IN the recent past, mainly due to economic turbulences, the banking sector in Zambia has seen increased volatility in exchange rate.
This is mainly on account of lower sales of foreign exchange on the market, rising demand, lower supply and a stronger United States dollar.
The banking industry is the financial lifeline of the nation and its soundness is synonymous with efficient, productive stable and a shock-free environment.
According to the Bankers Association of Zambia (BAZ) end-of-year statement for 2014, at end of last year, Zambia’s financial sector comprised 19 commercial banks and accounted for K33.7 billion in deposits.
The sector also continued to provide liquidity to all the key sectors of the economy through loans and advances which totalled K21.7 billion.
During the period under review, the sector remained well capitalised and profitable with total assets amounting to K46.8 billion, representing 33 per cent of the country’s Gross Domestic Product (GDP).
On the other hand, domestic credit grew by 12.8 per cent in the first quarter of 2015 from 12.1 per cent.
Similarly, money supply grew by 7.2 per cent compared to four per cent in the fourth quarter of 2015.
Underlying this growth was increased lending to both the private sector and the Government.
Commercial bank’s credit to the private sector increased by 4.9 per cent compared to the 0.2 per cent registered in December 2014, with the agriculture, wholesale and retail trade and mining and quarrying sectors as the major recipients.
Bank of Zambia (BoZ) Governor Denny Kalyalya points out that the banking industry experienced some turbulences, adding that supply of foreign exchange on the market declined during the first quarter of 2015.
This is reflected in lower sales of foreign exchange to commercial banks by the public, mining companies and foreign banks.
“Rising demand, amidst lower supply and a stronger United State (US) dollar, resulted in a weakening Kwacha against the four major trading currencies, notably the US dollar, British Pound, Euro and South African Rand.
“This was compounded by declining copper prices, adverse sentiments emanating from the newly-introduced mining tax for fiscal year 2015 as well as the Fitch Credit Rating’s downgrade to the economy,” Dr Kalyalya said.
Over the first quarter of 2015, Dr Kalyalya pointed out that the supply of liquidity tightened mainly on account of net BoZ  sales of foreign exchange to the market, sales of Government securities and withdrawals through open market operations.
“With tightening in liquidity conditions, the volumes of funds traded in the interbank money market declined and the overnight interbank rate edged upwards to 12.9 per cent in March 2015 from 11.5 per cent in December 2014,” he notes.
Dr Kalyalya says preliminary data indicates that the overall balance of payments deficit widened to US$405.2 million from $131.9 million recorded during the fourth quarter of 2014, largely on account of unfavourable performance in both the current and financial accounts.
The current account deficit widened to $223.3 million from $179.6 million registered the previous quarter, driven by a decline in the surplus on the balance on goods and lower secondary income inflows.
On the monetary policy, Dr Kalyalya explains that towards the end of the first quarter, exchange rate volatility increased threatening to undermine the inflationary objective.
To address this, in March the Central Bank raised the statutory reserve ratio on both Kwacha and foreign currency deposits from 14 per cent to 18 per cent effective on April 8, 2015.
Dr Kalyalya observed that to complement monetary policy, further adjustments are required to address revenue shortfalls and rationalise expenditure so as to achieve fiscal sustainability.
This is critical to achieving a stable macroeconomic environment going forward.
Commenting on the banking sector, financial expert Soumendra Dash says it is important for the regulator to step in and create a congenial environment for the expansion of the banking sector with the emergence of new banks in the country.
“The concentration in banking sector is not good for the common citizens of the country in terms of quality of banking products and services and charges would be unreasonably high for the common people,” Dr Dash says.
He encourages the banking sector to invest progressively more in treasury bills and the Government borrowings which are crowding out the private sector credit.
“Today’s banking sector is driven by very few large banks and the large chunk of business is coming from the government sector alone.
“The Government has to build and improve the image of the banking sector for inviting large amount of foreign capital to the country by providing sovereign guarantee, having buy-back options and among others,” Dr Dash says.
BAZ says the economy and banking sector experienced instability during the first half of the year when the kwacha depreciated sharply against the US dollar and other currencies, and inflation pressure increased.
In response the sector held high level consultations with the BoZ after which the central bank came up with policy actions, which subsequently stabilised the Kwacha and regained about half of its lost value.
Bank of Zambia (BoZ) raised the amount of money that commercial banks are required to deposit with it to 18 per cent as from April 8 in a bid to address the Kwacha currency volatility.
BAZ chief executive officer Leonard Mwanza says lending rates will go up as a result of the expected increase in the cost of funds on the market.
For banks to obtain reasonable margins in relation to their cost of funds, the lending rates are likely to go up.
Mr Mwanza explains that the upward adjustment in Statutory Reserve Ratio by 400 basis points means that banks will have to deposit more funds with the Central Bank.
“Banks will therefore be denied an opportunity to earn interest income from either loans or treasury bills on an extra four per cent of their total deposits from the current levels of 14 per cent,” Mr Mwanza said.
This will translate into less liquidity on the financial markets and increased competition to boost liquidity by financial service providers could push up offer rates on institutional and corporate deposits from local and offshore players.
Mr Mwanza says the upward push on interest rates on institutional rates and corporate deposits will increase the cost of funds for banks and create pressure to increase lending rates.
He says the lending rates will increase from the current cap of 24 per cent for banks to obtain reasonable margins in relation to their cost of funds.