10 December 2009

Zambia: Resilient Economy Props Up Local Banking Sector

ONE of the sectors to have been most affected by the world economic crisis has been the financial sector, which resulted in world stock markets falling, large financial institutions collapsing or being bought out, and governments in even the wealthiest nations coming up with rescue packages to bail out their financial systems.

In one of the most dramatic events in Wall Street history, Merrill Lynch agreed to sell itself to the Bank of America for roughly US$50 billion to avert a deepening financial crisis, while another prominent securities firm Lehman Brothers filed for bankruptcy protection after it failed to find a buyer.

But even as the fates of Lehman and Merrill hung in the balance, another crisis loomed as the insurance giant American International Group (AIG) became insolvent.

But while all this was happening, the Zambian financial sector was receiving new players on the scene such as Access Bank of Nigeria, EcoBank from West Africa, First National Bank (FNB) from Africa's biggest economy, South Africa and the United Bank for Africa Plc (UBA) of Nigeria.

With the coming in of these financial institutions, Zambia now has 17 banks in total.

Also, Investrust Bank is planning on expanding its branch network in various parts of Zambia at a cost of more than K5 billion. The bank is set to open branches in Mansa, Kasama, Ndola, Mongu, Chirundu and Lusaka's Castle Shopping Centre on Kafue Road.

The Business Times of Ghana in April also reported that Swiss-based International Commercial Bank (ICB), controlled by finance minister, Tun Daim Zainuddin is looking to expand its business to Zambia.

It was reported that it recently received the go-ahead from the Bank of Zambia to establish a bank in the country to be called International Commercial Bank Zambia Ltd.

ICB Bank operates in other African countries such as Senegal, the Gambia, Guinea, Sierra Leone, Ghana, Djibouti, Tanzania, Malawi and Mozambique, apart from Albania (Europe), Laos, Bangladesh and Indonesia.

ICB Global management Sdn Bhd regional director for Africa, Sashi Nair told Business Times that the bank is on the lookout for opportunities in emerging economies, especially in Africa and Asia.

"We are concentrating on small and medium-sized businesses as well as retail banking, although we provide the full range of banking services such as wholesale and commercial banking."

ICB, listed on the AIM market of the London Stock Exchange, offers consumer banking, commercial corporate banking, international banking and electronic banking.

According to the results for the financial year ended December 31, 2008 released earlier in April, its group assets grew by 9.2 per cent to $1.12 billion, total loan and advances grew by 8.7 per cent to $588 million and customer deposits grew by 4.1 per cent to $777.6 million.

However, of the latest banks to have come to Zambia, Access Bank was the first to be registered. It serves more than two million customers from 130 branches located in all major commercial centres and cities across Nigeria, eight other African countries like Burundi, Cote D'Ivoire, Democratic Republic of Congo, Ghana, Rwanda, Sierra Leone, The Gambia, Zambia.

The UBA is the product of the merger of Nigeria's third and fifth largest banks, namely the old UBA and the erstwhile Standard Trust Bank Plc (STB), and a subsequent acquisition of the erstwhile Continental Trust Bank Limited (CTB). In its long history, it has maintained a consistent and solid financial performance of leading and pioneering innovations in the Nigerian financial sector.

As for Ecobank, whose official name is Ecobank Transnational Inc., it is a pan-African banking group with a presence in more African countries than any other bank. It is the leading independent regional banking group in West and Central Africa, serving wholesale and retail customers.

On the other hand, FNB is one of South Africa's "big four" banks, and is part of the FirstRand Limited group, which trades on the Johannesburg Securities Exchange. It has subsidiaries in Swaziland, Mozambique, Botswana and Namibia, which are all listed on their country's respective stock exchanges.

At the launch of FNB in Zambia, chief executive officer Michael Jordaan said they have invested K85 billion in their operations in the country since they obtained a licence last November and are planning on further expansions in the country.

Dr Jordaan said FNB planned to open two more branches next year to bring to five outlets in the country while aiming to have a branch in every provincial headquarter as part of its immediate growth strategy.

FNB chief executive for Africa, Jabu Khethe says they believe Zambia is investor-friendly and had little political risk.

"FNB made the decision to enter Zambia as it has one of the highest Growth Domestic Products in the region and the economy is growing at a favourable rate," Khethe was quoted as saying in the South African media.

Bank of Zambia Governor Caleb Fundanga says the interest being witnessed in the financial sector is due to the favourable economic environment that has been created in the last few years.

"During this period, the economy has performed relatively well as reflected in the overall macroeconomic stability, which has been underpinned by sustained positive growth rates in the real Gross Domestic Product averaging more than five per cent in the last five years.

"In the financial sector, stability has continued to characterise the financial system with all banks being adequately capitalised and non-bank financial institutions performance being satisfactory.

"I am convinced that this stability, among other factors, will continue to contribute to the attraction of international investors such as Access Bank to invest in Zambia," Dr Fundanga said at the launch of Access Bank.

World Bank country manager for Zambia, Dr Kapil Kapoor says the setting up of new banks is a very positive development. The financial sector like other sectors of the economy, thrives on competition and they expect that with increased competition, the quality of service that clients receive will improve and the cost of financing will come down.

Zambia Chamber for Small and Medium Business Associations (ZCSMBA), executive secretary Maxwell Sichula, is also happy with the coming-in of new banks, which will lead to more competition.

"In the market place competition is generally a good thing. It gives the consumer a choice and keeps the supplier of goods and services on their toes. Our assumption therefore is that the new banks, once they settle down, are going to increase the tempo of competition in the market place. It is too early to say how this is going to pan out, but definitely people in Lusaka will have a wider choice.

"I can only hope that all the new banks will extend their services to other parts of the country as soon as possible so that the benefits are extended beyond Lusaka. ZCSMBA has had preliminary discussions with Ecobank top management for a possible partnership. The bank has expressed interest in supporting Zambian micro, small and medium enterprises," Sichula says.

In 2004, Zambia launched the Financial Sector Development Plan (FSDP), which has seen a lot of work being undertaken in addressing the weaknesses in the Zambian financial sector, including the level of financial access.

Some ground-breaking market studies that have helped characterise both the demand and supply side issues peculiar to the Zambian financial sector have been undertaken which include the 2005 FinScope study findings which showed that only 33 per cent of the country's adult population had access to any formal or informal financial service or product.

Arising from this, the Zambian Government in collaboration with cooperating partners developed a performance assessment framework, under which a target of at least 50 per cent by the end of the year has been set for the level of financial access.

The findings of the on-going follow up survey, whose results are due to be finalised will give an indication of the direction and level of access currently.

Dr Fundanga says before the end of FSDP Phase one, which ran from July 2004 to June 2009, it became quite apparent that a number of challenges and recommendations would arise, which would not be possible to implement within the initial five-year period approved by Cabinet in 2004.

In addition, there were new developments, coupled with key recommendations from the second Financial Sector Assessment Programme (FSAP) of 2008, which required to be incorporated into the FSDP.

Therefore, the second phase is envisaged to deal with longer-term issues pertaining to the overall strengthening of the legal framework for the financial system. Against that background, a FSDP Phase II consultative meeting, was held in Lusaka in October.

However, some concerns have been raised suggesting that the increasing number of commercial banks in the country is likely to result in a crisis similar to the one experienced in the 1990s, which was brought about by the proliferation of financial institutions.

At the height of the local financial crisis in the 1990s, certain key commercial banks such as Credit Africa Bank and Meridien Bank were placed under liquidation, throwing a lot of depositors in agony.

But Minister of Finance , Situmbeko Musokotwane, who at the time was at the central bank, believes the increasing number of commercial banks in the country is manageable as the central bank has enough regulatory and supervisory tools for monitoring.

"The entry of new commercial banks in the country would reduce the cost of lending through inducing competition," Dr Musokotwane says.

Already, the country has witnessed some banks reducing their base lending rates, the most recent being Standard Chartered Bank which slashed its rates from 24 to 21 per cent.

The development comes on the heels of Republican President, Rupiah Banda's concerns during the opening of FNB that the interest rates were too high and were discouraging borrowing.

The chain of developments in the banking sector are a demonstration of resilience in the Zambian economy, that despite the global economic crisis, the country is still able to attract foreign investment and subsequent development.

This indeed is good sign of things to come.

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