Share the article
twitter-iconcopy-link-iconprint-icon
share-icon
AfricaNovember 3 2003

Bulls in a tight economy

It is a wonder that Zambia’s banks survive, let alone make money, in a country where running costs are high, reports Gill Baker.
Share the article
twitter-iconcopy-link-iconprint-icon
share-icon

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.

896.photo.jpg

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.

897.photo.jpg

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.

Was this article helpful?

Thank you for your feedback!

Read more about:  Middle East , Africa , Zambia