Question

what is financial inclusion? write up 10 pages on the weaknesses of the financial system in Zambia.
recommend what should be included in the financial inclusion in Zambia

Answer 1

1) The financial Inclusion means allowing individuals and organizations systematically into participating or availing financial services.

The organizations of different sectors are permitted to avail these financial services if they are included in financial inclusion. And different kinds of individuals also were permitted to engage in financial services.

This helps in keeping the financial services available EQUALLY to all sectors including the poor individuals who wants to save.

2)Zambia’s financial system is relatively underdeveloped and bank dominated.Banks account for about 67 percent of total financial sector assets, with majority foreign-owned banks, all of which are subsidiaries of their parent banks, accounting for about 83 percent of total bank assets. The nonbank financial institution (NBFI) sector is dominated by pension funds, of which the government-run National Pension Scheme Authority (NAPSA) accounts for about three-quarters.
Microfinance institutions (MFIs) comprise 8 percent of total nonbank financial sector assets, and insurance companies 12 percent. Other NBFIs include building societies, leasing companies, development finance institutions, and FX bureaus.
The BoZ-regulated NBFIs sector is small but plays a growing role. At end-2016, the sector comprised 34 microfinance institutions (MFIs); 8 leasing companies; 73 FX bureaus; 4 building societies; a development bank (Development Bank of Zambia); a Savings and Credit Institution (National Savings and Credit Bank); and a credit reference bureau. Unlike in many other Sub-Saharan African countries, financial cooperatives are not common in Zambia. Although growing rapidly, MFIs represent a small proportion of financial sector assets and are primarily focused on payroll lending. In 2014, the BoZ raised the minimum primary capital requirements so that, by end-2016, deposit-taking MFIs are required to have ZMW 2.5 million. The adoption of mobile money has been tepid, despite Zambia’s sparse rural population, due to insufficient investment by mobile network operators, inadequate product design, lack of a low-income remote area strategy, low levels of consumer education, and a poor telecommunication and electricity network.The pension sector in Zambia covers only about 7 percent of the labor force. The National Pension Scheme—managed by the National Pension Scheme Authority (NAPSA)—covers all private sector employees and public sector workers who joined the labor force after 2000. The NAPSA is a young scheme with a positive cash flow and is generating a surplus. Almost all occupational pension schemes are defined contribution in nature. The mandatory NAPSA and public sector schemes are all defined-benefit schemes. There are no individual pension savings product and no coverage for the vast majority of informal sector workers. Pension schemes represent the main domestic institutional investor base, but a large share of their assets is held in short-term instruments and in real estate. In 2015, their assets under management amounted to 9 percent of GDP. The NAPSA manages about 65 percent of the sector’s assets, of which about two-thirds are currently invested in government securities and fixed deposits.

Zambia faces a number of significant external and domestic risks that, in combination with vulnerabilities, have the potential to undermine financial stability . The largest external risk factor is the world price of copper. Important domestic-source risks include the crowding out of private credit markets by fiscal funding needs, large budget payments arrears, electricity shortages, and very high real interest rates. In 2015–16, monetary policy had shifted a significant burden to the financial sector (through high and unremunerated statutory reserve requirements (RRs)) and heightened liquidity management risks through the use of administrative measures. Financial supervision is not fully effective due to the increasingly out-of-date legal and regulatory framework coupled with severe resourcing constraints, the latter resulting in large gaps in timely onsite inspections. NPLs have been rising rapidly and banks may be under-provisioning for credit losses. Also, foreign-owned banks, which comprise some 80 percent of total banking sector assets, place significant liquidity abroad—presumably with their parent banks—that leave them vulnerable to liquidity squeezes. These pressures have eased significantly in 2017, but NPLs continued to rise through mid-2017 on their lingering impact.

A focused review of the banking system oversight in Zambia was conducted to assess its effectiveness . The main emphasis was on issues related to governance, powers and resources, licensing, home-host relationships, capital adequacy, risk management, concentration risk and large exposure limits, transactions with related parties, and financial reporting and external audit. The BoZ’s supervisory perimeter includes all deposit-taking financial institutions, including anumber of MFIs. The key conclusions of the review are:
• The BoZ’s ability to supervise in an effective manner is severely constrained by staff shortages. Some banks have not been inspected for several years, and only five banks have been inspected since March 2015 under a new risk-based approach to supervision.

• The legal framework is cumbersome with some detailed regulations set out in primary legislation and statutory instruments, requiring Parliamentary approval of new laws and amendments to existing ones.

• The BoZ Act contains provisions that could impact on the independence of the BoZ. It is understood that these provisions will be deleted from the new version of the BoZ Act following the new Constitution, which contains a provision conferring independence on the BoZ.
• Country and transfer risk are currently outside the purview of the BoZ. There are diversification limits on FX placements (irrespective if within Zambia or abroad) but the existence of significant placements abroad can be a source of concern, and the BoZ should issue risk management directives incorporating concentration and cross-border exposure limits.
• There is no provision for the exercise of consolidated supervision, although it is expected to be addressed in forthcoming legislation, and there is very little interaction between home and host authorities regarding subsidiaries of foreign banks operating in Zambia.
• Lower minimum capital requirements for locally owned banks (than for foreign-owned ones) appears to be subject to arbitrage and gaming.
• There is no framework for identifying systemically important banks.

As in other lower-income countries, Zambia is vulnerable to commodity price volatility, in part due to a lack of economic diversification. In the long run, structural reforms could promote diversification; but, meanwhile, the application of risk mitigation techniques and imposition of higher capital requirements (or buffers) and/or loan concentration limits should be considered to make the financial system more resilient to commodity price shocks.

3)Access to finance has worsened for SMEs in Zambia, although individual financial inclusion has expanded over the past five years, with account ownership increasing by 14 percentage points. Only 8 percent of SMEs had a line of credit in 2013, compared to the sub-Saharan average of 17 percent. SME access to finance challenges include high levels of informality and collateral requirements, and poor bank-lending tools. This has been exacerbated by the stress from recent very high real interest rates and the crowding out of private credit markets by government debt. A joint private/public effort is required to stimulate the SME sector in the medium term, including by: rationalizing government support programs; training banks in “down-scaling;” and aiding SMEs in preparing bankable business plans. Efforts to develop and implement a national financial inclusion strategy should be prioritized.