurance business ,
d)
Reinsurance Brokers - company takes the assumed risk by a broker
e)
Insurance Brokers - means a person who, on behalf of an insured person or a person who intends
to take up an insurance policy, arranges insurance policies
f)
Insurance Agents - means a person who, not being a salaried employee of an insurer- [I] initiates
insurance business; or [II] does any act in relation to the receiving of proposals for insurance, the
issue of temporary insurance cover-notes, or the collection of premiums; on behalf of an insurer
g)
Claim Agents - means a person who negotiates, on behalf of an insured person, the settlement of
an insurance claim with an insurer or the insurer’s representative
h)
Assessors - means a person who, where a claim is made against an insurer for loss or damage,
assesses the extent of the loss or damage
i)
Loss Adjustors - a person who makes assessments of liability, or settle claims, on behalf of an
insurer and
116
j)
Risk Assessor – an independent surveyor employed by an insurer to carry out a survey on a
particular risk.
25.5
Objectives of insurance companies;
Uncertainty, risk and insecurity are incidental to life and business. The aim of all insurance is whilst
making profits compensate the owner against loss arising from a variety of risks which he anticipates to
his life, property and business.
25.6
Types of insurance policies; Insurance is mainly of two types—life assurance and general
insurance.
General Insurance means Fire, Marine and Miscellaneous insurance which includes insurance against
burglary or theft, fidelity guarantee, insurance for employer’s liability, and insurance of motor vehicles,
livestock and crop.
25.7
a.
Fundamental Principles of Insurance
Utmost Good Faith [uberrima fides in Latin]—since insurance shifts risk from one party to another,
it is essential that there must be utmost good faith and mutual confidence between the insured and
the insure. In a contract of insurance the insured knows more about the subject matter of the
contract than the insurer. Consequently, he is duty bound to disclose accurately all material facts
and noting should be withheld or concealed. Any fact is material which goes to the root of the
contract of insurance and has a bearing on the risk involved. It is only when the insurer knows the
whole trust that he is in a position to judge (a) whether he should accept the risk, and (b) what
premium he should charge.
b.
Indemnity—A contact of insurance contained in a fire, marine, burglary or any other policy
(excepting life assurance and personal accident and sickness insurance) is a contract of indemnity.
This means that the insured, in case of loss against which the policy has been issued, shall be paid
the actual amount of loss not exceeding the amount of the policy, i.e. he shall be full indemnified.
The object of every contact of insurance is to place the insured in the same financial position, as
nearly as possible, after the loss, as if the loss had not taken place at all. It would be against public
policy to allow an insured to make a profit out of his loss or damage. If that were so, the insured
might be tempted to bring about the event insured against in order to get money.
117
c.
Insurable Interest—A contract of insurance effected without insurance interest is void. It means
that the insured must have an actual pecuniary interest (and not a mere anxiety or sentimental
interest) in the subject-matter of the insurance. The insured must be so situated with regard to the
thing insured that he would have benefit by its existence and loss from its destruction. The owner
of a ship runs a risk of losing his ship, the charterer of the ship runs a risk of losing his freight and
the owner of the cargo incurs the risk of losing his goods and profit. So, all these persons have
something at stake and all of them have insurable interest. It is the existence of insurable interest
in a contract of insurance which distinguishes it from a mere wagering agreement.
d.
Causa Proxima—The rule of causa proxima means that the cause of the loss must be proximate or
immediate and not remote. If the proxima cause of the loss is a peril insured against, the insured
can recover. When a loss has been brought about by two or more causes, the question arises as to
which is the causa proxima. In such cases, the real or the nearest cause shall be the causa proxima.
Although the result could not have happened without the remote cause. But if the loss is brought
about by any cause attributable to the misconduct of the insured, the insurer is not liable.
e.
Risk—In a contract of insurance the insurer undertakes to protect the insured from a specified loss
and the insurer receives a premium for running the risk of such loss. Thus, risk must attach to a
policy.
f.
Mitigation of Loss—In the event of some mishap to the insured property, the insured must take all
necessary steps to mitigate or minimise the loss, just as any prudent person would do in those
circumstances. If he does not do so, the insurer can avoid the payment of loss attributable to his
negligence. But it must be remembered that though the insured is bound to do his best for his
insurer, he is, not bound to do so at the risk of his life.
g.
Subrogation—The doctrine of subrogation is a corollary to the principle of indemnity and applies
only to fire and marine insurances. According to it, when an insured had received full indemnity
in respect of his loss, all rights and remedies which he has against third persons, will pass on to
the insurer and will be exercised for his benefit until he (the insurer) recoups the amount he has
paid under the policy. It must be clarified here that the insurer’s right of subrogation arises only
when he has paid for the loss for which he is liable under the policy and this right extends only to
the rights and remedies available to the insured in respect of the thing to which the contract of
insurance relates.
118
h.
Contribution—Where there are two or more insurances on one risk, the principle of contribution
comes into play. The aim of contribution is to distribute the actual amount of loss among the
different insurers who are liable for the same risk under different policies in respect of the same
subject-matter. Any one insurer may pay to the insured the full amount of the loss covered by the
policy and then become entitled to contribution from his co-insurers in proportion to the amount
which each has undertaken to pay in case of loss of the same subject-matter. In other words, the
right of contribution arises when (i) there are different policies which relate to the same subjectmatter, (ii) the policies cover the same peril which caused the loss, (iii) all the policies are in force
at the time of the loss, and (iv) one of the insurers has paid to the insured more than his share of
the loss.
25.8
Regulatory Framework - The Zambian insurance industry is largely subjected to the following
Acts among others;

Insurance Act No. 27 of 1997, including any subsequent amendments. The amendment by Act No.
26 of 2005, prohibited the existence of composite insurance companies.

Pensions Scheme Regulation Act No. 28 of 1996, including any amendments.

Road Transport (Safety and Traffic Management) Act 1999 including any amendments.

Companies Act Cap 388 of the laws of Zambia

All general insurance premiums are standard rated for value added tax (VAT) purpose.

All brokers are required to be members of the Insurance Brokers Association of Zambia (IBAZ).

All the licensed insurers and re-insurers are required by law to be members of the Insurers
Association of Zambia (IAZ).
Unit 25
Lesson Summary
The Insurance industry like the economy it is part of has undergone radical changes since independence.
Earlier changes were the nationalization o the industry resulting in a ZSIC monopoly. Then came
liberalization of the economy giving way to new entrants. The Creation of a regulator is a more recent
development.
The PIA has been established to protect the interests of holder of insurance policies, to regulate,
promote and ensure orderly growth of the insurance industry and for matters connected therewith or
incidental thereto. The PIA has registered 2 Reinsurer, 21 General Insurance Companies, 11 Long Term
119
Insurance Companies, 2 Reinsurance Brokers, 30 Insurance Brokers, 222 Insurance Agents, 6 Claim
Agents, 8 Assessors, 6 Loss Adjustors and 1 Risk Assessor.
Unit 25
Progress Test
1
What is Insurance?
25.1
2
What is reinsurance?
25.1
3
Define a ‘claim agent’
25.4
4
What is uberrima fides?
25.7
5
Explain the principle of ‘subrogation’
25.7
120
Unit 26
Pensions Institutions
Unit 26
Syllabus requirements – Definitions, Micro, Small and Medium financial
institutions, types of savings instruments; types of provident funds in Zambia;
Pension plans in Zambia.
Unit 26
Unit 26
Unit 26
Aim: To provide a brief overview of Pension and pension companies
Objectives - After studying this Unit you will be able to:
1st)
Appreciate types of pension companies
2nd)
Understand developments in the pension Industry
3rd)
Understand what Pension is
Time required - It’s estimated that you should spend one [1] day on this Unit.
Unit 26
Reflection – Differentiate between an Annuity, Provident fund, Pension and a
Savings
-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------26.1 Definitions:

Annuity – an investment contract purchased from a life insurance company that makes
guaranteed payments at some future date, usually after retirement. [Dictionary of Banking Terms]

Annuity – Originally an investment that bought a fixed annual payment for the investor [called the
annuitant] until his or her death.

Pension – is simply a form of savings for retirement. It is a stream of income that is paid usually
when one attains retirement, but it can also be paid to children. Widows and widowers may also
receive the late spouses’ pension. [PIA]
121

Pension – a fund set up to collect regular contributions from a company, government, or
organisation to provide post-retirement income for eligible employees. [Dictionary of Banking
Terms]

Provident Funds – [especially on South East Asia] an investment fund contributed to by
employees, employers and [sometimes] the state, out of which a lump sum is provided to each
employee on retirement.

Savings – is income not spent, or deferred consumption. Methods of saving include putting money
aside in, for example, a deposit account, a pension account, an investment fund, or in cash. Savings
also involves reducing expenditures, such as recurring costs. [Wikipedia]
26.2 Small Savings & Provident Funds In the Zambia the lead organisation in the mobilization of savings is the National Savings and Credit Bank.
Commercial banks also attract savings accounts. Post Office Saving Banks was incorporated into the
National Savings and Credit Bank.
The only provident fund named the Zambia National Provident Funds was absorbed by the
NAPSA who has been authorised to manage its assets and pay out any claims from the former.
26.3
Registered Pension Companies – In Zambia we have basically two types of pensions: the
governments [statutory pensions] which are local superannuation Fund [LASF], Public Service Pension
Fund [PSPF] , Worker Compensation Fund Control [WCFCB] and National Pension Scheme Authority
[NAPSA] and on the other hand occupational pension scheme.
The number of Pension services providers registered with the PIA as at 1st January are: 6 Pension
Fund Managers, 6 Pension Scheme /Fund Administrators and 238 Pension Schemes [Trusts]
a)
Fund Managers – [1] “fund” means the total assets of a pension scheme; [2] “Manager” means a
company or institution registered under the Pension Act whose business includes:
o undertaking, pursuant to a contract or other arrangement the management of the funds
and other assets of a scheme fund for purposes of investment; or
o providing professional services on the investment of the scheme funds; or
o reporting or disseminating information concerning the assets available for investment of
scheme funds.
b)
Fund Administrators - “Administrator” means a company or institution registered under the
Pension act whose business includes-
122
o undertaking, pursuant to a contract or other arrangement the management and day to day
administration of the fund; or
o providing consultancy and secretarial services to the scheme funds;
c)
Pension Scheme - “pension scheme” means any scheme or arrangement other than a contract for
life assurance, whether established by a written law for the time being in force or by any other
written instrument, under which persons are entitled to benefit in the form of payments determined
by age, length of service, amount of earnings or otherwise and payment primarily upon retirement,
or upon death, termination of service, or upon the occurrence of such other event as may be
specified in such written law or other instrument
d)
“Trust” means the legal entity, separate from the employer, in which the pension scheme funds are
accumulated and includes a multi-employer trust or a single employer trust.
26.4
Types of Pension Scheme: A Pension Scheme can be designed as a defined benefit scheme [DB]
or defined contribution [DC] or a hybrid.

Defined Benefit Pension Plan: This plan is based on the last salary and the time period of service
of the employee in an organisation. It is paid every month after retirement.

Defined Contribution Pension Pan: In this plan the employer and the employee make a defined
amount of contribution every year. This is invested and when the employee retires the value of the
investments is made and a lump-sum amount is given to the employee on retirement. Investments
are made in various instruments like Government Bonds, Corporate Bonds, property, fixed
deposits, and so on.

A hybrid combines the features of a DB and DC
Unit 26
Lesson Summary
Small savings are very important in Zambia as they cover the low income and medium income group of
people. This being spear-headed through the National savings and Credit Bank.
The abolition of Zambia National Provident Funds closed the provident fund scheme.
Pension Fund is now the dominant retirement benefit in Zambia. There are different kinds of pension
schemes.
Unit 26
1
2
Progress Test
What is an Annuity?
What is a Savings?
26.1
26.1
123
3
4
5
What is a Pension?
What is a Pension Scheme?
What is DB?
26.1
26.3
26.4
PART III –Summary
The term ‘financial institution used loosely includes all those organisations, institutions or companies
involved in the financial system. The financial system can be subdivided into three major components.
The parts are banking, pension and insurance and capital markets. The sub parts of these being companies
brings in the Patents and Companies Registry Agency. Superintending the sector too is the Competition
and Consumer Protection Commission.
From the Banking Sector the regulator Bank of Zambia was introduced. The two arms of banking that it
supervises which is the commercial banks and the non-financial institutions were covered. Collectively
they are referred to as Financial Service Providers.
Under the Pensions and Insurance Authority the Insurance and Pension Services Providers were also
introduced.
From the Capital markets emphasis was placed on the regulator the Securities and Exchange Commission.
Randomly selected was the Citizens Economic Empowerment Commission which ideally a development
financing institution and should be under the supervision of the Bank of Zambia.
124
PART IV - OTHER FINANCIAL SERVICES
Part IV
Part IV
Part IV
Introduction - This last part of the module provides an overview on some financial
services. Services offered by financial service providers connotes ‘financial
services’. Financial Service Providers here include companies in banking, pensions,
insurance and capital markets.
Aim - The aim of Part 1V is to familiarize students with some of the financial
services, their nature, role and composition, the reforms undergone or undergoing
in Zambia. This section provides the reader with relevant knowledge of a financial
services and should also heighten awareness of contemporary issues that put the
following parts into context.
Objectives - After studying this Part of the module you will be able to:
1st
Know the nature and role of a financial services in an economy;
2nd
Know and be able to explain various financial services;
3rd
Know and understand the various reforms that have taken place and are
envisioned to take place in the financial services
Part IV
Time required - Spend a minimum of nine [9] days on this Part.
Part IV
Structure - Part IV is organized into nine [9] units. Each Unit as syllabus
requirement, aim, objective, time required, reflection, introduction content
addressing a particular topic, a unit summary and a progress test. The Units are:
Unit 27
Venture Capital (VC)
Unit 28
Credit Rating
Unit 29
Merchant Banking
Unit 30
Mutual Funds
Unit 31
Debt Securitization
Unit 32
Internet Banking
Unit 33
Leasing
Unit 34
Hire Purchase
Unit 35
Factoring & Forfaiting
125
Unit 27
Venture Capital [VC]
Unit 27
Syllabus requirements - Introduction , Definition, Advantages of VC,
Mechanism of Venture Capital, Types of Venture Capital financing, Exist
Mechanism, Venture Capital Firms in Zambia
Unit 27
Aim: - To familiarize students with Venture Capital services, their nature, role
and composition, the reforms undergone or undergoing in Zambia
Unit 27
Unit 27
Unit 27
Objectives - After studying this Unit you will be able to:
1st
Define Venture Capital
2nd
Understand the varies aspects of the Venture Capital Market
3rd
Understand the stages of venture capital financing.
Time required - It’s estimated that you should spend one [1] day on this Unit.
Reflection - With the use of a diagram outline the stages of venture capital
financing
----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------27.1
Introduction - Venture capital finance is often thought of as “the early stage financing
of new high risk and high rewarding young enterprises seeking to grow rapidly” It is equity support
to fund a new concepts that involve a higher risk and at the same time, have a high growth and profit.” It
broadly implies an investment of long term - long-term investment attitude that necessitates the Venture
capital firms (VFCs) to wait for a long period, say 5 to 10 years, to make large profits. It is also potentially
financing equity participation through direct purchase of shares, options or convertible securities. Venture
financing ensures continuing participation of the venture capitalist in the management of the
entrepreneur’s business.
27.2
Definition
126

Money provided by investors to startup firms and small businesses with perceived long-term
growth potential. This is a very important source of funding for startups that do not have access to
capital markets. It typically entails high risk for the investor, but it has the potential for aboveaverage returns. [Investopedia]
27.3
a)
Advantages of VC
Venture Capital financing has economic advantages such as -— helps in industrialization of the
country— Helps in the technological development of the country— Generates employment—
Helps in developing entrepreneurial skills
b)
There are advantages to the Investor too:— Benefit to the investor is that they are invited to invest
only after company starts earning profit, so the risk is less and healthy growth of capital market is
entrusted.— Profit to venture capital companies.— Helps them to employ their idle funds into
productive avenues.
c)
Not to be left out the Entrepreneur gets Finance - The venture capitalist injects long-term equity
finance, which provides a solid capital base for future growth. A Business Partner - The venture
capitalist is a business partner, sharing the risks and rewards and Mentoring – Alliances - The
venture capitalist also has a network of contacts in many areas that can add value to the company
The downside for entrepreneurs is that venture capitalists usually get a say in company decisions, in
addition to a portion of the equity
27.4
Mechanism of Venture Capital - The Venture Capital process is summarized in the diagram
below. The Venture Capitalist is usually a middleman. They solicit funds from Investor and in turn place
that money including their own into worthy projects.
Investors
Returns
Capital
Venture Capitalist
127
Equity, Debt,
Warrants, etc.
Capital
27.5
Types of Venture Capital financing - The different types of venture capital financing depends
on the investment of specific purpose within the life of Target Company as the high return rate of the
company remains constant and it has no effect on it. There are a number of types of venture capital
financing:
a)
Seed Money: Low level financing needed to prove a new idea.
b)
Start-up: Early stage firms that need funding for expenses associated with marketing and product
development.
c)
First-Round: Early sales and manufacturing funds.
d)
Second-Round: Working capital for early stage companies that are selling product, but not yet
turning a profit.
e)
Third-Round: Also called Mezzanine financing, this is expansion money for a newly profitable
company
f)
Fourth-Round:— Also called bridge financing, it is intended to finance the "going public
process”
27.6
Exist Mechanism - After accomplishment of the purpose of the venture investment usually the
venture capitalist will exist the business initially funded. At exist several factors are taken into
consideration such as the nature of the venture, the extent and type of financial stake, the state of the actual
and potential competition, market condition, perception of the venture capital company and so on.
27.7
Methods of exist include:
128
a)
Initial Public Offer – IPO also known as Going Public or Floatation is a method of exist by a VC.
So the VC’s shareholding is replaced by public investment.
b)
Sales of shares. Here the VC sells his stake in the business to the founding shareholders or
employees.
c)
Puts and calls – In this method the VC exists on a predetermined formula. The put option is the
right to sell, while the call option is the right of the entrepreneur to buy.
d)
Liquidation – this may happen if the assisted business fails to take off due to stiff competition,
technology failure, obsolescence of technology, poor management etc.
27.8

Venture Capital Firms in Zambia - A number of firms have been set in Zambia among them:
Meanwood Venture Capital with an initial fund of $10 million;

Kukula Capital : is a leading venture finance and private equity firm in Zambia. The company
operates under two main business areas: Fund Management and Advisory.

The Tony Elumelo Foundation For Entrepreneurship program : The recently launched $100
million Tony Elumelu Foundation Entrepreneurship Program (TEEP) is an annual program of
training, funding and mentoring, designed to empower the next generation of African
entrepreneurs.

Seedstars Africa : is a member of Seedstars Group, a Swiss-based venture builder that is active
and invests in 35+ countries around the world especially in emerging markets in Asia, South
America, The Middle East and Africa

88mph : is a Seed Fund and Accelerator that started in 2011 and currently operates out of hubs in
Nairobi (Kenya), Cape Town (South Africa), and Lagos (Nigeria).88mph funds only tech
companies, with a particular emphasis on web and mobile products and services

The Awesome Foundation Lusaka : This organization supports any/all types of awesome ideas.
They support ideas that are both on paper and those that have launched
Unit 27
Lesson Summary
A business with funding shortfalls which fails to attract funds in the capital market may resort to Venture
Capital financing. Venture Capital financing is a form of equity financing designed especially for funding
high risk and high reward projects.
Venture Capital is still in its infancy in Zambia.
Unit 27
Progress Test
129
1
Define Venture Capital
27.1
2
List the various types of venture capital financing
27.5
3
What is an IPO?
27.6
4
Distinguish between Seed Money and Start-up
27.5
5
What is Liquidation?
27.6
130
Unit 28
Credit Rating
Unit 28
Syllabus requirements - Definition; role of credit rating agencies; limitation of
credit ratings. Introduction; Definition; Origin; Credit Rating Process; Features;
Advantages; Profile of Select International Rating Agencies; Profile of Local
Rating Agencies; Example of Rating Grades of International Raters
Unit 28
Unit 28
Aim: - To familiarize students with Venture Capital services, their nature, role
and composition, the reforms undergone or undergoing in Zambia
Objectives - After studying this Unit you will be able to:
1st)
Define Credit Rating
2nd)
Understand the varies aspects of the Credit Rating
Unit 28
Time required - It’s estimated that you should spend one [1] day on this Unit.
Unit 28
Reflection - Briefly outline the Credit Rating process.
-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------28.1
Introduction - In the complexity of the markets investors are in search for profitable
investment opportunities as such have recourse to various sources of information. They seek
information in documents from sellers/issuers, research reports about the markets, media reports, and so
on. Additionally investors can also base their investment decisions on the grading offered by Credit Rating
Agencies.
28.2

Definitions
Gurusamy (year) defines Credit Rating as the process of assigning a symbol with specific reference
to the investment being rated, that acts as an indicator of the current opinion on the relative
capability on the issuer to service its debt obligation in a timely fashion.

According to the Moody’s “A rating is an opinion on the future ability and legal obligation of the
issuer to make timely payments of principal and interest on a specific fixed income security.”
131

Standard & Poor says a “ Credit Rating help investors by providing an easily recognizable, simple
tool that couples a possibly unknown issuer with an informative and meaningful symbol of credit
quality”
28.3
Origin - Credit Rating originates in the United States. It can traced back to the 1849s when
following a financial crisis the first credit agency was set up in New York by Louis Tappan in 1841 called
Mercantile Credit Agency. This agency rated the ability of merchants to pay their financial obligations.
Born out of crisis the Credit Rating system has grown tremendously with the following additional factors
being attributed. They are

Increasing role played by capital and money markets as a source of funds

Increased the markets securitization of borrowings and lending

Globalization of the capital, money and credit markets

Growth in information technology

Increased confidence in the markets

Disintermediation and withdrawal of Governments from major roles in
28.4

Credit Rating Process - Credit Rating process by most rating agencies include the following
steps depicted below:
Client contracts with a Rater

The Rater sends a team of examiners to the Client

Data is collected

Data is analysed

Discussion between the parties

Credit Report prepared

The Credit report is sent to the grading Committee

Grade communicated to the Client
28.5
Features - Characteristic features of a credit rating system include:
a)
The rating is specific to the debt instrument. Its not a general purpose evaluation of the issuer.
b)
The rating is based on the relative capability and willingness of the issuer of the instrument to
service the debt obligations in accordance with the terms of the contract
c)
The rate is primarily a guide in determining the credit risk associated with it
d)
A rate is not a recommendation to buy, hold or sale
132
e)
A rate is a summation of various quantitative and qualitative parameters obtain from the issuer as
well as the market
f)
A rate is no guarantee for completeness or accuracy of the information on which the rating is based
28.6
Advantages - Credit rating offers the following advantages
a)
Offers an opportunity to compare an instrument’s ranking of default with others
b)
Offers investor who may not possess credit valuation skills to make a decision
c)
A credit rating agency is equipped with required skills, competence and credibility to provide a
professional service.
d)
Since a rate is a symbol it’s easy to understand
e)
It provide a low cost tool for appraisal
28.7
Profile of Select International Rating Agencies. - A brief note on the background of a few
major international rating agencies is as follows:
a)
Moody’s Investors service-often referred to as Moody's, was started by John Moody in 1909. It
ranks the creditworthiness of borrowers, rates debt securities in several market segments related
to public and commercial securities in the bond market. In Moody's Investors Service's ratings
system securities are assigned a rating from Aaa to C, with Aaa being the highest quality and C
the lowest quality.
b)
Standard & Poor – A merger between H.V and H.W. Poor Co and Standard Statistic Bureau in
1941. In 1966 The McGraw Hill Companies acquired the company. S&P offers wide range of debt
securities, ratings bonds and preferred stocks, short term ratings on Corporates, Municipalities and
States, government debts and son.
c)
Fitch – The firm was founded by John Knowles Fitch on December 24, 1913 in New York City.
Is an international credit rating agency based out of New York City and London. Together with
Moody and Standard & Poor rank the top three in the World.
28.9

Profile of Local Rating Agencies.
Credit Rating Agency (CRB) Limited is an independent credit rating agency operating in the
Republic of Zambia. It commenced operations after being licensed by the Securities and Exchange
Commission of Zambia in September 2014, and is the first active credit rating service provider in
Zambia. The first company to be rated was ZANACO and was rated AA
28.10 Example of Rating Grades of International Raters. - One example is the Fitch Ratings which
includes the following grades:
AAA reliable and stable
133
AA
A
BBB
BB
CCC
D
Unit 28
quality with a bit higher risk
economic situation could affect finance
middle class-an acceptable risk
more prone to economic changes
vulnerable, dependent on current economic situation
has defaulted before, high risk to again
Lesson Summary
A credit rating agency (CRA, also called a ratings service) is a company that assigns credit ratings, which
rate a debtor's ability to pay back debt by making timely interest payments and the likelihood of default.
The credit bureaus that issue these rates/scores have different evaluation systems, each based on different
factors. Each credit rater will issue its own rating for issuer.
Unit 28
1
2
3
4
Progress Test
What is meant by the term “Credit Rating”
What are the benefits of credit rating?
What are the limitations of credit rating?
What factors have contributed to the growth of credit rating?
134
28.1
28.6
28.5
28.3
Unit 29
Merchant Banking
Unit 29
Syllabus requirements - Definition; origin and nature of merchant banking;
Merchant banking functions
Unit 29
Unit 29
Aim: - To familiarize students with Merchant Banking services, their nature, role
and composition, the reforms undergone or undergoing in Zambia
Objectives - After studying this Unit you will be able to:
1st)
Define Merchant Banking
2nd)
Understand the varies aspects of Merchant Banking
Unit 29
Time required - It’s estimated that you should spend one [1] day on this Unit.
Unit 29
Reflection - Briefly outline the varies components of merchant banking
----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------29.1 Introduction - Merchant banking is a financial activity that formally specialises in
financing foreign trade, provides various services relating to capital market and finance to
corporate sector, provides consultancy to the corporate sector on the issues like finance, capital structure,
investment, mergers, takeover and amalgamations
29.2

Definitions
According to Random House Dictionary, “merchant bank is an organisation that underwrites
securities for corporations, advises such clients on mergers and is involved in the ownership of
commercial ventures. These organisations are sometimes banks which are not merchants and
sometimes merchants who are not banks and sometimes houses which are neither merchants nor
banks”.

According to Kindleberger (2009) , :merchant banking is the development of banking from
commerce which frequently encountered a prolonged intermediate stage known in England
originally as merchant banking”

A merchant bank is a financial institution providing capital to companies in the form of share
ownership instead of loans. A merchant bank also provides advisory on corporate matters to the
135
firms in which they invest. In the United Kingdom, the historical term "merchant bank" refers to
an investment bank- Wikipedia,
29.3
Merchant Banking services - Merchant Banks render services and functions, which are as
follows:
a)
Corporate Counselling - refers to a set of activities that is undertaken to ensure efficient
running of a corporate enterprise at its maximum potential through effective management of finance.
It aims at rejuvenating old-line companies and ailing units, and guiding existing units in locating
areas/activities of growth and diversification.
b)
Project counselling- refers to a part of corporate counselling, and relates to project finance. It broadly
covers the study of the project, offering advisory assistance on the viability and procedural steps for its
implementation.
c)
Pre-investment studies- refers to activities that are connected with making a detailed feasibility
exploration to evaluate alternative avenues of capital investment in terms of growth and profit prospects.
d)
Capital Restructuring Services –refers to activities that are carried out to assist projects in achieving
their maximum potential through effective capital structuring and to suggest various strategies to widen
and restructure the capital base, diversify operations and implement schemes for amalgamations,
merger or change in business status..
e)
Credit Syndication - Activities connected with credit procurement and project financing, aimed at raising
Zambian and foreign currency loans from banks and financial institutions.
f)
Issue management and underwriting connotes activities that are concerned with the management of
the public issues of corporate securities, viz. equity shares, preference shares, and debentures or bonds,
and are aimed at mobilization of money from the capital market.
g)
Portfolio Management - Making decisions relating to the investment of the cash resources of a
corporate enterprise in marketable securities by deciding the quantum, timing and the type of security
to be bought
h)
Working Capital Finance - The finance required for meeting the day-to-day expenses of an enterprise.
i)
Acceptance Credit and Bill Discounting - Activities relating to the acceptance and the discounting
of bills of exchange, besides the advancement of loans to business concerns on the strength of such
instruments
j)
Merger and Acquisition - This is a specialized service provided by the merchant banker who arranges
for negotiating acquisitions and mergers by offering expert valuation regarding the quantum and the
136
nature of consideration, and other related matters.
k)
Venture Financing - A specially designed capital, as a form of equity financing for funding high-risk
and high-reward projects.
l)
Lease Financing – leasing involves letting out assets on lease for a particular time period for use by the
lessee
m)
Foreign Currency Financing - The finance provided to fund foreign trade transactions
n)
Brokering Fixed Deposits
o)
Mutual Funds - the mobilization of the savings of innumerable investors for the purpose of channeling
them into productive investments of a wide variety of corporate and other securities,
p)
Relief to Sick Industries – includes rejuvenating old-lines and ailing units by appraising their
technology and process, assessing their requirements and restructuring their capital base
q)
Project Appraisal - the evaluation of industrial projects in terms of alternative variants in technology,
raw materials, production capacity, and location of plant.
Unit 29
Lesson Summary
Merchant banking, although a non-banking financial activity, resembles banking function. It is a set of
financial institutions that are engaged in providing specialist services, which generally include the
acceptance of ‘bills of exchange’, corporate finance, portfolio management and other banking services. It
is not necessary for a merchant banker to carry out all the above-mentioned activities. A merchant banker
may specialise in one activity, and take up other activities, which may be complimentary or supportive to
the specialised activity.
Unit 29
Progress Test
1
Define the term ‘merchant banking’
2
What are the activities connected with ‘corporate counselling’
29.1
29.3
3
What is credit syndication
29.3
4
What is meant by ‘portfolio management’
29.3
5
What is ‘leasing finance’
29.3
137
Unit 30
Mutual Funds
Unit 30
Syllabus requirements - Definition; evolution; growth and development of mutual
funds in Zambia; Types of mutual funds; organisation of a mutual funds.
Unit 30
Unit 30
Unit 30
Aim: - To familiarize students with Mutual Funds , their nature, role and
composition, the reforms undergone or undergoing in Zambia
Objectives - After studying this Unit you will be able to:
1st)
Define Mutual Funds
2nd)
Understand the varies aspects of Mutual funds
Time required - It’s estimated that you should spend one [1] day on this Unit.
Unit 30
Reflection - Explain the terms ‘investment’ and ‘investor’
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------30.1
Definition;

A trust that pools together the savings of investors who share a common financial goal.

A special type of institution that acts as an investment conduit

A financial service organisation that receives money from shareholders, invests it, earns returns
on it, attempts to make it grow and agrees to pay the shareholder cash on demand for the current
value of his investment -

Mutual funds are a type of investment that takes money from many investors and uses it to make
investments based on a stated investment objective. Each shareholder in the mutual fund
participates proportionally (based upon the number of shares owned) in the gain or loss of the fund.
30.2
a)
Why do People Invest in Mutual Funds?
Mutual funds offer investors an affordable way to diversify their investment portfolios.
b)
Mutual funds allow investors the opportunity to have a financial stake in many different types of
investments.
c)
These investments include: stocks, bonds, money markets, real estate, commodities,
etc…Individually, an investor may be able to own stock in a few companies, a few bonds, and
138
have money in a money market account. Participation in a mutual fund, however, allows the
investor to have much greater exposure to each of these asset classes.
d)
Most mutual funds are professionally managed by an investment expert known as a portfolio
manager. This individual makes all of the buying and selling decisions for the fund.
e)
This provides investors with many options to help them achieve their investment objectives.
"investment" means contribution of capital, in cash or in kind, by an investor, to a new business
enterprise, to the expansion or rehabilitation of an existing business enterprise or to the purchase
of an existing business enterprise from the State;- Investment ACT Cap 385
"investor" means any person, natural or juridical, whether a Zambian citizen or not, investing
in Zambia in accordance with the provisions of this Act; Investment ACT Cap 385
30.3
Evolution; - Mutual Funds originated from Belgium, where in 1882 a company was established
to finance investments in national industries associated with high risks under the name of “Societe
Generale de Belgiue”. In the 1860s, this movement spread to England.
30.4
Growth and development of mutual funds in Zambia; - Mutual exist in Zambia, some known
funds include Madison Unit Trust, Money Market Unit Trust Fund [Banc ABC], Equity Capital Resources
and Laurence Paul Unit Trust.
30.5
g)
Types of mutual funds; - Seven common types of mutual funds are
Money market funds - These funds invest in short-term fixed income securities such as government
bonds, treasury bills, bankers’ acceptances, commercial paper and certificates of deposit. They are
generally a safer investment, but with a lower potential return then other types of mutual funds
h)
Fixed income funds - These funds buy investments that pay a fixed rate of return like government
bonds, investment-grade corporate bonds and high-yield corporate bonds. They aim to have money
coming into the fund on a regular basis, mostly through interest that the fund earns. High-yield
corporate bond funds are generally riskier than funds that hold government and investment-grade
bonds.
i)
Equity funds - These funds invest in stocks. These funds aim to grow faster than money market or
fixed income funds, so there is usually a higher risk that you could lose money.
j)
Balanced funds - These funds invest in a mix of equities and fixed income securities. They try to
balance the aim of achieving higher returns against the risk of losing money. Most of these funds
follow a formula to split money among the different types of investments. They tend to have more
risk than fixed income funds, but less risk than pure equity funds.
139
k)
Index funds - These funds aim to track the performance of a specific index such as the S&P/TSX
Composite Index or LuSEThe value of the mutual fund will go up or down as the index goes up
or down. Index funds typically have lower costs than actively managed mutual funds because the
portfolio manager doesn’t have to do as much research or make as many investment decisions.
l)
Specialty funds - These funds focus on specialized mandates such as real estate, commodities or
socially responsible investing. For example, a socially responsible fund may invest in companies
that support environmental stewardship, human rights and diversity, and may avoid companies
involved in alcohol, tobacco, gambling, weapons and the military.
m)
Fund-of-funds - These funds invest in other funds. Similar to balanced funds, they try to make
asset allocation and diversification easier for the investor. The MER for fund-of-funds tend to be
higher than stand-alone mutual funds.
30.6

Load v. No Load Mutual Funds
A mutual fund that charges a commission to cover its administrative costs is called a load fund.

A front-end load charges the load when the shares are purchased, while a back-end load charges
the load when the shares are sold.

A no-load mutual fund doesn’t charge a purchase or sales commission.
Unit 30
Lesson Summary
A mutual fund is essentially pooling together the savings of a large number of small investors for collective
investments with the objective of attracting returns and appreciation in the investment value. The income
earned through these investments and the capital appreciation realised are shared by its unit holders in
proportion to the number of units owned by each investor. Mutual Funds are an important segment of the
financial system.
Unit 30
Progress Test
1
What is a ‘mutual fund’?
2
Explain the features of a Mutual Fund
30.1
30.2
3
Give an account of one type of Mutual Fund
30.5
4
Distinguish between front-end load charges and back-end load charges
30.6
5
What is no-load mutual fund?
30.6
140
Unit 31
Securitization
Unit 31
Syllabus requirements - Definition; history of securitization; Securitization
process; Advantages and disadvantages, Parties in a Securitization process
Unit 31
Unit 31
Aim: To familiarize students with Securitization, their nature, role and
composition, the reforms undergone or undergoing in Zambia
Objectives - After studying this Unit you will be able to:
1st)Define Securitization
2nd)
Appreciate the varies aspects of Securitization
Unit 31
Time required - It’s estimated that you should spend one [1] day on this Unit.
Unit 31
Reflection - What are the benefits of securitization?
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------31.1
Definition

Securitization is the process of taking an illiquid asset, or group of assets, and through
financial engineering, transforming them into a security. A typical example of securitization is a
mortgage-backed security (MBS), which is a type of asset-backed security that is secured by a
collection of mortgages.
The process through which an issuer creates a financial instrument by combining other financial
assets and then marketing different tiers of the repackaged instruments to investors. The process
can encompass any type of financial asset and promotes liquidity in the marketplace – Investopedia
31.2
History of securitization:- According Messrs Vinod Kothari (year) ‘securitization in its present
form originated in the mortgage markets in USA. It was promoted with the active support of the
government. The government wanted to promote secondary markets in mortgages to allow liquidity for
mortgage finance companies. GNMA was the first one to buy mortgages from mortgage companies and
to convert them into pass through securities - this was 1970. Other US government agencies, FNMA and
Freddie Mac jumped in later. The first securitization of receivables outside the mortgage markets
happened in 1975 when Sperry Corporation securitized its computer lease receivables’
141
31.3
Securitization process - Securitization turns mortgages into liquid assets. The process works like
this: A bank or other institution gathers hundreds or thousands of mortgages into a "pool." It then divides
that pool into shares and sells those shares as securities. Buyers of these securities gain the right to collect
mortgage payments made by the hundreds or thousands of homeowners whose mortgages have been
pooled, which is why they're called "mortgage-backed securities.". The following are the steps usually
taken
a)
A Company called ‘originator’ sells its securities which are in its name.
b)
The originator transfers the asset to a special purpose vehicle [SPV] which issues securities in its
own name. The securitized assets now become separate from the originator. The SPV now
becomes responsible to the investor for repayment of principal and recovery of interest.

Effect - If your mortgage has been securitized, it shouldn't have any real effect on you. The
loan is a binding contract, and all the terms remain in force. You may be directed to send
your monthly house payments to a different address, but that's about it.
31.4
Advantages and disadvantages
a)
Advantages - Securitization allows banks to convert their mortgages to cash, which they can then
use to lend money to more home buyers. This ensures that there is a steady supply of credit
available to the housing market. And as long as the homeowners whose loans were pooled
make their payments on time, buyers of the securities get a nice return on their investment.
b)
Disadvantages - Unfortunately, securitization can also encourage lenders to lend money to
high-risk people who are unlikely to pay it back. That's because once a mortgage has been
securitized and sold off to investors, the lender no longer has any money at stake; all the risk has
been passed off to the investors. This is what happened in the housing bubble of the early to mid2000s. When homeowners began defaulting on loans in record numbers, the securities backed by
those mortgages lost their value.
31.5
Parties in a Securitization process - Apart from the originator and special purpose vehicle other
parties form art of the process such as
a)
Regulator – In Zambia it would be the Securities Exchange Commission.[SEC] . Their role is to
find out the capital adequacy, liquidity and credit quality of the asset back securities and the
methodology of transfer of the assets
b)
Credit Rating Agency – would provide the estimate of credit risk in the securitization process
142
c)
The Trustee – that is the investor’s representative and acts in the interest of the investor
d)
Listing- the securitized paper is listed on the stock exchange
Unit 31
Lesson Summary
Securitization is a process through which certain receivables are converted into marketable securities by
restructuring cash flows which are generated by them. These receivables are not liquid but they have to
be processed through conversion by repackaging of asset in the form of collateral securities or loans. The
purpose of securitization is to create marketable financial claims. The entity that intermediates between
the originators of receivable and the end investors is called the Special Purpose Vehicle. The originator
transfers the assets to the special purpose vehicle that holds the asset for the investors and issues to the
investor its own securities. The special purpose vehicle is in other words the issuer of the security.
Unit 31
1
2
3
4
Progress Test
Define Securitization
Who is an ‘originator’?
List the parties involved in a securitization
What is Listing?
31.1
31.3
31.3
31.5
143
Unit 32
Internet Banking
Unit 32
Syllabus requirements - Traditional banking; internet banking; evolution of
internet banking; internet banking services available.
Unit 32
Aim:- To familiarize students with Internet Banking, their nature, role and
composition, the reforms undergone or undergoing in Zambia
Unit 32
Unit 32
Unit 32
Banking
Objectives - After studying this Unit you will be able to:
1st)
Appreciate what Internet Banking involves
2nd) Distinguish between Internet Banking and Traditional Banking
3rd) Distinguish between Internet Banking and e- Banking
Time required - It’s estimated that you should spend one [1] day on this Unit.
Reflection - Briefly discuss the mechanics involved in the usage of Internet
---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------32.1
Introduction - Banking transaction that takes place in virtual atmosphere on the website
of a financial service provider is termed as ‘internet banking;
32.2
Internet Banking vs. Tradition Banking - The basic difference between Internet Banking and
Traditional Banking is that in traditional banking the customer has to visit the branch in person for the
basic banking needs. In internet banking there no need to visit a branch for such transactions as withdraw
or deposit of cash, transfer of funds, statement of account, balance enquiry and so on. These can be done
through Personal Computers.
The greatest advantage of Internet Banking is the ability for a customer to perform most banking
services anywhere in the world. Other advantages include:
a)
Round the Clock performance of banking transactions
b)
No physical visit to the branch
c)
Access to the account and its operation can be done anywhere in the world
d)
Brick and mortar branches not required
144
e)
Banks can optimize the staff levels
f)
Banking services faster
g)
Automatic reconciliation in most entries
32.3
E-Banking vs. Internet Banking - e-banking is where banking operations are carried out through
electronic means. Electronic means of banking include electronically operated devices such as computers,
ATMs, etc. Internet Banking is a sub-set of e-banking.
32.4
Mechanics of Internet Banking - The steps involved in completing transactions through
Internet Banking are simple and user-friendly. The steps are:
a)
Access the Bank’s website
b)
Click on the option which provides Internet Banking
c)
Enter the User-ID, Password and Personal Identification Number [PIN]
d)
Perform the requisite transactions
e)
Log out
32.5
Services - Internet banking service offers banking services on-line with the same personal effort
that is received at the branch. Services offered include the following:
a)
Cheque book requests
b)
Viewing account statements
c)
Notification of changes in address so as to update records
d)
Buying drafts
e)
Transferring funds
f)
Stop payment intimation
g)
Notification of lost/stolen ATM card
32.6
Drawback of Internet Banking - Following are some drawbacks of Internet banking
a)
The customer needs a computer
b)
Not all transaction can be carried out electronically.
c)
Uninterrupted telecommunication require for efficient operation of internet banking
d)
Browsing can be slow
e)
Its lack of personal contract between the bank and customer can lead to mistrust
f)
Necessary legal framework may not be in place
g)
Insecurity on account of lack of faith in internet services
145
32.7
Evolution of internet banking - The concept of Internet banking has been simultaneously
evolving with the development of the world wide web. Programmers working on banking data bases came
up with ideas for online banking transactions, some time during the 1980s. The creative process of
development of these services were probably sparked off after many companies started the concept of
online shopping. The online shopping promoted the use of credit cards through Internet. Many banking
organizations had already started creating data ware housing facilities to ease their working staffs. The
development of these databases were widely used during the development of ATM's.
Sometime in 1980s, banking and finance organizations in Europe and United States started
suggestive researches and programming experiments on the concept of 'home banking'. Initially in the 80's
when computers and Internet were not so well-developed, 'home banking' basically made use of fax
machines and telephones to facilitate their customers. The widespread of Internet and programming
facilities created further opportunities for development of home banking.
In 1983, the Nottingham Building Society, commonly abbreviated and referred to as the NBS,
launched the first Internet banking service in United Kingdom. This service formed the basis for most of
the Internet banking facilities that followed.
The first online banking service in United States was introduced, in October 1994. The service was
developed by Stanford Federal Credit Union, which is a financial institution.
In year 2007/8 the first online banking was introduced in Zambia
Unit 32
Lesson Summary
Banking is no longer confined in the branches, as customers are being provided with additional delivery
channels such as ATLs, Mobile Banking, and Internet Banking and so on. Each of these channels has its
own specific advantages in terms of improved customer service and reduced transaction cost. Out of
various delivery channels, Internet banking is slowly taking the lead and becoming more popular among
Zambian customers.
Unit 32
Progress Test
1
What is ‘Internet Banking’?
32.1
2
Distinguish between Internet Banking and traditional banking
32.2
3
Distinguish between Internet Banking and e-banking
32.3
4
What is the major advantages of Internet Banking
32.2
146
5
List three services offered under Internet Banking
147
32.5
Unit 33
Leasing
Unit 33
Syllabus requirements - Concept of leasing; types of leasing; advantages of
leasing; limitations of leasing; leasing companies in Zambia; Governing legal
framework.
Unit 33
Unit 33
Unit 33
Unit 33
Aim: - To familiarize students with Leasing, their nature, role and composition,
the reforms undergone or undergoing in Zambia
Objectives - After studying this Unit you will be able to:
1st)
Appreciate what Internet Banking involves
2nd)
Distinguish between Internet Banking and Traditional Banking
3rd)
Distinguish between Internet Banking and e- Banking
Time required - It’s estimated that you should spend one [1] day on this Unit.
Reflection – By way of a diagram outline the varies components of a Lease
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------33.1
Definitions

A written agreement under which a property owner allows a tenant to use the property for
a specified period of time and rent.

The lessee (person taking out a lease) agrees to pay a number of fixed or flexible installments over
an agreed period to the lessor, who remains the owner of the asset(item) throughout the period of
the lease.
33.2

Features:
A method by which a business can acquire the use of fixed assets without purchasing them

Not used often by individuals for whom hire purchase is usually more suitable

Asset is purchased by a leasing company, who lease the asset to the business

The business pays monthly rentals to the leasing company.

The period of the lease is usually geared to the useful of the asset.
148
33.3

Mechanism of a Lease.
A lease is a contract whereby the owner of the asset
transfers the right to use the assets against payment of
fixed lease rentals.

There are two parties in a lease contract i.e lessor or the
owner and the lessee or user.

The lesser remains owner and the leased property
remains in the possession of the lessee.
33.3
Leasing activity by banks. Section 8 of the BFSA permits banks to engage in leasing – finance
leasing.
33.4
Types of Leases
a)
Finance Leasing [ lease purchase]

Long-term, non-cancellable lease contracts are known as financial leases.

The essential point - it contains a condition whereby the lessor agrees to transfer the title for the
asset at the end of the lease period at a nominal cost.

At lease it must give an option to the lessee to purchase the asset he has used at the expiry of the
lease.

High cost high tech equip.

The lease agreement is irrevocable.

All the risks incidental to the asset ownership are transferred to the lessee who bears

the cost of maintenance,

Insurance and repairs.

Only title deeds remain with the lessor.
b)
Operating Leasing [contract hire ]

Contrast to the financial lease

A lease agreement gives to the lessee only a limited right to use the asset.

The lessor is responsible for the upkeep and maintenance of the asset.

The lessee is not given any uplift to purchase the asset at the end of the lease period.
c)
Sale & Lease back [leaseback]
149

Sub-part of finance lease

The owner of an asset sells the asset to a party (the buyer), who in turn leases back the same asset
to the owner in consideration of lease rentals.

Under this arrangement, the assets are not physically exchanged but it all happens in records only.

Sale and lease back transaction is suitable for those assets, which are not subjected depreciation
but appreciation, like land.

The seller assumes the role of a lessee and the buyer assumes the role of a lessor.

The seller gets the agreed selling price and the buyer gets the lease rentals.
d)
Leveraged leasing

A third party is involved beside lessor and lessee.

The lessor borrows a part of the purchase cost (say 80%) of the asset from the third party i.e.,
lender

The asset so purchased is held as security against the loan.

The lender is paid off from the lease rentals directly by the lessee and the surplus after meeting the
claims of the lender goes to the lessor
33.5
Advantages and Disadvantages of a Lease
a)
Advantages

No large outlay compared to cash purchase

The cost is spread over a number of years; there is no need to pay the entire amount upfront.

Security:- The product is still owned by the leasing company, meaning that they have better
security on finance.

Tax advantages: -Some leasing companies pass on tax benefits to the lesser by reduced rentals.

Budgeting: - A fixed contract, it is relatively easy to budget and forecast with

Saving of capital- cash to buy actually asset saved

Improvement in liquidity:

Flexibility and convenience - The lease agreement can be tailor-made in respect of lease period
and lease rentals according to the convenience and requirements of all lessees
b)

Disadvantages
No Ownership

Costly option - high interest rates, costlier than straight buying

Long Term Expense
150

Maintenance

No working capital
33.6
Limitations of leasing; - One of the limitation of leasing is that the Lessee does not get any
ownership rights against the use of the assets. Secondly the risk of default is high. The lease is a debt
financing tool whose financing can prove very expensive as compared to other types. While using it the
lessee can damage the asset and thus return it in an workable condition.
33.7
Leasing companies in Zambia; - As per Bank of Zambia list of financial service companies the
following are licensed Leasing Companies









ALS Capital Limited
Commercial Leasing (Z) Limited
Leasing Finance Company Limited
Alios Finance Zambia Limited
Afgri Leasing Services Limited
Focus Financial Services Limited
Business Partners International Zambia SME Fund Limited
African Finance Business Zambia Limited
Zambian Home Loans Limited
Unit 33
Lesson Summary
Leasing has become popular in Zambia especially the provision in the Banking and Financial Services
Act Section 8 allowing Bank to engage in Finance Leasing. As a financial arrangement or agreement
between the lessor and lessee for use of an asset in return for a rent for a certain period, a lease has many
advantages that accrued to both the Lessor and Lessee. Thereto lays some disadvantages. A finance lease
is known in the Zambian market also as “asset finance’.
Unit 33
Progress Test
1
What is a lease?
33.1
2
What do you understand by ‘operating lease’
33.4
3
Distinguish between an ‘operating lease’ and a ‘finance lease’
33.4
4
List three advantage of leasing
33.5
5
State short comings of leasing
33
151
Unit 34
Hire Purchase
Unit 34
Unit 34
Unit 34
Unit 34
Syllabus requirements - Concept of hire purchase; advantages of hire purchasing;
governing legal framework
Aim: - To familiarize students with Hire Purchasing, their nature, role and
composition, the reforms undergone or undergoing in Zambia
Objectives - After studying this Unit you will be able to:
1st
Appreciate what Hire Purchase involves
2nd
Distinguish between Hire Purchase and Lay- by
3rd
Distinguish between Hire Purchase and leasing
Time required - It’s estimated that you should spend one [1] day on this Unit.
Unit 34
Reflection - What is HP? How is it useful to a customer??
-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------34.1
Concept of hire purchase; - Hire purchase [HP] is an agreement between two parties in
which the goods are taken on hire with the option of purchasing them by making payment of the
goods through instalments. In Zambia hire purchase is very popular for consumer durable. It’s a type of
“commercial and consumer financing”
The Hire purchase agreement is a contract in two parts. In the first part of the contract the goods
are given in the form of a bailment of goods. In the second part of the contract when the ‘hirer’ buys the
good. The owner of the goods continues to have the right of ownership until the purchasing party exercises
the option of acquiring it.
Hire purchase can be distinguished from lay-by instalment payment and lease financing:

Lay-by: Is a type of instalment sale where the seller retains the good and ownership rights until
the buyer pays the full amount through agreed installments.

Leasing: In lease financing the lessor has retains ownership of the equipment but releases the
equipment to the lessee on rent.
The hire purchase contract is usually between two parties but can be three parties. These are seller,
the hirer and the financer.
HP - K80 deposit and 12 payments of
K65.
Payments = 12 X 65 = 780
Add deposit → 780 + 80 = K860
HP is more expensive by K60
Example 1
Charlie buys a washing machine at a
Cash Price K800 or
152
Deposit
= 15% of 240 = 0.15 X
240 = K36
Payments = 12 X 21 = K252
Total = 252 + 36 = K288
Example 2
Bike costs K240 cash or or 15% deposit
and 12 payments of K21
34.2
a)
b)
34.3
a)
b)
Advantages of hire purchasing;
Advantages

Get it straight away

Do not have to save up
and disadvantages of hire purchase

Costs more usually*(Unless Interest free credit)

May still be paying for it when it no longer is in use (broken, lost, fed up with it etc.)
Governing legal framework
In the Zambia is governed by the Hire Purchase ACT
The tax treatment in hire purchase is in favour of the hirer. The depreciation of the asset can be
claimed by the hirer. The hirer can also get a deduction on the interest paid by him in his
instalment.
Unit 34
Lesson Summary
What hire purchase is?
 Buy over a period of time
 Usually monthly payments
 Also deposit (often 10 - 20%)
 You do not get your deposit back!
Unit 34
1
2
3
Progress Test
What does HP stand for?
Distinguish between lay-by and HP
Distinguish between HP and Leasing
34.1
34.1
34.1
153
Unit 35
Factoring & Forfaiting
Unit 35
Syllabus requirements - Definition; process and parties of factoring and forfaiting,
difference between factoring and forfaiting; advantages and disadvantages thereof.
Unit 35
Aim: - To familiarize students with Hire Purchasing, their nature, role and
composition, the reforms undergone or undergoing in Zambia
Unit 35
Unit 35
Unit 35
Objectives - After studying this Unit you will be able to:
1st
Appreciate what factoring & forfaiting are
2nd
Distinguish between factoring and factoring
Time required - It’s estimated that you should spend one [1] day on this Unit.
Reflection - Distinguish between factoring and leasing
---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------35.1
Definitions of factoring and that of forfaiting

Factoring refers to credit sales in which the receivables are sold by a firm to a specialized
agency called a factor. The factor is usually a financial intermediary who becomes responsible for
the management of the credit sales. The factor provides the services of finance, maintenance of
accounts, collection of debts and protection to a company from its credit risks. Factoring is a fund
based service. A factor takes a commission for undertaking the responsibility of realizing the
receivables from the customers. There are three parties in factoring. These are the seller, the buyer
and the factor.

Forfaiting is the financing of receivables that arise out of international trade. Banks of financial
institutions purchase trade bills or promissory notes through discounting and cover the risk of nonpayment at the time of collection of dues. The forfaitor/purchaser becomes responsible for the risks
He pays cash to the exporter [seller] n on discounting of the bills.
35.2

Who is a factor? So, a Factor is,
A Financial Intermediary

That buys invoices of a manufacturer or

Takes responsibility for collection of
payments.

a trader, at a discount, and
The parties involved in the factoring
transaction are:-
154

Supplier or Seller (Client)


Buyer or Debtor (Customer)
35.3

What services are offered by a factor?
Follow-up and collection of Receivables from Clients.

Purchase of Receivables with or without recourse.

Help in getting information and credit line on customers (credit protection)

Sorting out disputes, if any, due to his relationship with Buyer & Seller.
35.4

Process involved in factoring
The Client (Seller) sells goods to the buyer and prepares invoice with a notation that debt due on
Financial Intermediary (Factor)
account of this invoice is assigned to and must be paid to the Factor (Financial Intermediary).

Client sells the customer’s account to the Factor and notifies the customer.

Factor after scrutiny of these papers, makes part payment (advance) against account purchased,
after adjusting for commission and interest on the advance. The Factor, allows payment (, usually
up to 80% of invoice value). The balance is retained as Retention Money (Margin Money). This
is also called Factor Reserve.

Factor maintains the customer’s account and follows up for payment.

Customer remits the amount due to the Factor.

Factor makes the final payment to the Client when the account is collected or on the guaranteed
payment date.

Till the payment of bills, the Factor follows up the payment and sends regular statements to the
Client.
35.6
Banking versus factoring - Section 8 of the BFSA allows banks to engage in factoring. The
factor performs the functions of: purchase of receivables, maintenance of the sales or receivable
ledgers, submits sales account to the creditors, collects the debt on due dates, after collection, returns
the reserve money to the seller and provides advisory services to the customer in respect of marketing,
finance and production.
35.7
a.
The advantages of factoring are:
All sales practically become cash sales to the seller
b.
Money blocked with sundry debtors becomes available for business
c.
The seller also gets rid of collection of the receivables
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d.
His working capital management becomes efficient which also reduce his cost and in turn
improve the possibility of better profits.
35.8
Factoring, with or without recourse - A factor with recourse can return to the client and claim
back the earlier payment if the account receivable is unrecoverable. A factor without recover cannot and
therefore suffers the credit risk.
35.9
Forfaiting - Forfaiting represents the purchase of obligations, which fall due at some future date
and arise from delivery of goods (or services) in export transactions, without recourse to the previous
holder of the obligation.
Under forfaiting, the forfaiter deducts interest in advance for the whole period of credit and disburses
the net proceeds to the exporter. The sole responsibilities of the exporter are to manufacture and deliver
the goods to the importer, which creates a valid payment obligation of the importer.
The forfaiting originated when trade between western and eastern Europe was re-established during
the early 60s. the growing importance of trade with developing countries in Africa, Asia and Latin
America boosted the forfaiting market to an international level.
35.10 Forfaiting and factoring compared - Forfaiting and factoring: Factoring is suitable for financing
smaller and short term receivables with credit period between 90 to 180 days, whereas forfaiting is used
to finance capital goods' exports with credit terms between a few months to 10 years. Factoring covers the
commercial risk, whereas forfaiting additionally covers the political and transfer risk.
35.11 Process of forfaiting:
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Security for forfaiting: The drafts (in the form of promissory notes or accepted bills of exchange)
covering the transaction, are guaranteed by a bank (co- acceptance of bills of exchange or of promissory
notes by the bank) or a bank guarantee (as a separate guarantee bond), promising to pay the amount on
the given date, in the event of non-payment by the original debtor (i.e. importer). The guarantor is usually
an internationally active bank, resident in the importer's country which can ascertain the importer's
creditworthiness first-hand.
Without Recourse Clause: By transferring the drafts, the exporter also transfers his claim to the forfaiter.
This is done by the exporter by way of an endorsement in favour of the forfaiter. The endorsement excludes
the endorsee's right of recourse against the previous holder of the draft.
35.12 Advantages of Forfaiting:
a.
100 % risk cover as the forfaiter covers the (a) country risk (b) currency risk (c) commercial risk
(d) interest rate risk.
b.
Instant Cash: The forfaitor generates instant cash for the exporter that relieves his balance sheet
and improves liquidity.
Unit 35
Lesson Summary
Factoring is the Sale of Book Debts by a firm (Client) to a financial institution. (Factor) on the
understanding that the Factor will pay for the Book Debts as and when they are collected or on a
guaranteed payment date. Normally, the Factor makes a part payment (usually upto 80%) immediately
after the debts are purchased thereby providing immediate liquidity to the Client.
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Debt discounting for exporters in which a forfeiter accepts at a discount, and without recourse a
promissory note, bill of exchange, letter of credit etc received from a foreign buyer by an exporter is called
forfaiting
Unit 35
Progress Test
1
What is factoring?
35.1
2
What are the characteristics of factoring?
35.7
3
Explain the basic different types of factoring
35.8
4
Discuss the functions performed by a factor
35.9
5
What is ‘forfaiting’?
35.9
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PART IV –Summary
The concluding of this module is a selection of concepts, developments and some services provided in the
financial sector. Most services chosen for discussion here include those that are rarely offered in the
market but rank highly in future prospects. For instance ‘securitization’ is yet to take root in the Zambian
Financial Sector. Venture Capital is still rudimentary. Credit Rating has just seen that establishment of a
company recently. Mutual funds also called Unit Trust are slowly gaining recognition. Hire purchase has
taken root but is generally unregulated.
The student should seek further study of the topics covered and that not covered.
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REFERENCES
1. Gupta, N. K. and Chopra, M. (2010) Financial Markets, Institutions &
Services, 2nd edition. Ane Books Pvt Ltd: London
2. Singh, P. (2009) Dynamics of Indian Financial System. Ane Books Pvt
Ltd: London
3. Anthony Saunders & Marcia Million Cornett (2012) Financial
Markets and Institutions : Mc Graw Hill: Delhi
4. Indian Institute of Banking (2007) Laws of Cooperative Banking. 1st
Edition. Macmillan: Delhi
5. Indian Institute of Banking (2007) Securities Market and Products 2nd
Edition , Taxman
6. Ministry of Finance and National Planning (2004-2009) Financial Sector
Development Plan (FSDP) Report.
7. Webster Twaambo Jr (2012) Basics of Insurance – the Zambian
Experience
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