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Wednesday, 6 June 2007

Access to financial services in Zambia

On the blog A new Government bank for farmers? I mentioned information from the chart above and other facts related to constraints on financial access for smaller firms. This information is drawn from a brilliant and fairly recent world bank policy paper on "Access to financial services in Zambia". Its well worth the read for anyone interested in understanding the current level of acess to financial services. It also has some interesting observations on why "liberalisation of the banking system has not delivered the benefits" - and the potential lessons that holds for Zambia. Like most World Bank papers, its full of proposals on what Zambia must do to promote access to financial services.

4 comments:

  1. Well the picture painted by the report is rather bleak, but that comes as no real surprise. We all know that there is woefully little access to credit, especially in rural areas of the country, and what capital exists in the financial sector is primarily in foreign hands. There were a few areas described in the report that I found of particular importance for expansion of access and capitalisation.

    The two largest barriers to low income access of savings accounts, even for consumers with access to local bank branches, are rules for minimum balances (too high) and Know Your Customer (KYC) regulations which exclude informal sources of income even when personal identity can be confirmed. But I am almost glad that the barriers are in place, because small depositors are not given any interest, not even parity with inflation. That means there is actually an active disincentive for the poor to save!

    Since almost all customer transactions carry per use fees, and 86% of savings deposits held by banks are presumably reinvested by the bank in profitable loans and bonds (with 14% reserve by law), there is no excuse for sub-inflation interest rates on savings. If the more than 5.5 million adults without accounts were to save an average of just US$5 per year (with interest sufficient to defend the value of deposits against inflation), financial sector capital would increase by US$27.5M per annum, or enough to provide minimal statutory capitalisation for 352 new deposit-taking MFIs.

    What that means is that with the backing of 80,000 potential savers (or groupings of savers) capable of a US$100 initial deposit, a hundred deposit-taking credit institutions could be created to provide access to the currently unbanked across the nation. Even if the new MFIs simply invested deposits exclusively in government bonds and took on no more risky loan activities, they would be able to pay slight inflation positive interest to depositors with a remainder left over to pay salaries and overhead (and hopefully a modest profit). As savings balances increase (through interest and additional deposits), economies of scale begin to tilt in favor of the MFI, improving profitability and allowing for greater risk exposure by extending loans to local borrowers.

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  2. ”What that means is that with the backing of 80,000 potential savers (or groupings of savers) capable of a US$100 initial deposit, a hundred deposit-taking credit institutions could be created to provide access to the currently unbanked across the nation. Even if the new MFIs simply invested deposits exclusively in government bonds and took on no more risky loan activities, they would be able to pay slight inflation positive interest to depositors with a remainder left over to pay salaries and overhead (and hopefully a modest profit). As savings balances increase (through interest and additional deposits), economies of scale begin to tilt in favor of the MFI, improving profitability and allowing for greater risk exposure by extending loans to local borrowers.”

    Its sounds very straight forward.

    Presumably the logical question is why such a system does not already exist, given the low risk?

    A number of areas are identified in the paper relevant to your suggested solution.

    1. Existing MFIs charge high rates - your suggestion seems to suggest it need not be that way.

    2. By law, "the approximately 50 MFIs that operated in Zambia in 2005 were not allowed to take deposits from the public".

    3. There are few MFIs in Zambia - serving 0.005% of the population.

    4. MFIs have failed to become self-sustainable and many do not meet basic reporting amd financial disclosure requirements. The public has often been defrauded by unscrupulous persons posing as MFI officers.

    Is the solution therefore a regulatory approach that ensures the system you have in mind emerges through gradual development of the market? Or are you actively seeking a NABARD style approach that we have been previously discussing in the context of farmers - to use the author's phrase - the visible hand of Government?

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  3. Cho,

    1) Correct, need not. Ultimately interest is determined by cost of capital plus projected profit vs. risk. Many MFIs to date have been started with an artificially low fear of risk due to donor sponsorship with little or no expectation of profitability. Many are chartered with educational and development missions which increase their overhead costs significantly.

    MFIs chartered to protect the savings of rural Zambians, with inflation positive interest rates and backing by government bonds, could be a "no frills" pay-per-service kind of backbone for the growth of rural credit access.

    2) Under the new regulations MFIs able to take public deposits require capitalisation of at least KW$250M (US$62,035) with higher licensing fees. Non-deposit taking MFIs need only KW$25M, but:

    "The services and products that can be provided under the MFRs are restricted to the provision of credit facilities, linkage banking, in-country transfers and compulsory savings for borrowers only for DT MFIs and credit facilities only for NDT MFIs. Thus, the range of services that can be provided is narrower than that provided for under the BFSA. This restriction may stifle service and product innovation in the microfinance sector."
    ---

    "So, in relation to matters regarding the ownership and governance structure of MFIs, the MFRs are stricter. However, trusts are still not permitted to own shares or control MFIs. This provision will have a negative impact on the industry, as trusts are the preferred investment vehicle for most donors. There is still a requirement for MFIs that are companies to have a minimum of five board members and all MFIs to have separate individuals as the chief executive officer (CEO) and chief financial officer (CFO).
    http://www.microfinancegateway.org/files/32237_file_Zambia.pdf

    3&4) Yes, the new regulations were written in such a way as to eliminate the ability of NDT MFIs to accept "cash collateral" by classifying it as a deposit. They also require prudential reports every month for the DTs and every quarter for NDT. Complicated and expensive for small scale development MFIs with mandates from NGOs and donors. Less so for a savings-only backbone with known interest in/out ratios, but trimming fees down to only the cost of regulation wouldn't hurt.

    The goal is to get a model out which can be implemented under the current regulations, and still not be so top-heavy that it can't reliably meet its expenses. Simple income streams lead to simple and repetitive accounting, which reduces reporting costs and fraud. Sharing premises and services with agricultural marketplaces further reduces fraud and overhead, and provides a ready supply of unbanked medium to long term savers.

    If we assume for a moment that each MFI at startup has the minimum KW$250M stake, bonds are 6% over inflation, and depositors are paid 2% over inflation. That leaves KW$10M to pay expenses for the first year(s), not much.

    It would take an average of KW$250,000(US$63) from each of 1,000 depositors, all at once, to meet the standard the MFI needs to accept deposits in the first place. With only US$1.7B in the whole Zambian financial sector, any flow of rural savings into the new bond market from currently unbanked sources will help. It can be done without a government waiver (for savings-only startups that can demonstrate a reasonable expectation of reaching an unbanked population), but much more slowly. Solid figures from the Economic Census should help with market forecasts.

    Once the backbone is in place, then NABARD style central bank refinancing of local development projects could be funneled through the new infrastructure. MFIs would have to meet benchmarks for capitalisation and profitability before being eligible, and would be expected to carry from 0%-50% of the loan finance. Refinancing allows MFIs to maintain high bond holdings to support deposits while providing long term investment credit at low rates to known customers with viable projects in target sectors.

    It would of course be best to have both hands, visible and invisible, lifting in unison. "Unfortunately, there seems to be far more opportunity out there than ability.... We should remember that good fortune often happens when opportunity meets with preparation" -Thomas Edison

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  4. Thanks for flagging the Chiumya paper. It paints quite a bleak picture though:

    "On the other hand, the costs of implementation are quite high. A number of MFIs will have to cease operating, as they will not be able to meet the licencing requirements if they are strictly enforced....."

    What puzzles me though is that in face of what it identifies as a key drawback of the regularly, its solutions are quite weak. It openly suggests that the BOZ does not enforce its own regulations - albeit in much weaker language:

    "The challenge, therefore, lies in weigh the costs of strictly enforcing the legistlation in light of expected benefits and achieving the desired outcomes. Only time will tell whether the current regulatory and supervisory framework wil indeed fulfill these expectations.."

    I don't think such "hopeful" approach will help widen credit to the poor. It seems to me that in face of such heavy regulation and demnds the approach you suggest is the best way forward. We need a "visible" push financed by Government at lower bond rate to encourage MFIs to start in rural areas - a sort of improved "infant industry" approach. I just don't share Chiumya's hope.

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