Reforms and a large unbanked rural population are behind new strategies at Zambia’s otherwise stable banks. By reducing branches and employing agents in established small businesses, banks hope to shrink costs while reaching more clients, as Jason Mitchell reports.

Zanaco

Zambia’s banking sector is relatively healthy, though the economy faces a looming threat from rising debt, dwindling foreign reserves and the ongoing weakness of the kwacha. In the face of such challenges, banks are trimming costs by reducing their reliance on ATMs and the traditional physical branch networks, and turning increasingly to local agents to extend the reach of banking services.

Since 2015, the central bank, Bank of Zambia, has put in place a regulatory framework for agency banking to help financial institutions take their services to previously unbanked or underbanked parts of the country. Under the model, banks use local agents to carry out small-scale banking services, including loan applications, deposits, withdrawals and bill payments. Many agents operate from small booths beside the road, while others operate from established small businesses such as hardware stores, post offices and petrol stations. 

The use of such third-party agents enables banks to expand their effective footprint with minimal outlay, and thus keep overall costs low. “We see agency banking as complementary to digital banking; the shops and outlets provide another level of functionality,” says Henk Mulder, CEO at Zambia National Commercial Bank, commonly known as Zanaco. “In time, our branches will transform from being transaction units to sales units. They will concentrate on private and preferred banking clients.”

Zanaco's special agents

Zanaco is one of Zambia’s top five banks, with its total assets climbing 11% to K10.61bn ($815m) at the end of 2018. In May 2019, the bank had a return on assets (ROA) of 1.4% and a return on equity (ROE) of 17.3%, slightly below the aggregate for the sector as a whole. Its non-performing loan (NPL) rate outperformed its peers, however, standing at 8.5% at the end of 2018, down from 18.97% in 2017. 

Some 45.59% of Zanaco’s equity belongs to Arise (an investment company co-owned by Dutch lender Rabobank), the Netherlands Development Finance Company, and Norfund, the Norwegian investment fund for developing countries. Zambia’s Industrial Development Corporation, a state-owned company, owns a further 25%. 

Zanaco had a cost-to-income ratio of 76% in May 2019 but has a target to reduce this eventually to 65%. It has 69 branches and about 200 ATMs, with a headcount of 1200 staff. In May 2019, the bank had 2700 Zanaco express agents throughout the country. “We expect to have 4000 agents by the end of this year and 8000 by the end of 2020,” says Mr Mulder. “We will cut back on the number of branches and ATMs. The truth is that this is a global issue, and banks everywhere are considering this move.”

Zanaco had more than 900,000 clients and a 13% share of the market of Zambia’s bankable population in May 2019. Its focus on expanding its network of agents goes hand in hand with its mobile banking offering, Xapit, first launched in 2008. About 500,000 clients now use the platform, which is available on both smartphones and less sophisticated ‘feature’ phones, using traditional USSD technology. The bank subsequently launched a new mobile banking app in December 2017.

Remote control

Zambia’s disparate and largely rural population makes the adoption of mobile banking by its lenders – both banks and non-bank financial institutions – an obvious strategy. According to the World Bank, around 56% of the population live in rural areas, where infrastructure is often lacking, making it hard to maintain traditional branches and ATMs. 

Throughout the country, there are fewer than five commercial bank branches for every 100,000 adults, according to Finca Zambia, a microfinance provider. In 2015, more than 3.5 million Zambian adults – about 40% of the adult population – were financially excluded, and more than 5 million Zambian adults – about 60% of adults – did not use financial products and services from regulated providers, according to Bank of Zambia. 

Finca Zambia, part of an international network of lenders operating under the umbrella of US-based Finca International, had 75 agents in March 2019, but plans to bring the number up to 800 over the next four years. Finca intends to have roughly one banking agent per 1000 people in key districts across Zambia. Every agent is being equipped with a tablet device that enables them to process loan applications and to open new accounts within minutes, and uses biometric identification to protect clients against fraud.

Investrust Bank, one of Zambia’s smaller commercial banks, had about 400 banking agents at the end of 2018, but is aiming to expand that number. As with other banks, there are relatively few requirements for prospective agents – the main thing is to own a registered cash-generating business with a fixed operating environment. 

“With the banking agency model, banks are able to minimise the fixed costs of setting up branches by offering bank products and services through cash merchants and retail outlets in a commercially viable way and thereby providing them access to additional revenue sources,” says Maria Karima, head of corporate affairs and marketing at Investrust Bank.

With the use of third-party agents on the rise, some banks, especially embattled smaller lenders, are cutting costs by shuttering traditional branches as part of their reorganisation strategies. The total number of bank branches in Zambia fell to 372 in 2018, from 410 in 2017, according to the central bank. Just four commercial lenders increased their total number of branches in 2018, while eight closed branches in that time. Investrust went from 30 to 27.

Cavmont reduction plan

Another lender to cut its branch network is Cavmont Bank, which is 97% owned by Capricorn Group, a Namibian diversified financial services group, with the remaining equity held by local shareholders. The bank, which has 75 ATMs in Zambia, had total assets of K1.2bn in May 2019, but both its ROE and ROA were negative.

According to Bank of Zambia data, Cavmont reduced its branch network to 19 from 20 in 2018, and in June 2019 it announced plans to close a further four branches in Lusaka’s industrial area, and in the districts of Mpulungu, Mwense and Mufumbwe.

“Previously, the quality of the advances that we made was not so good,” says Cavmont CEO Peet van der Walt. “We suffered because a big economic downturn happened in 2015 and 2016, related to a fall in copper prices. Banks must be careful in the small and medium-sized enterprise [SME] market in the country where the company failure rate is about 20% per year. 

“However, we have been undergoing a very big clean-up and the bank’s strategy now is to focus on treasury business, corporate customers, and retail delivery channels.”

Cavmont's NPL ratio stood at 12% in May 2019, compared with 17% in 2017. The bank has about 55,000 personal clients and 2000 corporate clients. 

Closure or consolidation?

With traditional branches closing, a logical question is whether banks themselves will follow suit. Zambia’s commercial banking sector consists of 18 banks and 129 non-bank financial institutions (including 35 microfinance institutions), serving a population of just 17 million. “Zambia is overbanked,” says Zanaco’s Mr Mulder. “The banking system is ripe for consolidation. Zanaco has implemented Basel II and IFRS9 but not all the commercial banks have managed to do so.”

Of the country’s 18 banks, eight are foreign subsidiaries, seven are locally owned private sector banks, and three are partly state owned. The Bank of Zambia stipulates that the minimum capital requirement for a locally owned bank is K104m, rising to K520m for a subsidiary of a foreign-owned lender. 

The total assets of the banking sector grew by 14.5% year on year to K82.09bn at the end of 2018, up from K71.7bn at the end of 2017, according to the central bank. The country’s commercial banks made a total after-tax profit of K421.75m in the first quarter of 2019, 8.43% higher than the first quarter of 2018 and 10.31% higher than the final quarter 2018, according to the Economics Association of Zambia (EAZ). The country’s top five banks – Stanbic, Barclays, Standard Chartered, Bank of China and Zanaco – made up 74% of the system’s profitability during the first quarter of 2019 compared with 86% during the first quarter 2018, says EAZ. 

In the first quarter of 2019, Stanbic Bank, a subsidiary of Standard Bank, had the highest after-tax profits in the country of K78.8m, followed by Barclays at K73.45m, Standard Chartered at K69.5m, Bank of China at K47.96m, and Zanaco at K43.04m. Commercial banks’ total income was up by 11.94% during the first quarter 2019 to K2.21bn, up from K1.98bn in the first quarter 2018, according to EAZ. This was underpinned by higher interest income, from credit growth, of K1.15bn, compared with K886.59m for the same period 2018, while income earned on government securities also rose marginally to K872.17m in the first quarter of 2019, from K748m in the same period in 2018.

Zambia’s commercial banks had an average capital adequacy ratio of 20.1% at the end of 2018 compared with 24.5% in 2017, according to Bank of Zambia. The regulatory requirement is 10%. The system’s overall ROA was 2.8% in 2018 compared with 3.1% in 2017, while RoE was 15.4%, unchanged from the previous year. 

Cutting NPLs

“The Zambian banking sector is strong,” says Leonard Mwanza, CEO of the Bankers Association of Zambia. “The sector’s performance is satisfactory in terms of its profitability. The system is stable despite the challenges that some banks have faced from NPLs. Out of 18 banks, only three or four do not make any money.”

Mr Mwanza adds that the Bank of China has made impressive growth in the country, on the back of the growing commercial relationship between the Asian country and Zambia. The bank had only two branches in the country at the end of 2018, but is now among the top 10 in Zambia in terms of its balance sheet size.

“All the banks have had to make a big effort to improve their loan books,” adds Mr Mwanza. “They have made a concerted effort to pursue recoveries on NPLs and have improved their loan writing standards.” The overall ratio of gross NPLs to total loans stood at 11% at the end of 2018, against 12% at the end of 2017, according to the central bank.

In 2018, the total provisions to the NPL ratio stood at 83.8%. On a sectoral basis, the agriculture, forestry, fishing and hunting sector accounted for the largest proportion of gross NPLs in 2018, at 32.4%. “The microfinance sector was worst hit by NPLs, which hit up to 50% of the loan books of some microfinance institutions,” says Mr Mwanza. “Banks have certainly become more cautious in providing credit. They are watching sectoral risk and the SME segment is the riskiest. That sector saw the highest concentration of NPLs.”

New regulations related to fees and a new payment system have added to an already challenging operating environment for banks. In September 2018, Bank of Zambia issued a new set of rules – called the Prohibition of Unwarranted Charges and Fees Directive – that forced the commercial banks to waive a total of 26 fees and charges. These include the charge for account opening for both local and foreign currency, the ATM surcharge, and the charge for transfer of funds between retail accounts held at the same bank.

“Zanaco has lost about K60m in income since the rule’s introduction,” says Mr Mulder. “It has forced the bank to reconsider [our] strategy. Cash handling is an expensive activity for the bank and we will have to re-adjust our branch infrastructure.”

In June 2019, the country’s national financial switch platform went live. All ATM transactions at 14 of the country’s participating commercial banks have migrated from the Visa platform to a local platform. The national switch is being extended during the third quarter of 2019 to include point-of-sale transactions and customers will be able to send money through their mobile to any other recipient in the country regardless of which mobile network they use. 

Barclays takes digital route

Barclays is among the top five banks in Zambia and has a cost base that is a lot lower than other commercial banks. Its cost-to-income ratio stood at 58% in May 2019 but it has the target of bringing that ratio down to 45%, mostly through increased digitalisation. The bank invested around K43m in new technologies to digitalise its financial services between 2015 and 2018.

“Our bank is being very innovative,” says Mizinga Melu, managing director at Barclays Bank Zambia. “We want to be a digitally led bank. We want to bring banking to you – to our customers’ doorstep – through mobile banking and automated platforms. Only 40% of the Zambian population has access to formal banking services. That creates a huge opportunity for us. Our bank is also an important corporate bank in the country; we provide banking to more than 200 major corporate clients. We provide considerable financing to the country’s key industrial sectors, including mining, agriculture, manufacturing and energy.”

Barclays in Zambia is in the process of rebranding to Absa following the South African group’s separation from Barclays in 12 African countries announced in 2017. The rebranding exercise will be completed in June 2020. 

In December 2018, Barclays teamed up with Jumo, a Mauritius-based fintech company, and MTN, a mobile telecommunications provider, to launch Kasaka, a short-term savings product targeting the country’s banked and unbanked population. This savings account is available to 2 million active MTN mobile money users through Barclays Zambia’s network. (MTN Mobile also has 30,000 agents who can market the product). It has been built and run on Jumo’s operating platform.

Kasaka is an extension of a loans product, called Kongola, which was launched by Barclays, MTN and Jumo in October 2018. More than 1.3 million loans to the total value of about $38m have been disbursed since launch.

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