For K1000 (21 cents), Kelvin and his gang will make sure your car is
“safe” while you conduct business at Standard Chartered Bank in Cairo
Road, downtown Lusaka. A similar scene is played out close by the other
banks along the main thoroughfare, as the street boys duck and dive
from the official security guards. Failure to pay off the minders in
the rougher, neighbouring Cha Cha Cha Road could result in a missing
spare wheel or worse. The air-conditioned banking halls seem a haven of
tranquillity in comparison with the mayhem outside but running a bank
in Zambia still requires a deft combination of professionalism and
street-wise savvy.
Costs outpace income
Growth in the main banks’ costs are outpacing income; a culture of
loan default still lingers from the days of lax lending by state
institutions; fraud, ranging from petty theft by tellers to cheque
fraud, eats away up to $1m a year; and margins on forex and money
market trading have been shrinking. Add to that the small size of the
market: from a population of about 10 million, there are an estimated
500,000 bank accounts spread between the country’s 14 commercial banks.
Total commercial bank deposits stand at about $375m in kwacha and $300m
in foreign currencies.
At first glance, the question arises of how banks survive at all, let
alone make money. Yet bank executives remain unfazed. “One has to
constantly think of ways and means of making money,” says Margaret
Mwanakatwe, managing director of Barclays Bank Zambia.
The big four banks, Barclays, Standard Chartered, Citibank and Stanbic,
have seen little growth in assets or liabilities, a situation
attributed to the state of the economy. Meanwhile, their cost income
ratios range from 41% to 66%, with little sign of income growth to
bring that down. As a result, banks are focusing more on non-interest
income and looking at their fee structures as an alternative source of
revenue.
“All those banks that have good asset-liability management and good
risk management policies in place make money,” says Alok Misra,
managing director of Indo-Zambia Bank and chairman of the Bankers
Association of Zambia.
Since 1992, about 10 banks have gone belly-up, however. “The reason
was, to some extent, mismanagement and, to some extent, bad loan
books,” reckons Dilip Kapadia, managing director of Cavmont Merchant
Bank. “You have a situation where, if you borrow from a bank, for the
bank to get its money back the legal process is just a nightmare. For
the banks in Zambia, the challenge is to make credit available in an
environment that is not credit-friendly.”
“Lending is not the best thing to do,” says Abdul Munshi, managing
director of regional African Banking Corporation. Why lend to customers
when you can get a 30% yield from treasury bills with no issues of debt
collection or arrears? The problems stem from past lending by
government institutions, when “every credit from the government was
assumed to be a grant”, he says.
Alok Misra: Good policies bring in money
Lending is high risk
The relaxed attitude towards debt repayment in some quarters is
exacerbated by a legal system that can take years to reach a judgment.
“There is no real social stigma attached to default on commercial
loans. It is a risky business and you need to be very careful who you
lend to,” says Mr Kapadia.
The attitude towards lending seems to differ between the big four banks
and the smaller local banks, however, with the international contingent
having the systems in place to cope better with lending. Indeed, Ms
Mwanakatwe sees an improvement in the attitude towards borrowing,
especially as a new generation of entrepreneurs begins to appreciate
the benefits of a clean credit record. “Those that are lending need to
be incentivised and those that are not lending need to be penalised,”
she says.
That sentiment is echoed by Ignatius Mwanza, head of sales in the
corporate banking unit at Standard Chartered. “What surprises me is why
a bank would call itself a bank if it did not lend. It is the essence
of banking,” he says. But Standard Chartered’s head of global markets
in Lusaka, Saloum Jobarteh, cautions: “You have to be very mindful. You
cannot just lend like crazy.”
Rajaram Venkatraman, managing director of Citibank Zambia, says: “At
the end of the day, you cannot lend against collateral, you have to
lend against cash flow.” He believes that most of the “extremely high”
non-performing loans are associated with old parastatal loans from
government-controlled institutions, while the private sector banks are
“relatively okay”.
Two-thirds of Barclays’ lending, for example, is in US dollars.
“Lending in kwacha, I still make money but only a brave business can
borrow at a base rate of 43%,” says Ms Mwanakatwe.
The small deposit base does not help matters. “There is just not the
critical mass that you would have in, say, Johannesburg,” explains Mr
Mwanza. And Mr Kapadia says: “If you look at those figures, they tell
you there is a problem. They are very small figures when you consider
the infrastructure that is supporting the banking industry.” Mr
Venkatraman of Citibank Zambia – where liabilities are 80%-85%
comprised of institutions such as the United Nations – says: “The fact
that the productive sector of the economy is not very large or deep
means you do not have customers you can lend to.”
Liquidity requirements
Banks are required to keep 35% of their deposits in core liquid
assets – effectively treasury bills, although in practice the
industry-wide figure is nearer 60%, giving a strong indication of some
banks’ nervousness to lend. “The bank environment is over-taxed,”
according to Mr Kapadia, who cites the 15% withholding tax on
government paper, 17.5% statutory reserve, corporate tax of up to 45%
(compared with 35% for other corporates), and levies for central bank
supervision and electronic clearing. About 70% of deposits are thus in
the form of non-discretionary funds under central bank control. “Then
they ask you why you do not lend more,” says Mr Kapadia.
In general, however, the regulatory framework in Zambia is praised.
“The regulation and financial infrastructure in Zambia is far superior
to most other comparable countries,” says Mr Venkatraman. “There is a
good Financial Services Act and a very savvy regulator. It does a
fairly good job. We have a robust clearing system but the problem with
Zambia is there is a lot of first world technology for fourth-world
type problems.”
Mr Jobarteh agrees. “Bank of Zambia has really got its act together in
the past few years. It has come a long way in bringing discipline,” he
says.
For many of the smaller banks, trading in treasury bills, government
bonds and foreign exchange is a more attractive source of income than
lending. But with the forex market still small and volatile, and
margins falling dramatically since the central bank began liberalising
the market 18 months ago, even that is becoming harder work. “The
challenge now is to increase volumes. Now we are chasing turnover
rather than margin,” says Mr Munshi, whose bank is one of six primary
dealers, along with Barclays, Standard Chartered, Stanbic, Finance Bank
and Citibank.
Year-on-year, the kwacha weakened 4.5% against the dollar and 8.6%
against sterling in August. A switch in July to broad-based interbank
foreign exchange trading, replacing the Bank of Zambia’s auction
system, seems to have contributed to stability in the past couple of
months, and Mr Munshi believes exchange controls “are not an issue
unless something crazy happens”. However, Mr Kapadia cautions:
“Historically, this country had exchange controls and that risk is
always there.”
Margin squeeze
Noah Manjeese, president of the Institute of Bankers and managing
director of Intermarket Discount House – which is trying to develop a
secondary money market in government paper – believes the general
squeeze on margins is a good thing. “Large margins were shielding
inefficiencies and people are now going to focus on real issues rather
than inefficiencies,” he says.
The challenges need to be viewed in the context of an economy that,
although showing some signs of improvement, is still small and
struggling. “The banking system can never out-do the economy and there
are serious economic pressures here which mean that, until something is
done to adjust the structural problems in the economy, the banking
sector is going to suffer,” says Mr Venkatraman.
Noah Manjeese: real issues coming into focus
Outlook is mixed
On the plus side, the Bank of Zambia is confident of achieving its
4.5% GDP growth forecast, the base rate has come down steadily from 49%
to 39% in the past 18 months and the kwacha’s depreciation has slowed,
despite sliding from 3882 to the dollar at the beginning of 2002 to
about 4700 to the dollar in August. However, the government’s inflation
target for the year of 13% looks unlikely to be met, the current
account deficit is estimated at $657m and the government is under
pressure to curb a $140m budget deficit to win debt relief from
international donors.
The industry is bullish, though. The Bankers Association is working on
a switch to allow ATM system sharing between banks and a real-time
gross settlement system is scheduled for operation in the first quarter
of next year. A credit bureau is also scheduled to come into operation
in the first quarter, something that has been on the drawing board for
some time and has been awaiting Bank of Zambia approval in relation to
customer privacy issues.
“We see a strong financial sector emerging and the worst is behind us.
The banks are well-capitalised and well-regulated, and the people at
the helm are professional people who know the risks they are taking and
how to manage it,” says Mr Misra.