Country: Zambia

Payroll lending review – Zambia

This report documents the results of an assessment of the payroll lending sector in Zambia. The study was commissioned by FSD Africa on behalf of the Bank of Zambia and was carried out between July and November 2014. The study forms part of a broader theme of work initiated by FSD Africa on credit markets within the region.

The study aimed to understand and quantify the extent of systemic and operational risks that may have arisen as payroll lending in Zambia has grown in prominence. Based on data collected from the largest payroll lenders, the research estimates that payroll loans now account for one-third of all Zambian banking system loan value, up from 25% at the end of 2008. Personal loans, driven by payroll loans, have been the largest contributor to commercial bank loan portfolio growth every year since 2011, accounting for just under one-third of the total growth of the Zambian credit markets between June 2010 and June 2014.

Yet even though payroll lending is a key driver of Zambian credit market growth, information is scant and oversight and regulation is limited.

Given the growing exposure of banks and microfinance institutions (MFIs) to payroll lending and the concentration of portfolio growth within particular market segments the assessment raises significant questions about the operational and systemic risks that have already been introduced into the Zambian financial sector, or that could become risks in the future.

Skills development in financial institutions in sub-Saharan Africa

Skills shortages among financial institutions (FIs) in Africa have long been recognized as an important- and perhaps the most important- constraint to their growth. In late 2012, the Consultative Group to Assist the Poor (CGAP) conducted a global on-line survey which aimed to better understand the dynamics within the market for skills development and other services; and to develop guidance for funders to support market development.

Subsequently, FSD Africa and CGAP sought to better understand the demand for and supply of capacity building services for financial inclusion in Sub Saharan Africa (SSA) by digging deeper into available data from the 2012 CGAP global research.  The aim was to explore differences in responses by service provider type and clusters of countries/sub-regions.

The key highlights from the SSA analysis include: FIs acknowledge that the most significant short-term challenge they face is the lack of capacity to run their institutions professionally and regard risk management, strategic plnning and mid-level and people management skills as most needed; although FIS are aware of the availability of the services they need in the marketplace, they do not always regard these to be of high quality.  Lastly, capacity building providers face the challenge of finding, training and maintaining qualified staff for the provision of high-quality services

IDRC and FSD Africa enter into a partnership to deepen financial inclusion using big data analytics

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Nairobi, Monday 17th July 2017 – Financial Sector Deepening Africa (FSD Africa) and Canada’s International Development Research Centre (IDRC) have entered into a partnership to implement the ‘Deepening Financial Inclusion Using Evidence Based Decision Making’ project.

Digital finance services are increasingly becoming a critical asset for financial service providers (FSPs) within sub-Saharan Africa (SSA). Digital finance adoption is enabling these providers to improve their operating effectiveness and their service delivery to customers. Digital delivery channels are increasingly becoming a cost-effective method of enabling FSPs to reach a broader clientele. Further, there is a growing realisation within the financial sector that insights derived from analysis of FSPs internal data and big data leads to improved customer value propositions. Hence, it enables FSPs to provide relevant financial services to financially excluded market segments whi low-income women.

The project seeks to demonstrate to FSPs the benefits of using data to make evidence based decisions.  This will involve: i) building the capacity of FSP staff to use data to make evidence based decisions; ii) demonstrating the business case for FSPs to utilise internal data and big data to develop financial products that address the financial needs of different customer segments within their operating environments; iii) building the capacity of local research and data analytics communities to provide data handling support to FSPs; and iv) developing a toolkit that will provide guidance to FSPs seeking to use internal and external data to make evidence based decisions.

Paul Musoke, the Director Competitive Strategies at FSD Africa said: “We are pleased to be partnering with IDRC in this exciting journey. The most significant trend affecting the financial sector today is digital finance services, changing the way products are delivered at scale. With growing digital footprints driven bye mobile phone and internet, poor and excluded people are becoming less anonymous. Coupled with the exponential increase in data that provides deeper insights into how people manage their financial lives, data management and analytics capabilities are going to be imperative for the sustainability of FSPs going forward. The opportunities it offers to profitably reach excluded segments previously regarded as un-bankable, with relevant products at scale are truly exciting.’’

“This pioneering work with FSD Africa will make the business case for investing in data use and analysis, which will hopefully lead to the development of innovative financial products and services better suited for women. By helping service providers better understand women’s needs and the key barriers they are facing, we believe the gender gap in access to finance can be reduced. We know that when women have control over their finances, they are empowered to make better decisions for themselves and their families. We are confident s partnership will contribute to maximising the impact of financial inclusion in a way that fosters opportunities for women and the poor,’’ said Martha Melesse, Senior Program Specialist in charge of the project at IDRC.

The project will cover at least three (3) countries; Tanzania, Sierra Leone and Zambia and will run for a duration of 30 months.

It is our conviction that using data analytics to develop insights into customer preferences will be a powerful spur to game changing product innovation that will have a big impact on people’s lives within SSA.

Notes to Editors

About IDRC

As part of Canada’s foreign affairs and development effort, IDRC invests in knowledge, innovation, and solutions to improve lives and livelihoods in the developing world. Bringing together the right partners around opportunities for impact, IDRC builds leaders for today and tomorrow and helps drive large-scale positive change.

For more information about IDRC’s recent activite subscribe to IDRC’s bulletin and visit:

Twitter: @IDRC_CRDI

LinkedIn: International Development Research Centre (IDRC)

Youtube: https://www.youtube.com/user/IDRCCRDI

Website: www.idrc.ca

 

About FSD Africa

FSD Africa is a non-profit company which aims to increase prosperity, create jobs and reduce poverty by bringing about a transformation in financial markets in SSA and in the economies, they serve. It provides know-how and capital to champions of change whose ideas, influence and actions will make finance more useful to African businesses and households. It is funded by the UK aid from the UK Government

For more information about FSD Africa’s activities and current updates follow our social media platforms:

Twitter: @FSDAfrica

Linkedin:  Financial Sector Deepening Africa (FSD Africa)

Website: www.fsdafrica.org

Email: shakila@fsdafrica.org

Financing the frontier: inclusive financial sector development in fragility-affected states in Africa

Poverty in sub-Saharan Africa (SSA) is reducing, but the concentration of extreme poverty in fragile states is likely to increase, according to a new report published today by the Financial Sector Deepening Africa in partnership with Mercy Corps. The report concludes that the donor community can crowd-in legitimate financial market actors and provide the flexibility needed to take risks, and allow development actors to pivot as the fragility-affected states in Africa (FASA) change and adjust.

SSA has one of the world’s highest refugee and internally displaced populations – over 19 million people in 2016 – and the numbers are rising due to new and ongoing crisis in several countries. According to the report, SSA has 483 million people living on less than US$1.25 per day, representing a poverty gap three times the level of South Asia. Poverty rates in fragile states are, on average, 20% higher than countries with comparable levels of economic development; the gap is widest for countries affected by repeated cycles of violence. Finance plays a crucial role in poverty and conflict cycles, as lack of equitable access to financial services can lead to underdevelopment and stagnation, exacerbating social and economic unrest.

As a group, fragile-affected countries lagged behind in reaching the Millennium Development Goals; nearly two-thirds failed to meet the goal of halving poverty in 2015. Today, the 50 countries and economies on OECD’s 2015 fragile states list – of which 30 are African – are home to 43% of the global population who live on less than US$1.25 per day and by 2030, this figure could reach 62%.

Commenting on the report, Joe Huxley, the Regional Strategies Co-ordinator at FSD Africa says: “Fragile economies require special attention if financial sector development outcomes are to be shared evenly throughout the continent. A vibrant financial sector provides room for facilitating employment creation, embarking on infrastructure projects, and opening-up new economic opportunities for entrepreneurs and small businesses. It is incumbent upon the private sector, governments and government agencies, and international development organisations to scale up efforts to build financial systems that are efficient, robust and inclusive in Africa.”

The report comes at a time when there is increasing recognition that inclusive financial market development in SSA faces new challenges, with levels of financial sector under-development in FASA distinctively lower than non-fragile counterparts. Examples of such challenges include: increasing degree of forced population movements, and recurrent humanitarian cycle of needs; weak and incentives for financial service providers; high prevalence of, and reliance on, informal financial mechanisms; wide-spread infrastructure deficits; and high levels of distortion from humanitarian aid and short-term investments from donors.

Thea Anderson, the Director, Financial Inclusion at Mercy Corps says: “A strong, transparent financial sector can contribute to economic stability, which can be both a driver and a result of overall stability. Financial inclusion can address income equality issues and is a core means to tackle vulnerability in FASA. It is critical to recognise that situations of fragility do not follow clean patterns, but rather often exist in ‘complex crisis’ situations for protracted periods of time. To address, we should prioritise market system solutions. While each FASA situation is unique and complex, using a market systems approach allows us to adjust tactics but adhere to several key principles: think long term, do not ignore the informal sector, ensure a positive business case, carefully sequence interventions, and utilise a diverse package of smart aid instruments.”

The report dubbed, “Financing the Frontier: Inclusive Financial Sector Development in Fragility-Affected States in Africa” provides justification for donors and development actors to invest in the foundations of a functional financial sector in FASA and the critical need for personal identification (ID) solutions and fit for purpose financial regulations. It also addresses the role the financial sector plays in resilience-building and fostering economic opportunity in FASA.

Financial sector development in FASA can: reduce transaction costs; build capital markets; encourage the development of entrepreneurship and business growth; provide options for mitigating risk and responding to shocks and stresses; and contribute to overall stability-building measures. FASA provides increased opportunity for payments and remittances infrastructure and diaspora investments as financial strategies to diversify risk central to both formal and informal financial sectors in FASA. The report highlights several promising trends in FASA including, finance for refugees and internally displaced populations, Islamic finance, inclusive insurance, and the increased use of liquidity facilities and increasing impact investing.

Harbingers of doom? bank failures in Africa – how to interpret these

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Yesterday, Zambia’s central bank announced it had taken over a commercial bank, Intermarket, after the latter failed to come up with the capital it needed to satisfy new minimum capital requirements. Three weeks ago, a Mozambican bank – Nosso Banco – had its licence cancelled, less than two months after another Mozambican bank, Moza Banco, was placed under emergency administration.

At the end of October, the Bank of Tanzania stepped in to replace the management at Twiga Bancorp, a government-owned financial institution which was reported to have negative capital of TSh21 billion.  A week before that, just over the border in Uganda, Crane Bank, with its estimated 500,000 customers, was taken over by the central bank, having become “seriously undercapitalised”. In DR Congo, the long-running saga of BIAC, the country’s third largest bank, continued in 2016, forced to limit cash withdrawals after the termination of a credit line from the central bank. And in Kenya, Chase Bank collapsed in April, bars after the failure of Imperial.

How are we to interpret this? It seems that 2016 is the year in which latent fragility in Africa’s banking sectors is being laid bare.  After years in which observers have favourably contrasted the relative stability of African banking with the financial sector chaos in Europe and the US, it seems that three critical perils – mismanagement, political interference and economic woes – are conspiring to transform the landscape of African banking into a decidedly treacherous place for depositors and investors.

We have had remarkably few bank failures in Africa in recent years and yet this sudden uptick in stories like Crane and Chase, against a backdrop of economic challenges in many places, raises the question as to whether there is worse to come.

Mismanagement and/or political interference have been at the root of most bank collapses over the past few decades. Martin Brownbridge’s grimly fascinating analysi”https://fsdafrica.org/knowledge-hub/blog/harbingers-of-doom-bank-failures-in-africa-how-to-interpret-these/#_ftn1″ name=”_ftnref1″>[1] on this subject from 1998 concluded that “moral hazard, with the adoption of high-risk lending strategies, in some cases involving insider lending” was behind most of the bank collapses in the 1990s. This certainly resonates today. Catastrophic lapses in governance rather than economic malaise are alleged to be behind the recent Kenyan bank failures (although their shareholders and directors vigorously refute this) – but how else can you explain why a small number of banks fail when the sector as a whole has been returning well over 20% on its equity for the past several years?

There are some excellent programmes like “http://www.centerforfinancialinclusion.org/programs-a-projects/abf” target=”_blank” rel=”noopener”>Accions’s Africa Board Fellowship Program, which aims to strengthen capacity at financial institutions because their promoters understand that weak governance undermines trust in the financial system and is therefore very bad for financial inclusion. But it is one thing to know what you’re supposed to do as a bank board director – quite another to actually do it.

Each bank failure seems to have its own special story – and we derive comfort from this. It is somehow reassuring to think that that might be the case because the prospect of a system-wide failure is so awful.

And each country context has particular features that impinge on the stability of the financial system. There are deep concerns in Kenya, for example, that the recent imposition of interest rate caps is going to result in a very messy period of bank failures and/or consolidation.

But are there common patterns that we should be taking note of?  Is there a system-wide issue that we should be facing up to?

Well, one pattern might be positive – that central banks are intervening more, and more quickly, to weed out the miscreants, less cowed by the politicians than they might have been in the past and more concerned to protect their well-earned professional reputations. Another is that central banks are finally implementing the increases in minimum capital requirements which many have been talking about for years with the inevitable intended consequence that some banks will be forced to get out of the market.

These might be two good reasons why we are seeing more collapses. You could say that’s excellent news for the future of African banking. But perhaps only to a point. There is still the risk that the cumulative effect of bank failures as a result of zealous supervisory action causes a loss of faith in the entire system resulting in mass panic and the withdrawal of deposits and credit lines.

Also, the inevitable result of this would be fewer, bigger banks which may have negative consequences for competition and access – altht worth pointing out that Tanzania, which has 55 commercial banks, still only manages to bank around 12% of its adult population (FinScope).

The more concerning issue is the impact of underlying economic weakness. Leaving aside the paradox that some of these bank failures are taking place in economies that are growing quite fast (Kenya and Tanzania forecasting 6-7% GDP growth), lower commodity prices and their pervasive impact across African economies are going to make life much tougher for banks – especially if they are poorly managed and have political skeletons in their cupboards.

One problem we have, especially when economic conditions are changing fast and for the worse (as in Mozambique), is that data is often out of date and is not sufficiently disaggregated. So, when we look at Africa as a whole, or even the banking system of one country as a whole, the averages we tend to look at create a blithely benign picture which masks dramatic variations.

So, non-performing loans (NPLs) across Africa up to014 were a little over 5% but NPLs in Ghana were more like 11-12%. NPLs in Tanzania are currently a little over 8%, yet Twiga Bancorp’s NPL’s were – unbelievably – at 34% in early 2015, according to media reports.

We think the African banking sector is in for a rocky ride in 2017 and 2018 and, in the short term, this is not good news for the real economy. However, one industry that is set to grow, surely, is central banking supervision.

“https://fsdafrica.org/knowledge-hub/blog/harbingers-of-doom-bank-failures-in-africa-how-to-interpret-these/#_ftnref1” name=”_ftn1″>[1] Brownbridge, M (1998): “Financial distress in local banks in Kenya, Nigeria, Uganda and Zambia: Causes and implications for regulatory policy” Development Policy Review, vol. 16, no.

Payroll lending in Zambia

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In March 2016, the Zambian government approved proposals to redesign the royalty regime for mining companies.  This involved introducing a new methodology for calculating Mineral Royalty Tax (MRT), linked to the prevailing copper price. Because mines can take several years to become profitable and start paying tax on those profits, MRT is an effective way for the government to get some tax revenue up front, rather than having to wait for mining operations to turn a profit.  The lack of clarity around MRT had been another major problem for an industry which had been battling to adjust to a collapse in global commodity prices and which had had to lay thousands of workers off.

For the 900,000 Zambians in formal employment, many of whom are mine workers, having a job also means having access to credit.  Banks like lending to salaried workers especially when they can do a bulk deal with the employer to make loans available to an entire workforce and collect the repayments through the payroll.  It’s efficien for the banks, more secure.

In fact, as FSD Africa research now shows, payroll lending now accounts for a third of all loans in the Zambian banking system and has emerged as the largest contributor to commercial bank loan portfolio growth every year since 2011. For several banks, payroll loans account for well over half of their total loan book. Government employees are responsible for nearly three quarters of outstanding loan schemes in mid-2014 and had the highest incidence of multiple borrowing.

Always controversial, payroll lending undoubtedly fuels consumer spending but, for those who have a payslip, it also provides financial access and a measure of economic empowerment.  For example, spending on housing in Zambia rose by 117% from 2006 to 2010, and much of this can be attributed to the availability of payroll loans.  But the reality is that lenders pay little attention to the reasons for borrowing. They make credit decisions based on the creditworthiness of the employer rather than of the borrow And so an environment develops in which in which the credit assessment process is relatively simple and there are strong incentives to over-lend.

Getting the right regulatory balance is therefore a big challenge.  Easy credit in an unfettered environment sees consumers “dance with the devil”, and with little protection.  Stifle access to credit and consumers are denied the opportunity to, quite literally, put a roof on their house.

Take, for example, the case of Mopani Copper Mines. Mopani is the biggest mining employer in Zambia according to Bloomberg, Africa’s second-largest copper producer, with 20,000 workers. At the end of 2015, the Lusaka Times reported that 3,051 workers were being laid off in response to the fall in the price of copper as part a debt reduction strategy by Glencore, Mopani’s owner.  Many of those laid off had loans outstanding to commercial banks.  These banks, it was alleged, had prior access to the retrenchment compensation that the workers were entitled to, with the rorkers received far less cash compensation than they were expecting.

The devil is the detail but it is the detail that can create disastrous outcomes for people in living in vulnerable circumstances.  Events like Mopani shine a spotlight on the relationship between labour markets and financial markets (is Mopani a story about workers’ rights or consumers’ rights?) and on the effectiveness of the contractual arrangements behind these loans.  What did the loan agreements actually say?  When the mine worker signed the loan agreement confirming that he understood all the terms and conditions (T&Cs), did he really understand them?  Did anyone test that?  Who actually explained the T&Cs to him – the bank? The employer? – and how much time did anyone actually take to explain the T&Cs?

The Zambian authorities have moved to deal with the threats posed by payroll lending.  The Banking and Financial Services Act limits the total amount of debt repayments and other deductions to 60% of gross i a minimum of 40% of gross pay as take-home or disposable pay.  Interest rate caps were imposed on micro-lenders in January 2013 in a well-meant attempt to keep the lid on the cost of borrowing for consumers:  the caps have, rightly, been removed now because they seemed to be having no dampening effect on the payroll lending industry and were even encouraging lenders to pursue lending strategies that were introducing systemic risk into the market.

Now, the Bank of Zambia, with support from FSD Africa, has launched a Market Monitoring System that will regularly gather much more granular data on credit market developments and trends so that problems can be picked up at an early stage.

It goes without saying that consumer protection is vital but so too is access to finance and we must strive to put in place a framework which allows credit markets to develop responsibly but which also safeguards borrowers’ legitimate interests and rights.

What is critical is that there should be proactive and well-informedulation of credit markets with appropriate weight given to market conduct regulation, alongside the traditional approach of supervising the soundness of financial institutions.  Today, too few financial market regulators in Africa have the right institutional structure or capacity to manage the development of credit markets effectively.  Central banks should not think they can do this in their spare time. This is a significant problem at a time when there is a need for more responsible credit in Africa and when digital finance is introducing all sorts of opportunities but also threats

FSDA’s credit market development programme: the programme in brief

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FSD Africa launched a new Credit Market Development Programme (CMDP) in July 2016. The Programme, which will run for three years, aims to support the development of credit markets across sub-Saharan Africa that are efficient, inclusive and maintain high standards of market conduct in order to expand quality access to retail and SME consumers. The development of effective credit markets will, in turn, contribute to financial sector development, economic growth and job creation. The rate of credit market growth depends on a number of factors. At a country level, credit markets are often undermined by weak regulatory frameworks, low levels of enforcement and insufficient market infrastructure. Such weaknesses breed predatory lending practices and increasing levels of debt stress which, if left unattended, result in increased risk to consumers. In creating an effective legal and institutional framework that supports robust market growth, it is necessary to strike a realistic balance between increased and more inclusive credit supply on the one hand and effective oversight over market conduct and consumer protection on the other.