Liberalizing the Financial Services Sector Zambia’s...

ESA/EAC Workshop on Services and Investment, Kampala Uganda, 28-29 May 2008

Liberalizing the Financial Services Sector

Zambia’s Experience

Mwila Mukosa DakaMinistry of Commerce, Trade and IndustryZambia


Outline

Infrastructural Role of Financial SectorFinancial Sector in ZambiaRegulation of the sectorLiberalisation – Scope and ExtentPost-liberalisation Status Necessary InterventionsConclusions


Infrastructural Role of Financial Sector

Strategic for governments thus need to monitor and regulate the sectorAn important infrastructural sector to ensure the smooth payment operations Conduit of all economic activitiesContributes to the GDP, employment and poverty reduction


Financial Sector in Zambia

3 main sub-sectors in the Zambia Market; Banking, Insurance/Pensions, Securities with different regulators

BankingContribution to GDP: 33% (2006)

Contribution to employment: 2.5% of formal employment13 banks: 9 Foreign owned, 4 partly locally ownedLow entry barriers


Financial Sector in Zambia(2)

Insurance Sub sectorContribution to GDP: 1.5%Employment: 2000 employees 32 insurance broking firms, 39 insurance agents, 2 loss adjusters, 7 motor assessors, 4 claim agents and 1 reinsurance company. Of the 9 insurance companies 4 are foreign majority owned



Pensions (same regulator as insurance)Contribution to GDP: 3-4%207 registered pension funds and 9 pension fund managers 3 pension fund managers majority foreign owned



Securities13 listed and 12 quoted companies (end 2005)

the Brokers (3); Dealers (12) and investment advisors (6) combination of both foreign and localMinimal entry barriers


Regulation of the sector

One of most regulated sectors in Zambia3 regulators for different sub sectors i.e. BOZ – banking; PIA – pensions and insurance; SEC: SecuritiesAlso have component to regulate competition in the sectorAll regulators independent, however latter two still reliant on government for funding


Liberalisation – Scope and Extent

Limited or no barriers to entry in the industry currentlyUniformity in entry criteria whether foreign or local individuals or institutionsExistence of competition commission to guard against unfair trading practices

Banking1991-94 de facto liberalisation of banking sector made explicit in law in 1994Reduced participation of Government in banking sector


Liberalisation – Scope and Extent (2)

Banking (2)Capital market liberalized. Mode 1 lending and borrowing by both firms and households are permittedMode 3: private ownership permitted up to 100%, requirement for local incorporationNational treatment principles applied


Liberalisation – Scope and Extent (3)Insurance

Insurance sector open to competition in 1992. Only 1 insurance co. 100% publicly owned.Mode 1 purchase of insurance services specially permitted by regulator on condition that the service is not locally availableAbove condition not applicable to reinsurance


Liberalisation – Scope and Extent (4)Insurance (2)

Mode 3 private and foreign ownership permitted up to 100%requirement for local incorporation

Binding Commitments in trade arrangementsFinancial sector as a whole not yet committed either in GATS or bilateral/regional arrangement


Post-liberalisation Status of the Sector

Wider access to financial services by individuals and firmsDevelopments in the sector through debit cards facilities, the ATMs network, electronic clearing of local and foreign cheques, telephone banking, branchless banking and foreign currency accounts have emerged over the years as result of presence of foreign banks Insurance sub sector also growing locally with a wider range of service products


Post-liberalisation Status of the Sector(2)However, reforms has not brought for Zambia

as many desired benefits as anticipated. Sector met with some challengedAccess to financial services not proportional to the populations demand e.g. lower coverage in rural areasCost of financial services, high even in places where players are availableIn spite of local competition, local players not in a position to engage in international export of financial services


Post-liberalisation Status of the Sector(3)

High taxation and lack of tax incentives to jump start growth in the sector and to attract direct investment both local and foreignHuge income tax for the banking sub-sector going to as much as 45%. This makes the sub-sector not to offer favorable interest rates (both lending and saving)Under staffing of regulatory entity posing threat to proper industry supervision and developmentLack of adequate financing of the regulatory entities


Necessary Interventions

Thus there is need for continuous training of its human resource so that they move in tandem with developments world wide.There is also need to enhance development in every sub-sector of the financial sector e.g. introduce incentives to both local and foreign investors need to strengthen supervisory capacities in the securities and insurance sub-sectors


Necessary Interventions (2)

Need to build capacities of local players in the sectorIn view of the above there is need to encourage negotiations in mode 3. In pursuit if this, Regional integration should be centre stage before advancing to other levels in order to facilitate mode 3 e.g. through harmonization of certain aspects of regulation


Conclusions

Very important sectorLiberalisation having not delivered the desired results of more access, cheaper cost, competitiveness to export more etcSector still faced with challengesFor most challenges, answers do not lie in making binding commitments only


Conclusions (2)

Judicious regulatory reform a necessary pre-requisite to liberalisation/binding commitmentsInternal interventions therefore necessaryNecessary framework for cooperation in the enhancing of sector’s performance and competitiveness

Liberalizing the Financial Services Sector Zambia’s...

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