Capital requirement to keep banks stable
Published On January 7, 2014 » 7058 Views» By Administrator Times » Business, Columns
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policy analysis 3 (1)EXACTLY two years ago, the Bank of Zambia (BoZ) increased the minimum capital requirement for both local and foreign commercial banks operating in the country.

The BoZ revised the minimum statutory capital requirement from K12 million or US$2.3 million to about K104 million for local commercial banks and to about K520 million or $100 million for foreign banks.

The commercial banks were given an extended deadline of up to December 31, 2013 to state how they intended to meet the new minimum capital requirement.

As the names entail, these are not the maximum capital requirements or indeed any other capital requirements, but they are the minimum or basic ones, meaning that banks can inject more capital into their operations over and above these amounts.

It is important to state that fact because in some instances, like on the Food Reserve Agency (FRA) floor prices for maize, people have tended to take the prices as the ceiling and yet they are mere floor or minimum prices.

Back to the BoZ, the policy measure could have been aimed at strengthening the capital positions of the banks operating in the country to ensure a solid future while at the same time guaranteeing safety for deposits of the accounts’ holders.

At another level, sufficiently capitalised banks would be able to effectively respond to the financial requirements of the members of the business community and other potential borrowers, with appropriate loan facilities.

The BoZ indicates that as the result of the policy measure, the quantity and quality of the banking sector’s primary regulatory capital has drastically improved.

According to its recent Press release, the overall quantity of the sector’s primary regulatory capital increased by almost 102 per cent from K2.56 billion as at end of January 2012 to K5.17 billion as at end of November 2013.

Largely because of the injection of further capital, the sector’s paid up common shares also increased from K380 million as at end of January 2012 to K3.35 billion in November 2013, which translates into a whopping 777 per cent.

In terms of individual banks’ performance, 14 out of 19 banks have met these minimum primary requirements in the two different categories.

Six foreign-owned banks have fully met and exceeded the K520-million requirement while two locally-owned ones have also fully met and exceeded the K104-million capital requirement.

Of the remaining 11 banks, six foreign ones have opted to convert themselves into local banks, obviously after failing to garner enough capital for the foreign bank category.

The six have consequently met and exceeded the K104-million minimum capital requirement for locally-owned banks.

These banks are, however, still in the process of transferring the majority equity stakes to Zambian citizens through various means including private placement and listing on the Lusaka Stock Exchange (LuSE).

As for the remaining five banks, one will convert to a non-bank financial institution with different minimum capital requirement while the other four have failed to meet their respective minimum capital requirements.

The BoZ has given them approval for them to come up with recapitalisation plans beyond the expired December 31, 2013 deadline.

This, according to BoZ, is because of various extenuating or mitigating circumstances.

“However, the Bank of Zambia has entered into formal agreements with these banks which are based on strict timelines and specific benchmarks,” partly reads the BoZ statement.

It is envisaged that, when fully met, these capital requirements will help in ensuring that the banks are adequately capitalised for them to remain resilient to financial instability as the result of external and internal factors.

The move will definitely enable banks to take on big transactions and improve the banking sector’s access to funds which the banks can easily loan to local depositors and foreign markets.

Above all, it is believed that this will lead to a situation where the banking sector will contribute more to the growth of the national economy while effectively serving the local people and organisations.

That, however, remains to be witnessed because previously, the Government through its various wings, including the BoZ, has come up with several well-intended policy measures which have ended up being frustrated by other stakeholders.

A good example is the subsidy on agriculture inputs which was intended for the reduction of prices for mealie meal, but other stakeholders, including millers, seem to have been frustrating the effort.

Within the banking sector, the Government under the 2012 national Budget reduced the corporate tax for the commercial banks from 40 per cent to 35 per cent, offering a relief of K65 million to the financial institutions.

This and other policy measures by the Government were aimed at reducing the cost of borrowing or interest rates, but the banks did not move accordingly.

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