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LECTURE ONE; INTRODUCTION
Lecture Outline;
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What is a bank?
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Why are banks important?
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What role/functions do banks play in the economy?
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Licensing requirements.
DEFINITIONs
The oxford dictionary defines a bank as a financial establishment that uses money
deposited by customers for investment, pays it out when required, makes loans at
interest, and exchanges currency. A loan is money lent out to a borrower to be generally
paid back with interest. This action of taking deposits and making loans is called financial
intermediation. When a bank acts as an intermediary-they are as a connecting link between
borrowers and lenders of money. Banks collect money from those who have surplus money
and give the same to those who are in need of money.
Another definition of a bank (The Banking and Financial Services (BFS) Act No. of 2017) is
as a company authorised to conduct banking business in accordance with BFS Act of
2017; and has been licenced in accordance with the guidelines and provisions of the regulator
(Bank of Zambia).
Banking business means— receiving deposits, including chequeing and current account
deposits, and the use of the deposits, either in whole or in part, for the account and at the risk
of the person carrying on the business to make loans, advances or investments; providing
financial services; and any custom, practice or activity, prescribed in rules issued by the
Bank, as banking business;
Let us look briefly at each one of these services in tum.
Acceptance of Deposits-This simply means that a bank must be prepared to take deposits of
cash and cheques from its customers and to credit their accounts with them. The bank keeps
these funds for their customers and undertakes to repay them on demand if the money is on a
current account, or at the expiry of a period of notice if the money is on an investment
account.
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The provision of ways in which deposits can be transferred- Money on current account can
be withdrawn by presenting a cheque for cash at the bank's counter or issuing it to a third
party who can then pay it into his bank account or cash it at the counter if it is an open (an
uncrossed) cheque. The vast majority of third party cheques are in fact crossed and are
presented through the banks' clearing system to the banks on which they are drawn.
Alternatively, the customer may draw on his deposit through an ATM; he may authorise the
bank to make payments from the account on his behalf against a standing order or a direct
debit; or he may use his/her debit card.
The provision of Credit-This means that the banks must be prepared to lend money to their
customers. This does not mean that every customer is entitled to borrow, far from it, but that
the banks are willing to provide loans to those customers who are sufficiently creditworthy.
This means that their assets and income must be such that they are able to repay the advance
over the time period that is agreed at the outset, and also to pay the interest as it falls due.
Lending money in this way is the main source of income to the banks - they accept deposits
and pay modest rates of interest, if any, on them, and then lend most of their deposits at rates
of interest that are considerably higher than those paid on deposits.
These are by no means all the services that the banks offer their customers, and indeed they
offer a wide range of services and, mostly through subsidiary companies, they offer services
(products) that compete with those offered by other financial intermediaries such as building
societies, microfinance companies, insurance companies, and unit trusts.
THE IMPORTANCE OF BANKING
Banks are essential for each country’s economy, since no growth can be achieved unless
savings are efficiently channelled into investment.
They are a primary source of funds for both individuals and businesses in this respect, the
lack of a full-fledged banking system has often been identified as a major weakness of any
economy.
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functions of a Bank
Primary
function
Accept Deposits;
- Current
Accounts
-Savings
Accounts
- Fixed deposit
Accounts
Grant advances;
-Overdrafts
-Individual loans
-Corporate or
business loans
-Other credit
facilities
Secondary function
Agency function;
-Transfer funds
-Cheque
collection
-Facilitate periodic
payments.
-facilitate periodic
collections.
-Management
of Portfolios
Utility functions;
-Issue of Drafts,
-Letter of credits
-Locker Facility
-Underwriting Services
-Foreign Ex dealings.
-Project Reports
THE ROLE THAT BANKS PLAY IN THE ECONOMY;
The intermediation role-this implies banks transforming savings received from households
into credit (loans) for business firms and others in order to make investments in new
infrastructure, equipment and other goods.
The payment role-carrying out payments for goods and services on behalf of customers
(such as clearing of cheques and providing a conduit for electronic payments)
The guarantor role-standing behind their customers to pay off customer debts when those
customers are unable to pay (such as issuing letters of credit)
Risk management role-the banks assist customers in preparing financially for the risk of
loss to property, persons, and financial assets.
Investment banking role-banks also assist firms and governments in marketing securities
and raising new funds. As well as assist households in investing in securities.
Safe keeping Role-safeguarding a customer’s valuables and certifying their true value
Agency role-acting on behalf of customers to manage and protect their property
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FINANCIALSERVICES OFFERED BY BANKS;
Building upon the services highlighted in the definition, banks a couple more of services
which include:
(a) Provision of unsecured and secured credit/loans to any person
(b) Dealing as a principal or as an agent in transactions involving:
(i) Bills of exchange, promissory notes, cheques, travellers’ cheques and like
instruments;
(ii) The currency of Zambia, and subject to the regulations, 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) Acting as a selling agent in connection with any equity or debt securities that are in the
course of distribution by the Privatisation Agency, established under the Privatisation
Act, or as an advisor to that agency with respect to any aspect of the privatisation of any
parastatal organisation;
(k) Provide safekeeping and custodial services for financial assets and securities;
(l) Provide merchant banking advice and services including the arrangement and
underwriting of shares, trade financing, corporate financing and the provision of financial
advice; and
(m) 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.
(n) Standing orders execution
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Note-Unless there are conditions attached to a particular banking licence otherwise provide, a
banking licence authorises its holder (Bank) to engage in all of the activities in addition to
banking and business as stipulated in the Banking and Financial Services Act (BFSA 2017).
REQUIREMENTS FOR SETTING UP A BANK IN ZAMBIA courtesy of the Bank of
Zambia website http://www.boz.zm/banksupervision_requirements.htm
PART 1
1. LICENSING REQUIREMENTS
To operate a bank in Zambia, it is a requirement that the bank be licensed by the Registrar of
Banks and Financial Institutions (“the Registrar”) whose office is based at the Bank of
Zambia. The decision to licence the bank lies with the Registrar. The applicant must first
submit its proposed name to the Registrar for clearance prior to making its application for a
licence.
1.1 The application forms, which can also be collected from the Bank of Zambia, must be
completed and submitted by the applicant to the Registrar of Banks and Financial Institutions
at the Bank of Zambia after it has received a name clearance.
These forms are:
(i) Form BFI completed by the promoters of the bank; and
(ii) Directors Questionnaires, Shareholders’ Questionnaires and Vital Statistics Form to be
filled out by prospective directors and shareholders as well as the Chief Financial Officer.
1.2. The forms in 1.1. above must be accompanied by the following:(i) Certificate of Incorporation and Articles of Association for the company;
(ii) Evidence of minimum required capital of K104 million or more for local banks and
k520 million or more for foreign owned banks;
(iii) A business plan with financial projections and forecasts for a minimum of three years
from commencement date. The business plan should include the income statement, balance
sheet, cash flow statement and a copy of the accounting policies the proposed bank would
follow. The underlying assumptions must be explicitly stated;
(iv) Audited financial statements of the company (where applicable) for the year immediately
preceding the application where applicable or confirmed;
(v) Detailed curriculum Vitae, including details of nationality and residence status residence,
for the senior management (i.e. proposed directors, senior executive officers) of the proposed
bank;
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(vi) Evidence of compliance with sections 23 and 24A of the Banking and Financial Services
Act, Chapter 387 of the Laws of Zambia as amended (“BFSA”); and
(vii) And other documents as may be requested by the Bank of Zambia.
1.3. The applicant is required to pay the following fees:
(a) A non-refundable application fee of 50, 000 fee units (currently K9,000,000) payable at
the time of making the application; and (b) Upon grant of a licence, an annual licence fee of
25,000 fee units (currently K4, 500, 000) payable at the beginning of each year.
The application and licence fees are payable in cash, by cheque, the Direct Debit and Credit
Clearing method or by such other method as may be prescribed by the Registrar from time to
time.
2.0. PROCESSING OF APPLICATION
2.1. Upon receipt of a complete application, the Bank of Zambia shall, within 180 days,
review the application and determine whether a license should be granted to the applicant or
not.
2.2. An application is considered to be complete when all the necessary documents have been
submitted and the application fee has been paid. These documents are listed above under
clauses 1.1 and 1.2. Upon receipt of a complete application, the
Bank of Zambia shall inform the applicant that it has received a complete application and the
180 days referred to in 2.1 therefore starts running from this date.
2.3. Where the Registrar is satisfied that the applicant:
(a) is fit and proper and has met all the requirements of the Banking and Financial Services
Act, Chapter 387 of the Laws of Zambia; and
(b) has met all the requirements set by the Bank of Zambia, the Registrar may then consider
approving the application.
When an application has been rejected by the Registrar, the applicant may make written
representations to Registrar who may then reaffirm, modify or revoke his/her decision. Where
the Registrar reaffirms his decision to reject the said application, the applicant may within 7
days of receipt of the rejection appeal to the Minister of Finance and National Planning who
shall appoint a three-person tribunal to preside over the appeal. The decision of the Tribunal
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is final and binding on the parties except as to a point of law i.e. where the decision is in
direct conflict with the law.
PART 2
3.0. POST-LICENCE REQUIREMENTS
3.1 When the requirements under Part 1 have been fulfilled and the Registrar has approved
the application, the applicant will be required, before commencement of business to
demonstrate its fulfilment of the minimum requirements for the premises of a bank. When the
premises are ready, but before commencement of business, the Bank of Zambia will conduct
an inspection of the premises.
3.2 The premises where a bank is licensed to operate should meet the following minimum
requirements:
a) A lease agreement where the premises are on lease or a Certificate of Title where the
premises are owned by the company (i.e. the bank);
b) Suitable location in an area that meets the needs of the community;
c) Proper counters and offices for the conduct of banking business;
d) The name of the bank should be prominently displayed on the building in which the bank
is housed;
e) Telephone, facsimile and email facilities;
f) A board for displaying exchange rates;
g) Safe (s);
h) Note counting machine (s);
i) Note detector (s);
j) Adequate security measures e.g. electronic alarm, security guard(s), etc; and
k) Any other requirements as may be advised by the Bank of Zambia.
PART 3
4.0. ISSUANCE OF A BANK LICENCE
4.1. Upon approval of the application and payment of the annual licence fee, the Registrar
shall issue the applicant with a bank licence to conduct banking business.
4.2. 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 bank.
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4.3. Once a bank 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 bank 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.
4.4. All banks operating in Zambia are supervised by the Bank Supervision Department of the
Bank of Zambia.
PART 4
5.0. OTHER REQUIREMENTS
The following are some of the key requirements that banks are supposed to take into account:
5.1. Once licensed, the bank shall be subjected to regular on-site and off-site inspections.
5.1.1 The bank shall be expected, inter alia, to file monthly prudential returns
5.1.2 The bank shall be expected to publish its financial statements in a daily newspaper of
general circulation throughout Zambia after they have been approved by the Bank of Zambia
5.2. A bank intending to open a new branch or other agency or representative office shall not
do so without prior written approval from the Bank of Zambia.
5.3. A bank shall not close a branch without giving the Bank of Zambia notice as provided
for under the Banking and Financial Services Act.
5.4. A bank shall not change its shareholders, directors, senior managers or its name without
prior written approval from the Bank of Zambia.
5.5. A bank shall ensure that it is compliant with sections 23 and 24 of the BFSA at all times.
5.6. A bank is expected to pay Supervisory Fees which are necessary to enable the Bank of
Zambia exercise its supervisory functions. Currently, supervisory fees are calculated at 0.2%
of a bank’s deposits in the past year.
5.7. A bank shall ensure that it has a Compliance Officer who shall, inter alia, ensure that a
bank complies with the provisions of the Prohibition and Prevention of Money Laundering
Act, Number 14 of 2001. A bank shall also ensure that it has adequate
internal anti-money laundering policies, guidelines and training programmes upon
commencement of business.
5.8. A bank shall submit to the Bank of Zambia such other information as may be required by
the Bank of Zambia from time to time.
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WORKSHEET 1:
Answer the following review questions in your note books;
a) Find out the types of financial institutions that we have in Zambia. What products and
services do they offer?
b) What is meant by a retail bank?
c) Prepare a list of the retail banks in Zambia. What are the common products offered by
these banks?
d) Read and understand the licensing requirements in your notes, are there any changes
that have taken place regarding the licensing requirements for banks and other
financial institutions?
e) When was the Bank of Zambia established, and what advantages does it have from
the outset compared with the other banks?
f) Explain the roles of the Bank of Zambia
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