Share the article
twitter-iconcopy-link-iconprint-icon
share-icon
AfricaApril 6 2008

Opportunity knocks

A stable economy and growing middle class is attracting international banks to Zambia. However, the greatest reward will come to whoever taps into the country’s 10 million unbanked inhabitants. Gill Baker reports.
Share the article
twitter-iconcopy-link-iconprint-icon
share-icon

The sharp suit-wearing, Toyota Corolla-driving, cellphone-owning epitome of Zambia’s growing middle class is now being bombarded with offers of salary-backed personal loans, mortgages and leasing deals. A few years ago he would not have got through the door, but now banks are falling over themselves to attract his business; there are win-a-car promotional draws at the shopping malls, and bank billboards almost outnumber the cellphone hoardings enveloping Lusaka’s streets.

It is a far cry from the ‘gin and tonic’ banking of five years ago, when all bankers had to do was take cheap deposits and buy treasury bills, with an occasional spot of foreign exchange trading on the side. Yet behind the billboards, often literally, Zambia’s unbanked – the 10 million poverty-stricken subsistence farmers in the rural areas and their struggling urban counterparts – have seen little change, battling with a familiar cycle of floods, drought, disease and hardship.

Exciting times

This dichotomy goes to the heart of the issues being grappled with by the banking sector as it rides a wave of phenomenal growth, innovation and rapid product roll-out. “It’s a very exciting industry to be in right now,” says Citibank Zambia managing director Saviour Mwepu Chibiya.

In 2003, one executive told The Banker: “Why lend to customers when you can get a 30% yield from treasury bills with no issues of debt collection or arrears?”

At the end of last year, yields on government securities were half that; the Bank of Zambia’s base rate was 18.3% and banks were lending kwacha at an average of 24.4%.

Indeed, loans and advances by the sector rose by about 50% last year, while deposits were up by about 30%. Total lending stood at ZmK5600bn ($1.2bn) in December last year, almost three times the 2004 figure. Barclays alone saw its consumer lending grow from ZmK200bn in 2006 to ZmK700bn last year, and is projecting ZmK1100bn for this year. Deposits have also seen a three-fold increase over four years.

The ignition of the sector has been the result of a series of events: government liberalisation of the sector in the 1990s; a rise in the price of Zambia’s chief export, copper; cancellation of $6.75bn of national debt under the heavily indebted poor countries initiative; and the government’s sale last year of 49% of Zambia National and Commercial Bank (Zanaco), to Rabobank.

The country’s stable political environment and economic management have also helped. The result has been 6% gross domestic product (GDP) growth, inflation at 8.9%, lower interest rates and a stabilisation in the value of the kwacha currency.

New reality

The flipside of the heady new banking reality, however, is that margins, while still good, are coming down, competition is increasing and banks are having to get serious about risk management. With narrowing margins, the key to profitability is volume, with much of the focus on the consumer market.

“Generally, all rates are coming down, with less margins for the banks, which means that we have to find alternative sources of income, and the only way do to that is to increase volumes,” says Mark Wiessing, managing director of Zanaco.

With a population of between 11 million and 12 million, the market is small. However, a 2006 survey for the government by the FinMark Trust, backed by the UK government’s Department for International Development (DFID), reported that 85% of the adult population were unbanked.

It is this segment that is increasingly becoming a topic of discussion. The banks are under pressure from the government to expand into the unbanked population but insist that targeting the sector is not merely a political move or a philanthropic gesture.

“I don’t think the banks are in the business of looking at the unbanked as being people with no money. There are 12 million people and of those probably about 500,000 have an account, yet there are two million with a cellphone. It is a huge part of the economy that is not necessarily visible at first sight and we believe the bank penetration will follow that to some extent,” says Mr Wiessing.

Access to finance

It is also a subject close to the heart of former Bankers Association of Zambia chair Sherry Thole, who has worked in five banks during a 30-year career and was until recently managing director of Intermarket Banking Corporation.

“We still have to address the issue of access to finance. Zambian people have literally been excluded from the banking sector. We tended to lay emphasis more on the foreign investor who is automatically given a loan. Our people have lacked the collateral, and the lack of a credit reference bureau has been a factor,” she says, pointing out that there were just 700,000 people in formal employment but four million in the ‘informal’ sector.

“The failure by us as Zambian bankers is our lack of attention to that sector, and that gap has been filled by loan sharks and microfinance institutions who charge five times what the banks are charging,” she adds.

Barclays Bank Zambia managing director Zafar Masud says: “Whoever shows the commitment to this market will succeed, but bringing this sector into the fold is not an easy job. It requires a lot of resources and patience; patience is something very critical in this market and one has to invest now to reap the benefit later on. It is going to be a painful and lengthy process and it will be quite a challenge.”

Credit bureau control

In the past, bad debts have been a problem, but that now appears to be improving. Gross non-performing loans are about 8.8%, compared with more than 11% two years ago, according to Chisha Mwanakatwe, director of bank supervision at the Bank of Zambia.

Ms Thole says: “Lack of a credit bureau and historical bad debt is no longer an excuse because the people have changed. The younger people are go-getters; they are young and they see opportunities in the economy. All that we need to do is give them access to finance. Management of problem loans and debt recovery was improving with the help of technology and better in-house systems.”

Citibank’s Mr Chibiya says: “If you have your personal loans doubling in a year, you have much higher risk; and then your whole risk management is critical. Apart from the systems, you also need to invest in the skills of the people to manage the new risks that are coming out. As a sector we are lagging behind and we need to invest more in people skills. We do have a gap, but it is not just in banking, it goes to the core of the education system in the country.”

The recent launch of a credit reference bureau is a step in the right direction but its practicalities have met with a mixed response. The Banking and Financial Services Act still guards customer privacy, preventing the automatic sharing of data, so banks are required to acquire the specific consent of borrowers before they can be entered onto the bureau records. While it is straightforward for new borrowers to sign a consent form, it is less practical to bring existing borrowers into the net, says Mr Wiessing.

Time to move on

But Ms Thole dismisses such concerns, saying: “it is time to just get on with it”, while Mr Mwanakatwe at the central bank hailed it as a “milestone”. He adds: “Poor credit culture has often been cited as one of the weaknesses in the financial sector and one of the contributions to the high cost of borrowing on account of the risks associated with a high default level. With the establishment of the credit reference bureau, we expect banks to be able to draw upon that to make an assessment of creditworthiness of the potential borrower and hopefully the pricing will come down.”

Larry Kalala, chair of the Bankers Association of Zambia and managing director of Stanbic Bank, says: “Investment is required in infrastructure, premises, telecommunications, power and human resources. There is a critical shortage of qualified skilled workers in lending. We have witnessed high staff turnover in the banking industry due to high demand caused by growth in most sectors.”

Mr Masud estimates it will take another five to six years for the bureau to kick in effectively. “In the interim there are huge opportunities out there and you cannot wait; you will miss the boat,” he says.

But is such a strategy of targeting the unbanked profitable? Certainly the banks are still sitting comfortably at the moment. The average return on assets is about 3.9%, and return on equity is at 35% as business expands and overheads become a smaller proportion of expenses. Mr Mwanakatwe describes capital adequacy ratios as “satisfactory”, despite a decline in tier 1 capital and total regulatory capital adequacy ratios over the past three years to 15.9% and 18.6% respectively, blamed on the shift from government securities to more risky loans. And average lending rates were still “lucrative”, says Ms Thole.

Fees and charges

Mr Wiessing, meanwhile, is concerned that some banks are over-stretching themselves on marketing expenses. He says that Zanaco’s strategy was to bring down the cost of service delivery using technology, introducing more ATMs and point-of-sale terminals.

The level of bank fees and charges is a topic that has come under increasing scrutiny from the central bank. Mr Wiessing says: “There is a lot of concern at government level about interest rates and charges that banks are levying and this is also being looked at in other markets.

“It is easy to make statements that interest rates on consumer lending are too high but it is difficult to determine what they should be. The reality of what the banks are facing is that credit growth is growing much more rapidly than deposits for most of the banks and the marginal cost of additional deposits to fund the credit growth is significantly higher.”

Mr Kalala adds: “Not all of it is profitable but there is a large informal sector that is cash rich. The main challenge in Zambia is that the population is spread over a wide area, especially the rural areas where infrastructure is relatively poor. However, with improved technology, cost-efficient distribution channels could be an answer.”

According to Mr Chibiya: “Interest rates are coming down and there is a wide belief that they should come down significantly further.”

While much of the growth in the sector has focused on the retail side, corporate banking is also becoming more sophisticated. Citibank Zambia is seeing more trade finance and foreign exchange transactions on the back of the economic expansion, with hedging starting to come into the picture alongside traditional spot deals.

Lengthening tenors

 

On borrowing, tenors are lengthening from simple short-term working capital facilities to five-year loans, some even incorporating a syndicated element, says Mr Chibiya. But while the big-ticket loans, once the preserve of the mining sector, are now filtering into other sectors with borrowers such as Celtel, Zambia Sugar and Chilanga Cement, they are still constrained by lack of depth in the loan market. With a limit of 25% of capital on lending to any single borrower, the country’s 13 banks would be hard-pressed to muster $90m between them, Mr Chibiya adds.

Big deals are being done, however, with overseas banks helping fill the gap. And competition is hotting up even in the corporate area. “Our typical customers have a lot of options and everyone is knocking on their door. Spreads and fees are much lower then the retail banks,” adds Mr Chibiya.

Sovereign credit rating

Meanwhile, Mr Mwanakatwe at the Bank of Zambia is taking risk management very seriously. The central bank is implementing the Basel II capital accord, although it has identified a number of challenges in terms of supervisory infrastructure, market risk, the cost of implementation, risk management practices and a shortage of appropriate skills, as a result of which it is taking a phased approach.

The government is also planning to obtain a sovereign credit rating, a move welcomed by Mr Chibiya. “That independent rating is quite important when dealing with institutions outside the country. It will be a critical step for the country. You are getting a stamp of approval and it helps in the pricing.”

All 13 of the country’s banks appear to be in good shape, with Barclays, Finance Bank and Zanaco leading the field in terms of branches. The last new entrant was the African Banking Corporation in 2001, but there are now five other unnamed regional and international banks looking to enter the market.

“The past 12 to 18 months have seen a significant increase in the number of entities wishing to set up banks in Zambia,” says Mr Mwanakatwe. “The level of interest is unprecedented and reflects investor confidence not only in the banking sector, but in the economy as a whole. The sector is poised to witness new entrants and it is expected that they will be able to provide strong competition to the existing players, which will result in benefits for the public and further growth.”

Was this article helpful?

Thank you for your feedback!

Read more about:  Africa , Zambia