93254 © 2014 The International Bank for Reconstruction and Development/THE WORLD BANK 1818 H Street NW Washington, DC 20433 USA All rights reserved This report was prepared by the staff of the Macroeconomic and Fiscal Management and Finance and Markets Global Practices of the World Bank. The findings, interpretations, and conclusions expressed herein are those of the authors and do not necessarily reflect the views of the World Bank’s Board of Executive Directors or the countries they represent. The report was designed, edited, and typeset by Communications Development Incorporated, Washington, DC. Cover design: Musa Mwamutanda Photos: Hellen Mungaila and Kelvin Ng’andu Contents Foreword   v Acknowledgments   vi Executive summary   vii Section 1 Recent Economic Developments   1 Recent global and regional developments    1 The state of Zambia’s economy    4 Economic outlook   11 Section 2  Financial Services—Reaching Every Zambian    13 Financial inclusion and its impact on development    13 Where does Zambia stand on financial inclusion?    15 Lay of the land of the supply side of financial inclusion    20 Is technology a game changer for financial inclusion for individuals in Zambia?    25 Conclusions   30 Annex A Economic Data   32 Annex B  Overview of Payment System Infrastructure    35 References   36 Boxes 1.1 The proposed change to the mining tax regime    8 2.1 Definitions and terminology   15 2.2 Overview of available global financial inclusion data    16 2.3 XacBank’s mobile banking challenges in Mongolia    25 2.4 The Connected Farmer Alliance as an example of digital financial services in agriculture   27 2.5 Partnership models can be successful for increasing financial inclusion through the post office   29 2.6 How Kenya’s Equity Bank was successful at reaching the lower end of the market    29 Figures 1.1 Real GDP grew moderately in Africa in 2014    2 1.2 Saharan Africa    2 Inflation edged upwards in 2014 in Sub-­ iii ZAMBIA ECONOMIC BRIEF—FINANCIAL SERVICES: REACHING EVERY ZAMBIAN 1.3 Sovereign bond spreads in Africa fell in 2014    3 1.4 The region’s currencies have generally stabilized    3 1.5 Commodity prices weakened further    4 1.6 Zambia copper production and global prices    4 1.7 The kwacha shows depreciation globally, 2011–14    5 1.8 Inflation and interest rates trend up    5 1.9 Public debt is rising but remains sustainable    9 1.10 Private sector and domestic credit growth    10 2.1 Voluntary and involuntary financial inclusion    14 2.2 Account penetration, 2011   16 2.3 Account penetration by individual characteristics, 2012    17 2.4 Use of mobile financial services, 2011    17 2.5 Cost and use of mobile money    18 2.6 Formal and informal savings, 2011    19 2.7 Sources of credit, 2011    19 2.8 Reasons for loans, 2011    19 2.9 Self-reported barriers to formal account use, 2011    20 2.10 Map of financial service access points, Zambia    22 2.11 Financial service access points—development challenges    23 2.12 Growth in technological infrastructure    23 Tables 1.1 2014 budget with preliminary and projected outturns    7 2.1 Banking sector outreach   21 2.2 Top 10 MFIs in Zambia    21 2.3 Access to mobile and Internet banking    24 A1 Growth by main sectors, 2005–13    32 A2 Central government finances, 2010–14    32 A3 Financial soundness indicators, 2008–14    33 A4 Selected balance of payments indicators, 2009–14    34 iv Foreword I am pleased to share the fourth Zam- improvement—Zambia ranks below its eco- ­ bia Economic Brief with a focus section on nomic and geographic peers on most indica- financial inclusion. This Brief is part of a tors of financial inclusion. series of short economic updates produced This Brief focuses on mobile e-payments twice a year by the World Bank. Each Brief and agency banking as modes for expanding includes two sections: the Bank’s assess- financial inclusion. They are well suited to ment of recent economic developments Zambia, where costs of formal banking ser- and outlook in the short to medium term, vices are high due to its low population den- and its analysis on a specific development sity and the small size of its banking sector. topic or theme. The previous three Briefs Evidence is mounting that basic payment ser- covered opportunities for human develop- vices can be the first step into the financial ment, jobs, and trade. system and can open access to other finan- Zambia is on a trend of strong growth, cial services such as savings and loans. but challenges remain in securing macro- The take-up of mobile e-payments has economic stability and making growth inclu- been limited so far, compared with several sive. Until very recently, the government other African countries. And providers have appeared to have gotten better control of the yet to achieve scale. But Zambia could be country’s fiscal situation. The political tran- poised for growth in e-payments if service sition following President Sata’s death will providers, regulators, and policymakers likely play an important role in how Zambia jointly ensure that a viable e-money ecosys- fares on macroeconomic stability and contin- tem is developed. Channeling government ued growth. payments through the mobile system could The government has been acting to make provide volume and scale, particularly in growth more inclusive, such as by expanding rural areas. social cash transfers. With growing empiri- We hope that the findings of this Brief cal evidence finding that financial inclusion will generate a healthy debate in the country is important for economic development and around policies and interventions on finan- poverty reduction, it has rightly commit- cial inclusion for individuals in Zambia. The ted to greater financial inclusion for indi- next Brief, to be produced in 2015, will focus viduals. And there is considerable room for on mining. Kundhavi Kadiresan Country Director for Zambia The World Bank v Acknowledgments The fourth Zambia Economic Brief has and Robin  Mearns. Peer reviewers were been prepared jointly by the Macro - Leora Klapper and Samuel Maimbo. Hellen economic and Fiscal Management and Mungaila provided administrative support. Finance and Markets Global Practices of the Kundhavi Kadiresan, Country Director, World Bank. The team was led by Praveen Zambia, and Sudarshan Gooptu, Practice Kumar and included Gunhild Berg, Fran- Manager, GMFDR, provided overall guid- cesca de Nicola, Asumani Guloba, Gerard ance and advice. Kambou, Uzma Khalil, Loretta Michaels, The report was edited and laid out by Philip Schuler, and Dorothe Singer. Useful a team at Communications Development comments were received from Nalini Kumar Incorporated, led by Bruce Ross-Larson. vi Executive summary In 2014 the Recent economic developments and budgeted. Personnel costs have stayed within final overall outlook budget at about 9 percent of GDP. deficit is The government has laid out its medium- Developments in 2014 term targets for overall deficits until 2017, expected Zambia’s economy is estimated to grow which show continuous fiscal consolidation. to be lower around 6.0  percent in 2014, slower than The 2015 budget has proposed an overall than the the 6.7  percent in the previous two years. deficit of 4.6  percent. However, following 5.7 percent of Growth comes from a bumper maize har- the death of President Sata in late October GDP originally vest; rapid expansion in the construction and with upcoming elections (a presidential budgeted, industry—supported in part by public invest- election in 2015 and general elections due ment in roads; and continued strong growth in 2016), risks to continued fiscal tightening reflecting in services. Following the large fiscal deficit have increased. In addition are two issues spending cuts of 6.6 percent in 2013, the economy experi- related to tax policy: changes to the mining and higher enced turbulence during the first half of the tax policy proposed in the 2015 budget; and than budgeted year when the kwacha depreciated sharply outstanding value-added tax (VAT) refunds revenues against the U.S. dollar and other currencies, that are large and need to be resolved. and inflation pressure increased. However, There are concerns that the mining tax in response to policy actions, the kwacha sta- policy change could have an adverse impact bilized subsequently and regained about half on investment and overall copper recovery of the lost value, and inflation pressure also from mines, while on refund of input VAT, ebbed. Average inflation in 2014 is expected Zambia’s requirements for verifying exports to be around 7.8  percent, higher than the are too stringent and not in line with min- targeted 6.5 percent and the 2013 average of eral exporters in the region or around the 7.0 percent. world. The government reasserted control over budget execution during 2014 and the final Medium-term outlook overall deficit is expected to be lower than The outlook for 2015 and beyond looks favor- the 5.7  percent of gross domestic product able but vulnerable to policy slippages and (GDP) originally budgeted. This ref lects external shocks. The economy is expected to spending cuts and higher than budgeted rev- grow 6.7 percent in 2015 and continue grow- enues. Spending cuts have not been uniform, ing by around 6.5–7 percent through 2018. nor have they been made in the most desir- New mines are coming on line and will boost able areas. The capital budget suffered the Zambia’s copper production and exports. most, falling below budget by around 20 per- The outlook is subject to significant cent, thus undermining efforts to address downside risks stemming from both domes- critical infrastructure constraints. Spending tic and external factors. Key domestic risks on farm subsidies is double that originally are associated with the uncertain political vii ZAMBIA ECONOMIC BRIEF—FINANCIAL SERVICES: REACHING EVERY ZAMBIAN environment that if not well managed could institution. Account penetration is on a par increase fiscal vulnerabilities and currency with other countries in the Southern African weakness. External risks relate to increased Development Community (excluding South volatility in global financial markets and Africa), but is slightly lower than the average delayed economic recovery in industrial for the rest of Sub-Saharan Africa and for countries. The government has succeeded other countries in the lower middle-income in accessing global capital markets, most group. recently with a $1 billion Eurobond issued In the Global Findex survey, 32 percent of in April. The price of this success is higher Zambian adults reported saving, using formal exposure to refinancing and currency risk. and informal means. As in the rest of Sub- Declining or even continued weak growth in Saharan Africa, Zambians rely primarily on Increased access export markets, combined with the expected family and friends for credit. Just 6 percent to finance is one gradual decline in copper prices, would of adults in Zambia report having borrowed of the three pillars dampen Zambia’s prospects to benefit from from a bank, credit union, or microfinance recent investment in new mines. institution in the past year. of reform pursued The use of mobile financial services by the Zambian Financial inclusion: Reaching every in Zambia has been slow to catch up and government under Zambian remains very low. Although 62  percent of its Financial Sector Financial inclusion, which encompasses adults in Zambia report owning a mobile Development Plan access to, use of, and quality of financial ser- phone, only 5  percent of adults use mobile vices, has attracted considerable attention financial services to pay bills or send or from Zambian policymakers in the past few receive money—far lower than the average of years. In 2012, Zambia made a commitment 16 percent for Sub-Saharan Africa. to greater financial inclusion for individu- als, as one of the first 17 countries to take Barriers to financial inclusion action under the Maya Declaration at the According to the Global Findex database, meeting of the Alliance for Financial Inclu- nearly 90 percent of adults without accounts sion. Increased access to finance—along with in Zambia mention not having enough money greater market infrastructure and more com- as a reason for not having an account and petition in the financial sector—is one of the 30 percent without an account cite this as the three pillars of reform pursued by the Zam- only reason. This is in line with evidence from bian government under its Financial Sector developing countries overall. The second most Development Plan. reported barrier is the high cost of maintain- Greater attention by the Zambian authori- ing an account. Half of those without accounts ties and policymakers worldwide recognizes in Zambia report that they do not have an the fact that financial inclusion has major account because it is too expensive. effects on people’s lives. It helps them save, Zambia’s low population density makes borrow, reduce costs of transactions, and reaching rural low-income individuals espe- manage shocks. There is growing empirical cially challenging. Two-thirds of Zambia’s evidence that financial inclusion is important population lives in sparsely populated rural for economic development and poverty reduc- areas. In contrast, traditional financial access tion, and that the poor benefit considerably points, such as bank branches, are concen- from basic payment and savings services. trated in urban areas—over 60 percent of all commercial bank branches are in Lusaka and Where does Zambia stand on financial the Copperbelt—where higher population inclusion? density makes it possible for them to operate Financial inclusion increased in Zambia profitably. These difficulties are compounded in recent years but still leaves much room by the relatively high incidence of poverty for improvement as the country rates below among the rural population. Consequently, its economic and geographic peers on Zambia’s banking sector is small: the country most indicators. According to data from has fewer bank accounts and bank branches the Global Findex database, 19  percent of per capita than other countries in the South- adults in Zambia have an account at a bank, ern African Development Community and credit union, cooperative, or microfinance than its economic and geographic peers. viii Partly due to its relatively small size, the sharing even in rural areas and the growing Zambian banking system is characterized popularity of cash-transfer providers and by high interest rate spreads, and high fees payment services demonstrate that users and other costs of banking services, all of are willing to try new technologies if the which create barriers to access for individu- value proposition is clear. Yet service provid- als. Policies targeted at enhancing financial ers, regulators, and policymakers all have inclusion—such as offering basic or low-fee to ensure that an enabling environment is accounts, granting exemptions from onerous developed. A key element of sustainability documentation, allowing for agency banking, will be in achieving scale, which will require and using bank accounts to make govern- more interconnection and cooperation ment payments—could be especially effec- between players than seen so far. Moving tive among those most likely to be excluded: forward with a national switch project will Despite the widespread the poor and rural residents. be crucial in achieving greater interconnec- introduction of mobile tion and scale. The development of shared e-payments, there has Is technology a game changer for agent networks through different strategies been limited take-up individuals’ financial inclusion in Zambia? will further support financial service provid- The gains in communications technology ers in reaching under- and unserved rural and providers have offer new opportunities to reach poor and areas. yet to achieve scale rural Zambians. In late 2011, mobile network Government payments can play a catalytic operators started offering mobile money ser- role in providing volume and scale in rural vices that can be used to pay bills, make rela- areas for financial service providers. The vol- tively small domestic money transfers, and ume of government payments—from salaries purchase airtime. Mobile financial services to pensions and social cash transfers—has are also offered by some commercial banks the potential to add substantial volumes of as additional services for customers. In addi- transactions to service providers. Moreover, tion, technological innovations also allow for electronic payments in agriculture could con- the adoption of new banking models, such as tribute to the move from cash to electronic agency banking. payments. Smallholder farmers, who num- But despite the widespread introduction ber 1.2 million households, typically operate of mobile e-payments, there has been lim- entirely with cash, from input payments to ited take-up and providers have yet to achieve receiving payments for their products. scale. While the two largest mobile network Leveraging existing infrastructure such operators claim to have almost 5 million as post offices also provides opportunities to mobile money customers, most of those are increase financial inclusion cost-effectively. only registered, not active, customers. A few In Zambia, ZamPost has the physical infra- banks have introduced low-fee, low-“know structure to reach individuals in rural areas your costumer” accounts that are proving that are not served by commercial banks, and popular with consumers, but these types of can leverage its popular domestic remittance services are not being broadly introduced. service (SwiftCash) and its recently acquired Use of mobile money and money transfer deposit-taking license as a microfinance services for bill payments in Lusaka is gain- institution to start offering other financial ing ground, but it is too early to say whether products. The provision of financial services this will lead to greater use of mobile money through the post office does not necessar- or e-payments for person-to-person money ily have to be through a full-fledged postal transfers, purchases, or saving. bank, but it can take several forms, includ- ing a partnership model with a commercial Developing a viable e-money ecosystem bank. Zambia is poised for growth in electronic Zambia stands to benefit from a coherent payments, but this growth will not necessar- approach to furthering financial inclusion. ily occur without a multipronged approach While the regulatory stance of the Bank of to establishing a robust and sustainable Zambia has been broadly helpful, a clear ecosystem. Zambia has lagged its neighbors overall framework would be beneficial. In in the growth of electronic payments, but other cases, such as for ZamPost and Nat- the increase in cellphone use and airtime Save (a government-owned savings bank), it ix ZAMBIA ECONOMIC BRIEF—FINANCIAL SERVICES: REACHING EVERY ZAMBIAN appears that the government is essentially tackle the low-income market, ensuring that investing in competing financial service pro- they complement rather than cannibalize viders. While multiple players can of course each other’s efforts. Zambia therefore stands be supported, the government should be stra- to benefit from developing a national finan- tegic in how these players use public funds to cial inclusion strategy. x SECTION 1 Recent Economic Developments Investment Recent global and regional Saharan Africa: Steady growth but Sub-­ in public developments slowdown in some large economies infrastructure Global: Uneven recovery continues Growth and mining, During 2014 the world economy continued Growth in Sub-­ S aharan Africa is expected a rebound in to struggle to gain momentum, with uneven to continue at 4.6 percent in 2014, as in 2013 agriculture, results. Preliminary estimates for 2014 show (figure 1.1), though some of the region’s larg- and a buoyant that global economic output picked up some- est economies have slowed.2 Notably, South services what with growth projected at 2.6 percent, up Africa’s economy expanded a mere 1.0 per- sector were from 2.4 percent in 2013.1 The United King- cent year on year in the second quarter of dom and United States show signs of recovery, 2014, slowing from an already weak 1.6 per- key drivers with growth projected at around 3.2 percent cent in the first, as strikes in the platinum of growth in and 2.2 percent. Yet there is a risk of secular sector dragged down mining and manufac- Sub‑Saharan stagnation in the Euro area, Japan’s growth turing output. Oil production declined in Africa has been disappointing at around 0.9  per- Africa’s third-largest economy, Angola, with cent, and financial vulnerabilities and actions mature oil fields coming off stream, drag- to slow the real estate market in China are ging down growth markedly. By contrast, likely to pull down gross domestic product economic activity remained strong in Nige- (GDP) growth to 7.4 percent this year. ria, the region’s largest economy, with GDP This modest growth in global output is advancing 6.5 percent year on year in the sec- associated with weak expansion of inter- ond quarter, up from 6.2 percent in the first. national trade and low or declining global Excluding South Africa, average GDP growth commodity prices, neither of which is prom- for the rest of the region is expected to hold ising for Zambia, a major metals exporter. steady at 5.6 percent, a faster pace than other But softer inflation expectations could delay developing regions, excluding China. many countries’ expected hikes in policy Investment in public infrastructure and rates. Low interest rates have allowed many mining, a rebound in agriculture, and a developing countries, including Zambia, to buoyant services sector were key drivers of access international bond markets in 2014. growth in the region. However, the region The coming years will likely be accompanied is seeing a slowdown in foreign direct invest- by a gradual tightening in financing condi- ment (FDI) inflows, an important source of tions, however. Thus capital flows to emerg- financing of fixed capital formation, reflect- ing markets will moderate, and investors will ing subdued global demand and weaker com- be influenced by country-specific vulnerabil- modity prices. FDI inflows are projected to ities and growth prospects. amount to $27  billion in 2014, down from 1.  World Bank Development Prospects Group. 2.  This section draws on World Bank (2014a). 1 ZAMBIA ECONOMIC BRIEF—FINANCIAL SERVICES: REACHING EVERY ZAMBIAN Figure Real GDP grew moderately in Africa in 2014 1.1 15 Zambia Sub-Saharan Africa (excluding South Africa) Real GDP growth (percent) Sub-Saharan Africa Developing countries (excluding China) 10 5 0 Inflation rose above 2007 2008 2009 2010 2011 2012 2013 2014 2015 (preliminary) (forecast) 2016 (forecast) 2017 (forecast) target in many Source: World Bank 2014a. countries, including Zambia, prompting S aharan Africa Figure Inflation edged upwards in 2014 in Sub-­ a tightening of monetary policy 1.2 20 Zambia Sub-Saharan Africa (oil exporters) Sub-Saharan Africa (oil importers) Sub-Saharan Africa Percent, year on year 15 10 5 0 2010 2011 2012 2013 2014 Source: World Bank 2014a. $28.3  billion in 2013, primarily reflecting External borrowing from capital markets grew reduced flows into South Africa and Nigeria. further in 2014 In the second half of the year, the region Inflation edged upwards experienced a strong increase in Eurobond Inflation edged upwards across the region sovereign issuances, including a maiden issu- in 2014 (figure 1.2), due in part to higher ance by Kenya. Year to date, total issuance for food prices, although this does not presently the region including South Africa amounted pose a major concern for most countries. The to $6.9  billion (above 2013’s $6.5  billion). uptick was most visible in the frontier market Several countries made a successful return countries that also sustained large currency to the international bond markets. Zambia’s depreciations and fiscal looseness—notably $1.0  billion sale of 10-year dollar-denomi- Ghana, where inflation was in double digits. nated government bonds in April 2014 was Inflation rose above target in many coun- followed by those of Côte d’Ivoire ($750 mil- tries, including Zambia, prompting a tighten- lion) and Senegal ($500 million) in July and ing of monetary policy.3 Inflation in Zambia, Ghana ($1.0 billion) in September. Many of in single digits, remains below the regional the issuances were highly oversubscribed, average. with orders reaching $8 billion for Kenya and nearly $5 billion for Côte d’Ivoire. 3. The finance minister announced in the 2014 Sovereign spreads on Africa’s bonds over budget speech the objective of reducing inf la- 10-year U.S. Treasuries fell across the board tion to 6.5  percent by the end of 2014. “2014 Bud- from their February 2014 peak (figure 1.3). get Address by Hon. Alexander B. Chikwanda, The average spread of Zambian bonds dur- Minister of Finance, Delivered to the National ing November was 157 basis points (bps) Assembly,” October 11, 2013, www.zambia.or.jp/ below their peak of 579 bps, and South docs/2014nationalbudgetaddress.pdf. African and Nigerian spreads fell by 78 bps 2 Figure Sovereign bond spreads in Africa fell in 2014 1.3 Spread above U.S. Treasuries (basis points) 1,500 Emerging Markets Bond Index global spread Zambia Côte d’Ivoire Ghana Kenya 1,000 Nigeria South Africa 500 0 Actions taken by the 2012 2013 2014 Bank of Zambia and Note: Spreads are calculated as differences in basis points over 10-year US treasury notes. signs that the fiscal Source: Bloomberg. situation could be improving have helped stabilize the kwacha Figure The region’s currencies have generally stabilized and put Zambia on a 1.4 path that converges Change in local currency unit–U.S. dollar 10 exchange rate (percent, year on year) with the rest of Africa 0 –10 –20 –30 Zambia Nigeria Ghana South Africa Kenya Uganda –40 Jan. Feb. Mar. Apr. May June July Aug. Sep. Oct. Nov. 2014 Source: Bloomberg; World Bank 2014a. and 64 bps during the same period. As the Commodity prices weakened further global emerging market bond index has Commodity prices weakened further in 2014 started to rise since its June 2014 low of 271, (figure 1.5). As of October, oil prices had the continued decline in African spreads declined 15.7 percent during 2014, and agri- points to declining borrowing costs in the culture and metals were down 4.1  percent region. However, spreads on bonds issued and 6.2  percent respectively for the year, by Ghana and Zambia—countries experi- reflecting increased supply and weakening encing significant fiscal deficits—remain demand, notably from China, the largest above those issued by other sovereigns in metal importer.4 Among metals, the price of the region. iron ore fell the most during 2014, decreas- In the current environment of still benign ing by 36.8 percent as of October, while the financial market conditions, most of the price of copper had dropped by 7.6 percent. region’s currencies have stabilized (figure In contrast, aluminum, nickel, and zinc regis- 1.4), after significant volatility early in the tered price increases. year, which could help contain inf lation pressures. Actions taken by the Bank of Zam- Ebola has hurt several economies bia (BoZ) and signs that the fiscal situation The 2014 outbreak of Ebola disease in West could be improving (discussed later) have Africa has taken a devastating human and helped stabilize the kwacha and put Zam- economic toll. The World Bank estimates that bia on a path that converges with the rest of Africa. 4.  World Bank Development Prospects Group. 3 ZAMBIA ECONOMIC BRIEF—FINANCIAL SERVICES: REACHING EVERY ZAMBIAN Figure Commodity prices weakened further 1.5 150 Energy Agriculture Copper Metals Index (2010 = 100) 125 100 75 Zambia’s economy is 2010 2011 2012 2013 2014 estimated to grow Source: World Bank 2014a. around 6.0 percent the epidemic will reduce economic output of bumper maize harvest and rapid growth in in 2014, slower than the three most affected countries—Guinea, construction, supported in part by public the 6.7 percent in the Liberia, and Sierra Leone—by $359 million investment in roads and continued strong previous two years in 2014, shaving 2.1–3.4 percentage points off growth in services. Agriculture is projected these countries’ annual GDP growth rates. to rebound to more than 6.5 percent growth The spillover cost on West Africa as a whole is in 2014 after shrinking by 7.4 percent in 2013. expected to be in the range of several billion Growth in maize output is supported largely dollars in lost 2014 GDP (World Bank 2014b). by sizable government subsidies in its produc- Countries that have succeeded in contain- tion and price support. Copper output has ing outbreaks—such as Nigeria and Senegal declined following operational problems in in 2014 and Uganda during past ­ episodes— some mines. During 2005–10 mining out- have done so by raising public awareness of put registered an average annual growth of the disease, building surveillance and detec- 20.5 percent following privatization of cop- tion capacity, and responding swiftly to new per mines and significant FDI inflows; min- cases of infection by identifying and test- ing output has fluctuated since then with ing those who have come into contact with three out of the four years registering nega- affected persons. tive growth (figure 1.6). Construction has been growing fast for the past several years The state of Zambia’s economy and is projected to grow more than 8 percent in 2014 and to account for a sixth of GDP Economic growth slowed in 2014 growth. In previous price cycles, increases in Zambia’s economy is estimated to grow copper prices and output have been accom- around 6.0  percent in 2014, slower than panied by a boom in construction and ser- the 6.7  percent in the previous two years vices. In 2014, services are likely to account (see annex table A1). Growth comes from a for the bulk of growth. Figure Zambia copper production and global prices 1.6 Copper production Global copper price 250 12,500 200 10,000 Million metric tons $ per metric ton 150 7,500 100 5,000 50 2,500 0 0 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Source: BoZ, Ministry of Finance, and World Bank staff calculations. 4 The exchange rate stabilized after sharp deprecia- induced by the depreciating kwacha, an tion in the first half increase in electricity tariffs, and increased The first half of 2014 witnessed considerable public wages all put pressure on consumer fluctuations in foreign exchange markets, prices. During 2014 inf lation f luctuated although conditions have stabilized toward between 7 percent and 8 percent. The aver- the end of the year. After holding steady age for the year is expected to be around against the U.S. dollar and the British pound 7.8  percent, compared with 7.0  percent in during most of 2013, the kwacha depreciated 2013 and 6.5 percent targeted. sharply against global currencies during the To contain inflation and depreciation first five months of 2014 (figure 1.7). By the pressures, BoZ undertook several measures end of May it had lost 19 percent of its value to tighten monetary policy. It raised the pol- against the dollar and 22 percent against the icy rate to 12 percent in April and increased Inflation in 2014 pound. More benign global conditions com- the statutory reserve ratio to 14  percent, fluctuated between bined with interest rate hikes by BoZ have from 8 percent. It also intervened in foreign 7 percent and helped the kwacha regain around half these exchange markets to contain volatility. More 8 percent, and is losses. The strengthening of the U.S. dollar recently, the policy rate was raised again in and political uncertainty after late October November to 12.5 percent. expected to end the have had an effect on the kwacha in recent Tighter liquidity conditions that resulted year with an average weeks, but it has largely been stable. from the monetary policy actions pushed of 7.8 percent up yields on government securities (see fig- Inflation is higher than the targeted 6.5 percent ure 1.8). The relative stability in the kwacha Inflation has been edging upwards over the and inflation in July 2014 enabled the central past year in Zambia as in other countries in bank to gradually start easing liquidity condi- the region (figure 1.8). Higher import prices tions. Yields on government securities, after Figure The kwacha shows depreciation globally, 2011–14 1.7 150 U.S. dollar British pound Index (Jan. 2011 = 100) Kwacha 100 50 0 2011 2012 2013 2014 Note: Higher values indicate appreciation of the kwacha, lower values depreciation. Source: BoZ. Figure Inflation and interest rates trend up 1.8 25 In ation rate Policy rate 20 Interbank rate Weighted Treasury bill rate 15 Percent 10 5 0 Jan. Mar. May July Sep. Nov. Jan. Mar. May July Sep. 2013 2013 2013 2013 2013 2013 2014 2014 2014 2014 2014 Source: BoZ. 5 ZAMBIA ECONOMIC BRIEF—FINANCIAL SERVICES: REACHING EVERY ZAMBIAN peaking in July, had started edging down- Reserve Agency.6 Spending on the Farmer wards. The weighted yield on Treasury bills Input Support Program is also projected to declined to 17.5  percent in October from be around 2.5 times more than originally 22 percent in July 2014, although it remains budgeted. above the 2012 average of 11  percent. In 2015 the decline in the overall deficit Recently, yields on government securities would result from higher domestic revenues have started climbing again due to political and continued restraint on total expendi- uncertainty. ture. Part of the increase in domestic reve- nues (about 0.9 percent of GDP) would come The fiscal situation had begun to improve but from a substantial change in the mining tax faces risks in view of coming elections regime. The draft budget proposes replac- Based on preliminary The 2014 budget had planned a lower fiscal ing the current two-tier system of mineral outturn data as of deficit than in 2013 and the government man- royalties and corporate income taxes with a September 2014, aged to bring a measure of control to bud- “simplified mining tax structure”: 8 percent get execution after the difficulties faced in mineral royalty for underground mining domestic revenue was 2013. 5 The 2015 budget presented to Parlia- and 20 percent for open-cast mining opera- 7.3 percent above ment in October maintains the stance of fis- tions as a final tax, and 30 percent corporate projection for the first cal tightening by proposing an overall fiscal income tax on income from tolling and pro- three quarters while deficit of 4.6 percent of GDP. The medium- cessing of purchased mineral ores. But as dis- total expenditure term expenditure framework for 2015–17 cussed just below, the change in the mining was 10.0 percent plans for continued fiscal consolidation with tax regime could have a negative long-term the overall deficit narrowing to 3.2 percent impact on copper output and investment. below budget by 2017 (Ministry of Finance 2014). How- Fiscal consolidation faces bigger risks now. ever, following the death of President Sata The 2015 budget is premised on a continued and with upcoming elections (a presidential freeze of civil service wages. It also assumes election in 2015 and general elections due that the Food Reserve Agency’s maize pur- in 2016), risks to continued fiscal tightening chases in 2015 will not exceed 0.5  million have increased. In addition are two tax-policy tons. Both these assumptions may not hold. issues of concern: changes to the mining fis- The 2014 freeze on public wages is coming cal regime proposed in the 2015 budget; and under political pressure and overspending large outstanding value-added tax (VAT) on agriculture subsidies has been a recurring refunds that need to be resolved. feature of Zambian budgets under the Patri- Fiscal year 2014 is expected to end with otic Front government. Every year higher sub- a lower deficit against the 5.7  percent bud- sidies than planned result in ad hoc budget geted (table 1.1). Based on preliminary out- cuts and accumulation of arrears. Holding turn data as of September, domestic revenue the line on the wage freeze and maize pur- was 7.3 percent above projection for the first chases may become more difficult: the new three quarters while total expenditure was president will face general elections less than 10.0  percent below budget. The projected two years after assuming office. It is possible deficit would be higher still if outstand- that fiscal restraint may lose out to populist ing input VAT refunds totaling more than preelection spending. K4.3  billion, being withheld by the Zambia Revenue Authority due to noncompliance Tax policy issues—change to the mining fiscal with VAT rules on export verification, were regime and outstanding VAT refunds netted out of domestic revenues. The decline The proposed change to the mining fiscal in total expenditure is going to be a net result regime has several drawbacks. Due to dif- of relatively large cuts on the capital budget ferent cost structures, and thus profitability, (around 20  percent) and significant over- that are inadequately captured by the open spending on purchases of maize by the Food 6.  In October, the Minister of Agriculture announced that the Food Reserve Agency had already purchased 5.  In 2013, the fiscal balance deteriorated sharply, end- more than double the strategic reserve requirement ing the year with an overall deficit of K8.2 billion versus of 500,000 tons of maize to keep domestic prices high a K5.0 billion deficit originally projected in the budget. in the face of the bumper harvest. 6 Table 2014 budget with preliminary and projected outturns 1.1 (millions of kwacha) 2014 2015 Original Preliminary Projected Proposed budget (year to date) annual budget Total revenue and grants 31,615 23,019 32,192 36,318 Domestic revenue 29,539 22,912 30,635 35,104 Tax revenue 24,457 19,544 25,896 25,345 Income taxes 10,781 8,926 11,972 11,793 Out of which mining company tax 2,253 1,403 1,869 0 Value-added tax 8,099 7,032 8,707 6,577 Customs and excise 5,577 3,564 5,182 6,975 Export duty 6 22 36 Nontax revenue 5,082 3,368 4,738 9,759 Out of which mineral royalty 2,186 1,329 1,963 5,937 Grants 2,077 108 1,557 1,214 Total expenditures 41,049 27,912 40,428 44,970 Expenses 29,755 22,349 31,390 32,152 Personnel costs 15,497 11,595 15,552 16,604 Use of goods and services 5,202 3,206 4,524 5,267 Interest payments 3,040 2,602 3,510 3,594 Grants, transfers, and subsidies 3,986 3,775 4,936 4,544 Out of which Farmer Input Support Program 500 986 1,309 1,338 Social benefits 966 579 813 1,021 Other expenses 1,063 593 2,054 1,123 Out of which Food Reserve Agency 1,013 593 2,033 1,073 Assets 10,919 5,248 8,644 12,436 Nonfinancial assets 9,839 4,788 8,012 11,918 Financial assets 1,079 460 632 519 Liabilities 376 315 394 382 Changes in balance 0 747 1,302 Fiscal balance –9,434 –4,146 –6,934 –8,653 Financing 9,434 4,146 6,934 8,653 Net domestic 2,902 1,612 3,075 3,072 Net external 6,532 2,535 3,858 5,581 GDP 166,474 166,474 166,474 189,783 Note: Grant receipts assumed to be 75 percent of budget. Additional Food Reserve Agency spending assumed to be financed domestically. Source: World Bank staff calculations from Ministry of Finance data. pit–underground distinction (box 1.1), dif- overall copper recovery, and preliminary ferent mines will face very different effective calculations show that lost in situ value of tax rates on their income. Apart from being resources could be sizable. When extended inequitable, the changes could see mines that to the undiscovered copper potential of Zam- lose out constantly engaged in negotiations bia, the lost in situ value is even larger, repre- with the government, leading to an unsta- senting potential permanent value erosion to ble fiscal regime. Some hard-hit mines may Zambia’s copper wealth. curtail or completely close their operations, The proposed fiscal regime is character- hurting jobs (generally, the high-cost mines ized as a “simplified fiscal regime” but may are also those with higher employment). not turn out to be administratively simple. The proposed increase in royalty rates Since many mines blend ores from both could also have a significant impact on Zam- open-pit and underground mines, calcula- bia’s subsoil wealth through increases in the tion and verification of the royalty payments cut-off grade. This would result in lower will require in-depth assessment of the metal 7 ZAMBIA ECONOMIC BRIEF—FINANCIAL SERVICES: REACHING EVERY ZAMBIAN Box The proposed change to the mining tax regime 1.1 The proposed change is meant “to achieve a more equitable distribution of mineral wealth between the government and the min- ing companies.” Historically, the government’s total tax take from the mining sector has not met expectations, for several reasons including tax incentives granted by the government, large tax “assets” resulting from unredeemed capital redemption allowances, and overall lower profitability of several mining companies. In addition, the government faced challenges in administering profit-based taxes. But in the past few years, the mining tax take has averaged around 3 percent of GDP, a level similar to that in other comparable countries; it was set to grow further in the medium term due to larger inflows of corporate income taxes. The proposed new regime appears to be designed to circumvent the issues discussed above by avoiding profit-based taxes altogether. It distinguishes profitability of mines by their mining method—open pit versus underground. A higher royalty rate for open pits suggests that they are considered more profitable. Yet the method is a rather crude way to distinguish profit- ability. Zambia has open-pit mines with much higher per unit costs than underground mines, and vice versa. The requirements for documentation beyond the conventional proof content of the raw ores, as opposed to veri- bank.7 As of September 2014, the Zambia fication of concentrates. This will move the Revenue Authority had withheld K4.3  bil- of export introduce requirements for physical audits of produc- lion (2.6 percent of GDP) in VAT refunds on a significant drag tion one step back in the value chain where the ground that exporters did not meet the on Zambia’s export the logistics associated with sampling will be requirements of Rule 18 (Zambia Daily Mail competitiveness a challenge and assessment will be plagued 2014).8 with uncertainty. Furthermore, the inclusion All countries employing VAT require some of an ad valorem royalty for mining compa- form of verification of export. Typically a cus- nies, while maintaining the profits tax system toms declaration or VAT invoice satisfies this for processing facilities, may create incentives requirement. In contrast, requiring proof of for domestic profit shifting. payment, of importation of the goods into The cumulative impact of the proposed another country, and of deposit of funds in changes highlights the need for caution. The a domestic account runs counter to standard government should consider postponing the practice. Indeed, a survey of mineral export- proposed changes and undertake a careful ers in the region and around the world finds assessment of the likely impact of the pro- that no country makes such requirements.9 posed changes on investment and revenues. Apart from departing from international The government could also create the legal practice these requirements have the effect means necessary to obtain information from of transforming the VAT into an export tax companies, allowing the authorities to proj- rather than a consumption tax. Combined ect fiscal revenues from the mining sector with the additional administrative costs, the into the future. The draft Mines and Miner- requirements for documentation beyond the als Act affords an excellent opportunity to conventional proof of export introduce a sig- effect the necessary changes. Otherwise, con- nificant drag on Zambia’s export competi- tinuing to strengthen capacity to implement tiveness. Nor do these provisions of Rule 18 profit-based taxes should attract top priority. Government measures on refunding input 7.  These are provisions (b), (d), and (e) of Rule 18. VAT to exporters have implications for export The latter two requirements were provisions of the competitiveness and the overall cost of doing VAT General Rules of 1997, but had not been strictly business. In an effort to combat fraudulent enforced. claims for VAT refunds, in 2013 the govern- 8.  Zambia Revenue Authority Commissioner Gen- ment amended Rule 18 of the Value Added eral Berlin Msiska also reported that it had paid Tax General Rules of 1997. The revised rules out K762.3 million to exporters who had submitted require that exporters seeking refund of receipts and export certificates in compliance with input VAT provide not only tax invoices for Rule 18. goods exported and proof that the customer 9.  Countries surveyed include Australia, Canada, paid for the goods, but also documenta- Chile, Namibia, Peru, and Tanzania. Rules in the tion showing that goods have been shipped European Union, New Zealand, and United King- out of Zambia and have been imported into dom were also reviewed because many countries the country of destination, and that export have based their VAT rules on practices in these proceeds have been deposited in a domestic jurisdictions. 8 Figure Public debt is rising but remains sustainable 1.9 Kwacha Foreign currency 30 20 Share of GDP 10 0 The largest risks to 2006 2007 2008 2009 2010 2011 2012 2013 2014 (preliminary) debt sustainability Source: IMF and World Bank. come from delayed fiscal adjustment achieve the stated policy objective of reduc- term. The largest risks to debt sustainabil- ing fraudulent VAT refund claims. ity come from delayed fiscal adjustment and and negative shocks In his 2015 budget speech, the minister negative shocks to GDP growth, highlighting to GDP growth of finance announced that the issue of VAT the importance of maintaining fiscal disci- refunds will be resolved in an expeditious pline before the elections. and amicable way. In that vein it is expected The cost of borrowing has increased, how- that the government will balance the need to ever, as the government has shifted toward secure its revenues with the need to maintain borrowing in the market rather than from an attractive investment climate. In addition, concessional sources. To some extent this it will be important to improve the under- is a consequence of rising national income lying capacity to administer conventional and improved management of the economy. proof-of-export rules for VAT refunds. But Zambia faces higher costs in the inter- national sovereign bond market than do Zambia’s external debt is sustainable but debt many of its neighbors. With Ghana it shows portfolio has become costlier and riskier higher sovereign spreads than other coun- Government debt grew rapidly between 2010 tries (see figure 1.3), reflecting these coun- and 2013, when it reached 28.7  percent of tries’ less favorable fiscal positions among GDP (figure 1.9).10 Most of the recent growth market-access countries. Bolder measures to in debt is external and commercial. Foreign curtail growth in personnel spending or to currency debt as a share of GDP doubled broaden the tax base would help reduce costs between 2011 and 2014, primarily because of future bond issuances. of 2012 and 2014 Eurobond issues, which Zambia’s debt portfolio has also become mature in 2022 or 2024. In the domestic mar- riskier. The portfolio is highly exposed to ket, the government increased its short-term refinancing risks because of a large share domestic borrowing in late 2013 and early of Treasury bills. The “bullet” structure of 2014 to finance the budget deficit, which had the two Eurobonds, which together make the effect of pushing up short-term interest up around 40  percent of the external debt rates. portfolio, also contributes heavily to higher The 2013 Bank–International Monetary refinancing risk in the coming years. In Fund (IMF) debt sustainability analysis con- addition, the portfolio is exposed to greater cluded that overall public debt remains sus- exchange rate risk. Depreciation of the tainable under the baseline scenario. This kwacha would raise Zambia’s debt servicing conclusion likely holds in 2014, too. Even costs, particularly if this were to occur when though the analysis projected debt to rise the Eurobonds mature (2022 or 2024). To slightly in the medium term, the debt is manage foreign exchange risk, issuance of expected to decline gradually in the longer the large Eurobonds makes coordination between the Ministry of Finance and the 10.  This section summarizes findings of the World central bank more important than it was in Bank and IMF, with MEFMI and UNCTAD (2014). the past. 9 ZAMBIA ECONOMIC BRIEF—FINANCIAL SERVICES: REACHING EVERY ZAMBIAN Figure Private sector and domestic credit growth 1.10 80 Private sector credit Domestic credit 60 Percent, year on year 40 20 0 –20 Strong growth in 2011 2012 2013 2014 private sector credit Source: BoZ. since 2009 has Government borrowing is not guided by Caps on lending rates supported economic a published debt management strategy nor The October 2013 issue of the Zambia Eco- activity in Zambia informed by explicit analysis of the tradeoffs nomic Brief (World Bank 2013b) had dis- between risks and costs. The two-year debt cussed the issue of caps on lending rates11 management strategy prepared in 2008 was and cautioned about their impact on busi- not approved by cabinet. The government is ness strategies of commercial banks and aware of the need also to develop a strategy microfinance institutions (MFIs). Recent to address the large bullet repayments of the evidence collected by BoZ  shows that the 2012 and 2014 Eurobonds. effects of caps have been counter to what was intended in some cases. Lenders responded Credit growth and banking sector performance to caps on rates by introducing new or Strong growth in private sector credit since higher fees, which has meant that, in some 2009 has supported economic activity in instances, the effective rate including fees Zambia. In 2013, with the sharp downturn has remained close to pre-cap levels. These in credit growth and increased govern- fees have reduced transparency in pricing of ment borrowing (figure 1.10), there was loans. some crowding out of private investment Instead of promoting financial inclu- by the public sector. The rate of growth sion, credit to small and medium enter- in private credit picked up again in 2014, prises appears to have been rationed, and rising to 25  percent year on year in Sep- there has been no evidence of growth in tember 2014 from 13 percent in December personal loans to nonsalaried employees or 2013. Lending to government peaked in salaried employees at small firms—virtually February 2014, and the banking sector’s all personal loans are made through agree- gross claims on the central government ments with employers for automatic payroll declined by 19  percent between February and September. 11.  In January 2013 BoZ imposed a cap on inter- The banking sector has been perform- est rates that commercial banks and microfinance ing well over the past year as several finan- institutions could charge for loans. This was imple- cial soundness indicators show (see annex mented as a cap on spread above the BoZ policy rate. table A3). As of end-September 2014, capital Commercial Bank Circular 25/2012 set this margin adequacy was stable at 26  percent, against at 9  percentage points, making 18.25  percent the 27 percent at the end of 2013. Nonperform- maximum lending rate at that time, when the policy ing loans as a share of total loans decreased rate was set at 9.25 percent. The corresponding cir- to 6.4 percent from 7.1 percent at the begin- cular for nonbank financial institutions capped inter- ning of the year, and more than 75 percent of est rates charged by developmental MFIs initially at these nonperforming loans were provisioned 30  percent for nonbanks (conventional MFIs) and for. Liquidity indicators also improved, while 42  percent for developmental MFIs. Rates subse- earnings and profitability remained stable in quently rose along with the BoZ policy rate: the bank the last quarter of 2013 and in the first half lending rate to 28 percent, nonbanks to 42 percent, of 2014. and developmental MFIs to 64 percent by April 2014. 10 deductions.12 Consequently, only individuals will contribute to headline growth. Govern- who work for the state or large corporations ment consumption is projected to grow at have access to personal loans. The aver- a moderate pace, allowing for some fiscal age loan size has grown since the caps were consolidation, which could be a drag on imposed, contrary to the policy’s objective of economic activity. Efforts to contain wages supporting small borrowers. and salaries and streamline less productive Policies other than interest rate caps are expenditures on goods and services should needed to address the underlying structural help enhance the overall efficiency of public determinants of the high cost of credit in spending. Zambia. Other analysis suggests that large With copper production set to rise, export interest rate spreads are explained mainly growth should remain positive, although by high overhead costs resulting from the softening copper prices could slow it. In A sudden increase in small size of the market, high labor costs, China—a major destination for Zambia’s volatility in financial inadequacies in credit information systems, exports—economic growth is expected to markets and slower and weaknesses in the creditors’ rights slow from 7.7 percent in 2013 to 7.4 percent growth in emerging enforcement framework (IMF and World in 2014 and to an average of 7.1  percent in Bank 2009). Also, policymaking is itself con- 2015–17 as it makes the transition from markets are among strained by scarcity of information. There are an investment-led growth strategy toward the major external few disaggregated and standardized data on greater emphasis on domestic consumption. risks to Zambia’s volumes and costs across market segments. Meanwhile, on the import side, the demand growth outlook Therefore, it is important to address the for capital goods is projected to remain underlying structural barriers to reasonably strong, as the government continues to front- priced credit. load infrastructure investments and as pri- vate consumption remains strong. Reflecting Economic outlook these trends and the weakening of commod- Zambia’s medium-term growth prospects ity prices, net exports are expected to make a look favorable, assuming that current trends marginal contribution to overall growth. continue. Real GDP growth is projected to strengthen to an annual pace of 6.7 percent Risks to Zambia’s economic outlook in 2015 from 6.4 percent in 2014, and to sta- The outlook is subject to significant down- bilize at an average of 6.5 percent in 2016–17. side risks stemming from both domestic Under the baseline scenario, investment in and external factors. Key domestic risks are mining and infrastructure combined with associated with expansionary fiscal policy the rebound in agricultural production is and currency weaknesses. A sudden increase expected to continue to support growth. With in volatility in financial markets and slower new mines opening up, copper production is growth in emerging markets are among expected to rise, helping drive GDP growth. the major external risks to Zambia’s growth Consumption is also expected to remain outlook. strong in 2015–17. Reduced imported infla- tion, aided by a benign global inflation envi- Domestic risks ronment, a relatively stable currency, and a Budgetary concerns and currency weak- strong maize harvest, is expected to help con- nesses will remain sources of vulnerability for tain inflation pressures, which should allow Zambia over the next 12 months, particularly for some gains in real disposable incomes. if fiscal discipline is relaxed before the elec- These effects, coupled with the large increase tions. Notably, a resumption of looser fiscal in public sector wages enacted in September policy could deteriorate an already weak fis- 2013, should continue supporting private cal position, depleting fiscal buffers further consumption and domestic demand, which and leaving limited fiscal space to respond to exogenous shocks. An IMF program is not 12. Among other provisions, these arrangements yet in sight despite authorities’ request for employers give lenders the right to have employee one. Public sector wage pressures and the benefits attached to offset any remaining loan obli- two elections (2015 and 2016) could make gation should the borrower leave her or his current it harder for the authorities to maintain the position. pace of fiscal consolidation. 11 ZAMBIA ECONOMIC BRIEF—FINANCIAL SERVICES: REACHING EVERY ZAMBIAN Currency concerns are also likely to con- their current low levels remains a key down- tinue. A combination of weak export growth, side risk for Sub-­S aharan Africa. It would high import demand, and negative investor not only hit South Africa, which depends sentiment could cause the kwacha to weaken heavily on portfolio capital flows to finance against the dollar, particularly if investors its current account deficit, but also other come to believe that the economy has a high frontier markets such as Ghana, Nigeria, level of macroeconomic vulnerability, adding and Zambia, which have increased their reli- to inflation pressures in the country. While ance on external market financing. Recent moderate food prices and prudent monetary episodes of capital market volatility suggest policies could see inflation remain low, cur- that countries with large macroeconomic rency-induced price pressures will pose a per- imbalances would face strong downward sistent threat. pressure on their exchange rate and high currency-induced inflation. Besides finan- External risks S aharan Africa cial risks, countries in Sub-­ A sudden increase in risk premiums and face the risk of Ebola-related disruptions in global financial markets’ volatility from spreading. 12 SECTION 2 Financial Services— Reaching Every Zambian Innovations in There is substantial evidence that financial analysis of the challenges in that area and the payments inclusion is important for economic devel- possible means to address them. In addi- landscape, opment and poverty reduction, and that tion, its focus is on access to and use of for- the poor benefit tremendously from basic mal accounts, payments, savings, and credit such as mobile payment and savings services.1 But expand- products, even though financial institutions financial ing financial inclusion and reaching low- offer an array of financial services, including services income individuals is especially challenging insurance and pension products, which are and agency in Zambia due to the country’s low popula- equally important for managing the finan- banking, tion density. Two-thirds of the population cial lives of low-income individuals. as well as lives in sparsely populated rural areas. Tra- Financial inclusion has major effects on ditional financial access points, such as bank people’s lives. Without inclusive financial sys- leveraging branches, are, though, concentrated in urban tems, individuals and firms need to rely on existing areas where higher population density makes their own resources to meet their financial infrastructure, it possible for traditional financial institu- needs, such as saving for retirement, invest- such as post tions to operate profitably. This section ing in education, taking advantage of busi- offices and explores how innovations in the payments ness opportunities, and confronting systemic government landscape, such as mobile financial services or idiosyncratic shocks. In addition, transac- payments and and agency banking, as well as leveraging tions between parties would be costlier and existing infrastructure, such as post offices riskier to undertake without such systems. transfers, can and government payments and transfers, can From a policy perspective, greater financial help expand help address this challenge. inclusion also holds the promise of poten- financial tially making other policies more effective inclusion Financial inclusion and its impact on and efficient. For example, widespread avail- development ability of electronic payments makes it easier Financial inclusion encompasses access to implement pro-poor policies that rely on to, use of, and quality of financial services. electronic payments for conditional cash This section focuses on financial inclusion transfers or social transfers to the poor and of individuals rather than micro, small, and disadvantaged. medium enterprises as Zambia has commit- Financial exclusion is problematic and ted to significantly increase access to finance deserves policy action when it is involuntary. for individuals as part of the Maya Declara- That is the case when individuals would like tion2 of 2011 and to allow for a more in-depth to use financial services but are excluded by barriers—high account fees, long distances, 1.  See, for example, World Bank (2013a) for an over- view of the literature. as the G20 meeting in Mexico, February 2012, coun- 2.  Under this Declaration facilitated by the Alliance tries voluntarily committed to financial inclusion for Financial Inclusion in a meeting at the same time targets. 13 ZAMBIA ECONOMIC BRIEF—FINANCIAL SERVICES: REACHING EVERY ZAMBIAN Figure Voluntary and involuntary financial inclusion 2.1 No need for nancial services Users of Voluntary formal nancial exclusion services (self-exclusion) Cultural, religious reasons not to use, indirect access Population Insuf cient income, high risk Nonusers of Involuntary Discrimination, lack of formal nancial exclusion information, weak contract services enforcement, product features, price barriers due to Providing individuals market imperfections with accounts with Source: World Bank 2013a. saving and payment services has significant and lack of suitable products—that result is growing evidence in the academic litera- positive effects, from market failures (figure 2.1). Generally, ture that providing individuals with accounts including increasing financial inclusion as a policy goal should of with saving and payment services has signifi- savings, women’s course only be pursued with full consider- cant positive effects, including increasing empowerment, and ation of its costs and benefits. The distinction savings (Aportela 1999; Ashraf, Karlan, and productive investment between voluntary and involuntary financial Yin 2006), women’s empowerment (Ashraf, inclusion is not always straightforward, how- Karlan, and Yin 2010), productive investment ever. For example, individuals might report (Dupas and Robinson 2013a), and consump- no need for currently offered financial tion, investment in preventive health, pro- products, but might be interested in better ductivity, and income (Dupas and Robinson designed products tailored to their needs. 2013a,b; Ashraf, Karlan, and Yin 2010).3 In addition, indirect access—for example, Among policymakers, interest in the through someone else in the family—is not potential transformative power of finan- a substitute for direct financial inclusion. cial inclusion has increased. The World The literature highlights that ownership of Bank announced a new initiative to provide an account and thus one’s assets provides universal financial access to all working- greater decisionmaking power on how the age adults by 2020 during the 2013 annual money is spent (World Bank 2013a). meetings. In international forums, such as Financial inclusion is a distinct dimension the Group of Twenty (G20), financial inclu- of financial development. Commonly used sion has moved up the reform agenda. The measures of financial development (such as G20 has created the Global Partnership for financial depth, measured by domestic credit Financial Inclusion (GPFI), a platform for to the private sector as a percentage of GDP) all G20 countries, interested non-G20 coun- are imperfectly correlated with the use of for- tries, and stakeholders to advance work on mal accounts by individuals. For a given level financial inclusion, including the implemen- of financial depth, countries can have hugely tation of the Financial Inclusion Action Plan. varying levels of account use. Financial sys- At their February 2012 meeting in Mexico, tems are also assessed on their efficiency and G20 leaders agreed to follow through on the stability. A greater use of formal accounts is recommendations of the 2011 GPFI report associated with higher efficiency of financial (GPFI 2011), and take the financial inclu- institutions. Efficiency can be measured by sion agenda forward to concrete results. At the lending–deposit interest rate spread of a simultaneous meeting of the Alliance for financial institutions, but the relationship is Financial Inclusion, Zambia made a commit- also robust to a number of alternative mea- ment to greater financial inclusion as one of sures. There is no significant correlation the first 17 countries to take action under between account penetration and financial the Maya Declaration. Increased access to stability (World Bank 2013a). Financial inclusion matters for economic 3. See World Bank (2013a) for a more detailed development and poverty reduction. There discussion. 14 Box Definitions and terminology 2.1 The financial services industry is rapidly changing in terms of innovations and players, and many of the terms are being used interchangeably, which can get confusing. For this report, we use the following: Mobile banking refers to the ability to access one’s bank accounts via a mobile device, either a phone or a tablet. In many regards this is just another form of online banking. It is largely an additive service to existing bank customers. Mobile money is the term commonly used to describe prepaid stored value wallets that are accessed via the user’s mobile device. This service is commonly offered by mobile network operators or third-party providers and is not generally considered a deposit account, although there are growing examples of banks that are offering their customers the ability to link their deposit accounts to their mobile wallet accounts. Mobile payments refer to the ability to transfer funds, either from one user to another or for making purchases. Mobile pay- Innovations in business ments can be associated with bank accounts or with mobile wallets offered by mobile money providers. models, regulatory E-money refers to a digital form of currency that is prepaid with fiat currency—that is, an equal amount of local currency has changes, and been used to “purchase” the e-money and it can be exchanged for local currency. Many policymakers use the term e-money to refer to all digital currency, regardless of the service provider or the channel it is offered through; thus many emerging policy increased competition guidelines around new payment services like mobile money or prepaid card services are often referred to as e-money guidelines. from outside the traditional financial finance, along with enhanced market infra- least 1,000 individuals in each economy for sector are promising structure and increased competition in the a nationally representative sample (box 2.2). developments financial sector, is one of the three pillars of for furthering reform pursued by the Zambian government Account ownership financial inclusion under its Financial Sector Development Financial inclusion as measured by owner- Plan. ship of accounts has increased in Zambia in Contributing to the focus on financial recent years but there is still much room for inclusion have been major breakthroughs improvement. According to data from the in technologies that have created new deliv- Global Findex database, 19 percent of adults ery mechanisms for cost-effective outreach. in Zambia have an account at a bank, credit Examples include the spread of cell phones union, cooperative, or MFI (figure 2.2). This and mobile banking and low-cost point- share is in line with the FinScope estimate of-sale (POS) devices (some definitions of 14 percent of adults using a bank product are in box  2.1). In addition to technologi- and 23 percent of adults using formal finan- cal advances, innovations in business mod- cial services (bank or nonbank financial els (such as agency banking), regulatory institution) in 2009. 5 Overall, account pen- changes, and increased competition from etration is on a par with the rest of Southern outside the traditional financial sector are African Development Community (SADC) promising developments for furthering countries6 if South Africa is excluded, but is financial inclusion. slightly lower than the average for the rest of Sub-­ Saharan Africa as well as the average for Where does Zambia stand on financial other countries in the lower middle income inclusion? group, and about half of account penetration This section draws largely on data from the in developing countries in general. Global Financial Inclusion (Global Findex) In Zambia as elsewhere, account pen- database.4 Collected in 2011, the database etration varies by individual characteristics measures how adults (ages 15 years and (figure 2.3). Only 12  percent of people in older) in 148 economies save, borrow, make the lowest income quintile have a formal payments, and manage risk, surveying at 5.  FinScope considers as “financially included” any- 4.  The Global Findex database is available at http:// one who uses a formal or informal financial product, w w w.worldbank.org/globalfindex. All reported which increases their more widely reported estimate regional or income group averages are population to 37 percent. A new round of FinScope data collec- weighted. Updated data from the Global Findex are tion for Zambia is planned in the near future. being collected in 2014 and will be available in spring 6. Global Findex data are unavailable for SADC 2015. member countries Namibia and Seychelles. 15 ZAMBIA ECONOMIC BRIEF—FINANCIAL SERVICES: REACHING EVERY ZAMBIAN Box Overview of available global financial inclusion data 2.2 Global financial inclusion data are available from several sources that can be broadly distinguished along the supply and demand sides of financial inclusion. Supply side (providers of financial services): Financial Access Survey • Collects annual supply-side data provided by country regulators to the IMF. • 182 economies participated in the 2012 Financial Access Survey. Global Survey on Consumer Protection and Financial Literacy • Collects data on regulatory frameworks, institutional arrangements and enforcement mechanisms, and financial capability. • 114 economies participated in the first survey launched in 2013. Nineteen percent of adults in Zambia Demand side (users of financial services): have an account Global Findex at a bank, credit • Measures the use of financial services (accounts, payments, savings, credit, and insurance) by individuals through addition of questions to the Gallup World Poll. union, cooperative, • Surveyed over 150,000 individuals from 148 economies (at least 1,000 individuals per economy) in 2011. The latest round or microfinance of data is being collected in 2014. institution Demirguc-Kunt and Klapper (2013) provide a detailed description of the Global Findex database. Aside from global surveys, there are also country-led efforts to collect data on the use of financial services. Such national surveys have the advantage that they allow countries to tailor their financial inclusion definitions to the local context—at the cost of international comparison, however. To improve comparison across countries, countries in some instances have modified existing surveys or agreed to similar methodologies within a subregion. One such example is FinScope, a survey that measures the use of financial services by individuals in countries across Africa, including Zambia. This Brief primarily relies on data from the Global Findex database given that it is currently the only database that collects data on financial inclusion from the perspective of the user of financial services that allows for consistently benchmarking Zambia against its neighboring countries, Sub-­Saharan Africa, and developing countries in general. Data from the FinScope survey is available for Zambia for 2009 and reference is made to how these data compare with the Global Findex data from 2011. Figure Account penetration, 2011 2.2 50 formal nancial institution (%) Adults with an account at a 40 30 20 10 0 Zambia Rest of SADC Rest of SADC Rest of Rest of lower Rest of (excluding South Africa) Sub-Saharan Africa middle-income countries developing world Note: Data for Zambia are for 2012. Source: Demirguc-Kunt and Klapper 2013. account, against 28  percent in the highest example, 73 percent of adults with tertiary income quintile. The gap between urban education or more own a formal account and rural residents is substantial: while compared with only 27 percent of those with 36  percent of adults living in urban areas secondary education. Among those with pri- have a formal account, only 17  percent of mary education or less, the account owner- the almost two-thirds of Zambians living ship rate is even lower at 11 percent. Women in rural areas do so. Adults ages 25–64 and are far less likely than men to have a formal those with a higher level of education are account: the gender gap is almost 10  per- also more likely to have an account. For centage points. 16 Figure Account penetration by individual characteristics, 2012 2.3 80 formal nancial institution (%) Those with an account at a 60 40 20 0 High Q4 Q3 Q2 Low Urban Rural 15–24 25–64 65+ Primary Second- Tertiary or less ary or more Male Female While mobile phone Income quintile Locality Age Education Gender penetration is high in Source: Demirguc-Kunt and Klapper 2013. Zambia, use of mobile financial services is still very low Figure Use of mobile financial services, 2011 2.4 20 in the past year to pay bills or Adults using a mobile phone send or receive money (%) 15 10 5 0 Zambia Rest of SADC Rest of SADC Rest of Rest of lower Rest of (excluding South Africa) Sub-Saharan Africa middle-income countries developing world Source: Demirguc-Kunt and Klapper 2013. The gap in account ownership between in Zambia, use of mobile financial services Zambians in urban versus rural areas persists is still very low. According to data from the even when controlling for gender, education, Global Findex, 62 percent of adults in Zam- age, income, marital status, and employment bia report owning a mobile phone but only status. Econometric analysis using the Global 5 percent of adults use mobile financial ser- Findex confirms that rural versus urban vices to pay bills or send or receive money residency is a statistically significant deter- (figure 2.4). This compares with 54 percent minant of account ownership.7 Similarly, the penetration among adults in the rest of Sub-­ differences in account ownership identified Saharan Africa overall for mobile phones by comparing averages by gender, education, and 16 percent for the use of mobile finan- age, and income are also statistically signifi- cial services. Within Sub-­Saharan Africa the cant in a multivariate econometric analysis. use of mobile financial services varies greatly, as high as 68  percent in Kenya, due to the Mobile financial services widespread use of M-PESA. In the other Mobile financial services have emerged as an SADC member countries 8 the average use alternative to traditional banking in many of mobile financial services is 10 percent, or developing countries and allow people who about twice as high as in Zambia. are otherwise excluded from the formal Among those who use mobile finan- financial system to perform financial trans- cial services in Zambia, most also have an action relatively cheaply, securely, and reli- account at a formal financial institution. ably. While mobile phone penetration is high 8. Global Findex data are unavailable for SADC 7.  Regression results are available on request. member countries Namibia and Seychelles. 17 ZAMBIA ECONOMIC BRIEF—FINANCIAL SERVICES: REACHING EVERY ZAMBIAN While 52  percent of adults in Sub-­ S aharan of adults report having borrowed from a store Africa who use mobile technology to transfer over the same period (figure 2.7). In this Zam- money are otherwise unbanked, that percent- bia is not very different from the rest of the age is just 20  percent in Zambia. This may developing world. Globally, 9 percent of adults on the one hand be due to the early devel- report that they borrowed from a formal opment stage of mobile financial services in financial institution in the past 12 months. the country and the fact that early adopters In contrast, the share of adults who have bor- of new technologies tend to be richer, more rowed informally is many times higher, with educated individuals who are also more likely 42  percent of Zambians reporting to have to have a formal account. The relatively high borrowed from family and friends in the past cost of mobile services may also contribute to year. The importance of friends and family as The most common their low use, as suggested by the comparison a source of loans holds universally except in way of saving in with other Sub-­ S aharan African and SADC high-income economies (World Bank 2013a). Zambia is through countries (figure 2.5). On the other hand, Zambia’s proportion of those borrowing from this might be because mobile financial ser- family and friends, while similar to the rest of informal means only vices in Zambia are often offered in conjunc- Sub-­Saharan Africa, is much higher than in tion with an account at a bank (see below). other developing countries. People borrow for a variety of reasons. Saving and borrowing Data from the Global Findex show that in In Zambia 32 percent of adults save, in line Zambia the most common reason is to pay with the global average in developing coun- school fees, which 3 percent of adults report tries. Of adults who reported saving in Zam- (figure 2.8). This is followed by loans for bia in the year prior to the survey, 37 percent emergency and health purposes, purchase of report having used a formal account and home, home construction, and a funeral or 19 percent report having used a community wedding. People may also borrow for other savings club only (figure 2.6). The most com- reasons not captured in the survey, such as mon way of saving, however, is through infor- starting a business. In contrast to the rest of mal means only (44 percent). Informal saving Sub-­Saharan Africa and indeed other devel- includes saving with a person outside the oping countries, reported reasons for loans household, assets such as gold or livestock, or are very low. In the rest of the developing keeping it in the home. Savings in the form world, emergency or health purposes are of livestock and crop output are common in the most commonly reported reasons for an rural areas of Zambia. outstanding loan (11  percent), followed by As in the rest of Sub-­Saharan Africa, Zam- school fees (5 percent). bians rely primarily on family and friends for credit. Just 6 percent of adults in Zambia What are the barriers to financial inclusion? report having borrowed from a bank, credit According to the Global Findex database, union, or MFI in the past year while 7 percent nearly 90 percent of adults without accounts Figure Cost and use of mobile money 2.5 Number of mobile money transactions 25 Tanzania 20 Kenya per capita, 2013 15 10 5 Botswana Malawi Zambia Namibia Mozambique Madagascar 0 0 5 10 15 20 Cost of 40 calls per month prepaid, average across all mobile network operators, 2013 ($) Source: Financial Access Survey (IMF) and Research ICT Africa. 18 Figure Formal and informal savings, 2011 2.6 Saves using informal means only (not formal or community) Saves using community savings clubs only Saves using formal and community savings club Saves at a formal nancial institution only 30 any money in the past year (%) Adults who reported saving 20 10 About 42 percent of 0 Zambia Rest of Rest of lower Rest of Zambians borrowed Sub-Saharan Africa middle-income countries developing world from family and Source: Demirguc-Kunt and Klapper 2013. friends in the past year, similar to the Figure Sources of credit, 2011 rest of Sub-­Saharan 2.7 Family and friends Bank Another private lender Store Employer Africa but much 50 higher than in other Adults who reported borrowing 40 developing countries in the past year (%) 30 20 10 0 Zambia Rest of Rest of lower Rest of Sub-Saharan Africa middle-income countries developing world Source: Demirguc-Kunt and Klapper 2013. Figure Reasons for loans, 2011 2.8 Funeral or wedding Home construction Purchase of home Emergency or health School fees 20 Adults with an outstanding loan for purpose speci ed (%) 15 10 5 0 Zambia Rest of Rest of lower Rest of Sub-Saharan Africa middle-income countries developing world Source: Demirguc-Kunt and Klapper 2013. in Zambia mention not having enough money is the high cost of maintaining an account. as a reason for not having an account (fig- Half of those without accounts in Zambia ure 2.9) and 30 percent without an account report that they do not have an account cite this as the only reason. This is in line because it is too expensive. This proportion with evidence from developing countries is higher than for adults without an account overall. The second most reported barrier S aharan Africa and twice in the rest of Sub-­ 19 ZAMBIA ECONOMIC BRIEF—FINANCIAL SERVICES: REACHING EVERY ZAMBIAN Figure Self-reported barriers to formal account use, 2011 2.9 Lack of trust Too far away Lack of necessary documentation Too expensive Not enough money reasons behind not having an account (%), 20 Non-account-holders reporting of multiple answers permitted 15 10 5 People who are poor, 0 young, unemployed, Zambia Rest of Rest of lower Rest of Sub-Saharan Africa middle-income countries developing world out of the workforce, Source: Demirguc-Kunt and Klapper 2013. less educated, or living in rural areas as high as that for adults without accounts Lay of the land of the supply side of are less likely to have in developing countries on average. A third financial inclusion a bank account of non-account-­ holders in Zambia also cite Zambia’s banking sector is small. The country lack of documentation as one of the main has fewer bank accounts and bank branches reasons for not having an account, on a par per capita than other SADC countries and with the average in Sub-­ S aharan Africa. than its economic and geographic peers Zambian respondents are less likely than (table 2.1). The Zambian banking system is the unbanked in other Sub-­ S aharan coun- characterized by high interest rates, and high tries to cite distance, or lack of trust, as a fees and other costs of banking services, all of reason. which create significant barriers to access for An econometric analysis of Global Fin- individuals. Outstanding commercial bank dex data finds that across countries cost deposits have averaged around 27 percent of as a self-reported barrier is correlated with GDP in Zambia, 9  percentage points below objective measures of cost. This analysis the regional average and 21  points lower considered country-level characteristics and than other lower middle-­ income countries. policies as well as individual characteristics MFIs still play a minor role in Zambia.9 As to explain whether individuals had a for- of 2012, MFIs shared about 100,000 clients mal account and used it. The analysis found across 33 registered MFIs that can be placed that a higher level of account ownership is in two broad categories: development ori- associated with a better enabling environ- ented and consumption lending, the latter of ment for accessing financial services, such which are often referred to as “payday lend- as lower banking costs, greater proximity ers.” Neither of these two groups is thriving. to financial service providers, and fewer The market for payroll-based consumer lend- documentation requirements to open an ers is almost saturated, given the relatively account. At an individual level, people who low numbers of salaried workers in Zambia.10 are poor, young, unemployed, out of the Almost 90 percent of the microfinance sec- workforce, less educated, or living in rural tor’s portfolio is managed by consumption- areas are less likely to have an account. lending MFIs, which are based mainly in The analysis concluded that policies tar- Lusaka and the Copperbelt. Table 2.2 lists geted at enhancing financial inclusion— such as offering basic or low fee accounts, 9.  The liberalization of the banking sector in the granting exemptions from onerous docu- 1990s and the consequent cost-saving closure of bank mentation, allowing for agency banking, branches in rural and semi-urban areas offered an and using bank accounts to make govern- opportunity for MFIs to expand, but they have never ment payments—are especially effective been able to capitalize on these moves. among those people who are most likely to 10.  The total number of salaried workers is about be excluded: the poor and rural residents 700,000, or 6 percent of the population according to (Allen and others 2012). the World Development Indicators. 20 Table Banking sector outreach 2.1 Bank accounts per 1,000 adults Bank branches per 100,000 adults Bank deposits to GDP (%) Zambia 274 5 27 SADC (excluding South Africa) 500 6 46 Lower middle-income countries 640 11 48 Sub-­Saharan Africa 464 5 36 Source: Global Financial Development database. Table Top 10 MFIs in Zambia More than 2.2 MFI Report date Loans ($) Borrowers Deposits ($) Depositors 60 percent of all FINCA–ZMB 2013 16,363,318 45,559 — 84,178 commercial bank CETZAM 2009 2,513,353 5,423 394,146 5,423 MBT 2011 1,952,186 — 855,012 — branches are in AMZ 2012 1,770,791 10,579 257,688 — Lusaka and the PRIDE–ZMB 2006 1,510,279 3,687 158,658 4,930 Copperbelt PFSL 2006 599,835 2,851 — 0 Harmos 2009 501,993 3,366 114,405 — MLF Zambia 2012 311,868 3,228 0 0 E-MFI 2008 154,030 984 0 0 Note: Development (or deposit-taking) MFIs include FINCA–ZMB, CETZAM, and PRIDE–ZMB. Salary-based lenders include MBT, AMZ (Agora Microfinance Zambia Ltd), PFSL (Pulse Financial Services Limited), Harmos, MLF Zambia (Microloan Foundation Zambia), and E-MFI (Empowerment Micro Finance Institution Ltd). Source: MixMarket. the main players in microfinance, based on community-based non-deposit-taking non- data from MixMarket, to which not all insti- governmental organizations are active in tutions report. The recent introduction of some rural areas. interest rate caps led to the closure of four MFIs, yet new MFIs are still entering the sec- The geography of financial inclusion tor. Notably in late 2012, Zambia’s Post Office Financial service access points are highly was licensed as ZamPost Microfinance Zam- concentrated in Lusaka and a few other bia Limited. densely populated urban centers along the Unlike in many other Sub-­ S aharan coun- main trade corridors (figure 2.10): more tries, financial cooperatives are not com- than 60  percent of all commercial bank mon in Zambia. There are only 30 savings branches are in Lusaka and the Copperbelt. and credit cooperatives registered at the Conversely, 25 percent of districts12 in poorer Department of Cooperatives, and it appears provinces are not served by any branch of that financial cooperatives do not enjoy a either a commercial bank or an NBFI regu- good reputation because of a lack of ini- lated by BoZ. The imbalance in coverage is tiative and absence of good internal gover- less severe among mobile agents and post nance (ILO CoopAfrica 2009). Apart from office branches, of which 51  percent and the MFIs, the nonbank financial institution 48 percent respectively are present in Lusaka (NBFI) subsector includes 7 leasing compa- and the Copperbelt. nies, 4 building societies, the Development Multiple factors explain this dearth of Bank of Zambia, the National Savings and financial access points. Zambia’s low popula- Credit Bank (or NatSave, a government- tion density in rural areas makes it costly to owned savings bank), and 61 bureaus de serve customers outside the few urban centers change.11 These NBFIs tend to special- because it is difficult to reach economies of ize in niche markets and so have limited inf luence. Apart from the NBFIs, small 12.  This figure is an approximation and may not be factual due to the recent increase in the number of 11.  Zambia also has a credit bureau, the Credit Refer- districts as part of decentralization. The number of ence Bureau Africa Limited. districts as of April 2014 stands at 105. 21 ZAMBIA ECONOMIC BRIEF—FINANCIAL SERVICES: REACHING EVERY ZAMBIAN Figure Map of financial service access points, Zambia 2.10 Trade corridor Surface road International border Commercial bank Consumer MFI Development MFI Mobile NatSave Post of ce Population Less than 800,000 Zambia’s low 800,000–1 million population density 1–1.5 million in rural areas makes 1.5–1.75 million More than 1.75 million it costly to serve customers outside Lake the few urban centers because it is difficult to reach economies of scale Source: BoZ, Census, MixMarket. scale.13 These difficulties are compounded by A strong branch network across the country the relatively high incidence of poverty among has proved valuable for ZamPost, especially the rural population (figure 2.11). The figure for its domestic remittances services. ZamPost shows that the number of physical bank and has gained a leading position in domestic NBFI branches increases as provinces become remittances by leveraging its network of more more densely populated and developed. than 200 branches and 30 agents in 105 dis- Despite the challenges, some banks have tricts. SwiftCash is the preferred instrument expanded their branch networks outside the for domestic financial transfers. In a move to main urban areas to reach the unbanked diversify its financial base using its recently population in rural areas. Among the first to acquired MFI license, ZamPost has started adopt this strategy was NatSave, established providing salary-backed loans and plans to by the government in 1972 with the explicit venture into group and small-business lending mission to serve rural areas especially and to and to start taking deposits. mobilize savings. NatSave maintains a sizable branch network in rural areas with more than Innovations in financial inclusion half its 33 branches outside urban centers, and Over the past years Zambia has witnessed plans to further expand its business by setting improvements in its communication technol- up 50 new branches over the next five years. ogy. Since the mid-2000s, mobile phones and NatSave offers savings products, with differen- Internet connections have become increas- tiated fees for urban and rural costumers, as ingly more common (figure 2.12), and as well as personal and commercial loans. Payday of 2012 nearly 80 percent of the population lending accounts for the vast majority of the had a mobile subscription, according to the lending portfolio, despite the recent growth of Zambia Information and Communications financing of equipment purchases. Authority. Nevertheless, major infrastructure challenges persist. The lack of electricity with 13.  For instance, the setup costs for a bank branch which to power mobile phones and cell tow- are estimated at $300,000–$500,000, which is high ers, limitations in mobile network coverage, for the region. and poor roads and transport networks are 22 Figure Financial service access points— development challenges 2.11 0.8 Copperbelt Lusaka 0.6 Development index Central Southern 0.4 Northwestern Luapula Northern 0.2 Eastern Western 0 0 20 40 60 80 100 120 Since the mid-2000s, Population density mobile phones and Note: The population density and development index are plotted on the horizontal and vertical axes respectively. The size of the circles captures the number of financial service access points in a province. Internet connections Source: BoZ, Census, and SNDP. have become increasingly more Figure Growth in technological infrastructure common, and as of 2.12 Mobile cellular subscriptions Fixed broadband 2012 nearly 80 percent Internet users Internet subscribers 80 0.16 of the population had a mobile subscription 60 0.12 Per 100 people Per 100 people 40 0.08 20 0.04 0 0.00 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Source: World Development Indicators. all hindrances, especially in rural areas. The also offered by some commercial banks as authority’s recent decision to build 169 tele- additional services for existing customers. com towers in rural unserved areas and share Typically banks extend access to deposit their use across all mobile operators is a posi- accounts, and sometimes savings accounts, tive first step. via mobile phone and Internet, to reduce The development of technological infra- long lines at their branches (table 2.3). The structure offers new opportunities for mobile large success of First National Bank’s e-wal- financial services. In late 2011, mobile net- let among urban consumers is indicative of work operators (MNOs), specifically Airtel strong demand for simpler and more acces- and MTN, started offering mobile money sible banking products. Prepaid debit cards services that can be used to pay bills, make are another example of flexible products. relatively small domestic money transfers They are becoming available at most banks, (below $1,000), and purchase airtime. Com- but still involve standard KYC requirements pared with commercial banks, MNOs have and are therefore mainly used by existing lighter “know your costumer” (KYC) require- urban account holders, rather than by under- ments to open an account, compensated by served groups. limits on the size of transactions and total Technological innovations also allow for balances.14 Mobile financial services are the adoption of new banking models, such as agency banking. Commercial banks are 14.  Typically, a National Registration Card, driver’s collaborating with MNOs and other partners license, or voter’s license is sufficient, without the in expanding more cost-effectively. MNOs need for proof of address. are increasingly expanding the number of 23 ZAMBIA ECONOMIC BRIEF—FINANCIAL SERVICES: REACHING EVERY ZAMBIAN Table Access to mobile and Internet banking 2.3 Accessible via Financial institution USSD Desktop/laptop iOS Android BlackBerry First National Bank Yes Yes Yes Yes Yes Barclays Bank Yes Yes Yes Yes No Zanaco Yes Yes No No No Investrust Yes No No No No Standard Chartered Yes Yes No No No StanBic No Yes No No No Cavmont No Yes No No No Ecobank Yes Yes No No No The collaboration United Bank of Africa Yes Yes No No No between banks and Access Bank Yes Yes No No No mobile network USSD = Unstructured Supplementary Service Data. Source: Information on website of each individual bank. operators has large potential, agents for mobile financial services, with Zoona. However, their services are not nec- allowing for a wider mobile money agents present in all districts, essarily cheap: while SwiftCash tariffs came range of products though they do not seem to be operational down last year to match Zoona’s fees, postal while reducing at all times, such that service reliability is money orders remain very expensive, in the liquidity‑management still a concern (see also Bankable Frontiers 7–10 percent range.15 Associates 2012). The collaboration between The other major domestic payment ser- issues banks and MNOs has large potential. On vice is provided by Kazang, whose mobile the one hand, it allows for a wider range of POS systems are purchased by merchants for products and, on the other, reduces liquidity- facilitating payments. Kazang has around management issues. Yet the success of these 3,000 merchant outlets—2,000 of them partnerships is not guaranteed. After pulling active daily—with the majority of their trans- out of its collaboration with Zanaco, ZamPost actions being cellular airtime purchases, is now working with United Bank of Africa along with a growing bill payment business to offer prepaid cards. Zanaco has launched for electricity and television service. Kazang its own network of agents, and while they are recently launched a money transfer service, still few (only 160 agents across 90 districts) Kazang Money, and has 130 outlets that can and not operating at full capacity, their num- do money transfers. A new player is Roraima bers are expected to grow steeply. Data Services, which is also the provider of Technology improvements have brought the SwiftCash platform. Roraima is promot- groundbreaking solutions in retail payments, ing the Cash4Africa money transfer service especially for domestic money transfers and in Zambia, with the Zambian Cooperative bill payments. New and competitive players Federation as a distribution partner. Com- have entered this segment and are steadily mercial banks have played a marginal role expanding their range of services and cli- in retail-payment channel innovations. One ents served. Regulated as a designated pay- exception is First National Bank, which is ment system, Zoona is becoming the main introducing new terminals (mini- or “slim- competitor of SwiftCash, ZamPost’s money line” ATMs), but progress remains hampered transfer service. Both offer over-the-counter by a lack of cash-in/out agents. services via their 200 post office branches Some commercial banks have made an and 320 agents respectively, and Zoona’s mar- effort to develop low-end products, although ket share has reportedly increased to around progress has been slow and availability is 40  percent of transactions. Zoona can rely limited. Zanaco has launched two products on a sizable network of agents and a leaner structure resulting in lower transaction costs. 15.  International remittances are serviced largely Consumer trust in both ZamPost and Zoona by Western Union, which has a partnership with the agents is high, although customer loyalty to Post Office, and MoneyGram, but these services are ZamPost seems to be mainly among older expensive and have smaller, mostly urban, agent adults, while younger adults tend to favor networks. 24 in this segment: Xapit and Cultiv8. Though use of digital financial services in place of similar, the two products are differentiated cash. The growing penetration of cellphone by the fact that Cultiv8 is designed specifi- use and airtime sharing, even in rural areas, cally to be integrated with MNOs. It already and the growing popularity of alternative works with Airtel Money and will soon be cash transfer and payment services such as available for MTN’s customers. Barclays’ Zoona and Kazang demonstrate that users Tonse accounts are aimed at the low end, and are willing to try new technologies if the ser- the bank is apparently speaking with a major vice is convenient and the value proposition cotton producer about providing farmer sala- is clear. ries via Barclay’s debit cards, but whether In Kenya the popular M-PESA tagline this will be launched, and whether there will of a cheaper, easier way to “send money be enough ATMs or cash-in/out agents in home” resonated with the many Kenyans Service providers rural areas to properly service the farmers, who worked in cities but retain strong ties need to develop is unclear. to their home villages. The Zambian cul- products and services tural context differs from Kenya though, and that cater to the Is technology a game changer for people’s financial pain points focus more on financial inclusion for individuals in issues like inconvenience of paying bills and unique needs of the Zambia? documentation requirements for opening rural, low-income In the last decade new technologies have accounts. In addition, there may be other market, and not vastly improved the potential for expanding issues at play, including saturation and busi- just compete for financial inclusion: as seen, transaction costs ness models. While there have been posi- the same small and geographic distances have tradition- tive developments in Zambia, most service group of corporate ally been some of the main impediments to providers still need to develop products and and high‑end expansion. Technologies such as electronic services that cater to the unique needs of the payment solutions, mobile technology, credit rural, low-income market, and not just com- clients in Lusaka information systems, and universal individ- pete for the same small group of corporate ual identification can help overcome some of and high-end clients in Lusaka (box 2.3). these traditional barriers. Given Zambia’s low There is a tendency to assume that the gov- population density, especially in rural areas, ernment needs to conduct broad financial technological innovations and payment solu- education programs to stimulate demand. tions have an important role in harnessing While financial education would certainly be the country’s financial inclusion potential. useful, providers can also tailor their prod- This part now describes recent developments, ucts and messaging better, so that they meet challenges, and opportunities in more detail, the needs of the population. drawing on international examples as appro- Despite the widespread introduction of priate. It ends by highlighting policy consid- new mobile e-payments in the last few years, erations for the future. there has been limited take-up so far and providers have yet to achieve scale. While Electronic payments the two MNOs—Airtel and MTN—claim to While Zambia has lagged its neighbors in the have almost 3.1 million and 2 million mobile growth of electronic payments (e-payments), money customers, respectively, most of the sector is slowly expanding and innovat- them are only registered, not active, custom- ing, and citizens are starting to accept the ers. Customer awareness of the benefits of Box XacBank’s mobile banking challenges in Mongolia 2.3 In Mongolia, with a lower population density than Zambia, XacBank launched Amar mobile banking in 2009 to reach residents outside the capital of Ulaanbaatar. The Amar service is performing well, with over 123,000 clients, who have access to 845 agents and 1,108 merchants. As of mid-2013, the service was conducting over 50,000 transactions a month, worth $3.5 million. Despite its success, however, XacBank failed to understand its customers when it launched Amar and so suffered poor uptake. While it established a large agent network to serve customers, the initial service itself had limitations that lowered usefulness: it required a bank account to be opened, it imposed transaction limits that did not allow for salary payments, and the service did not allow for airtime top-up or bill payments, both of which were important to customers. The bank has since addressed these issues and improved service considerably, leading to much greater uptake and use. 25 ZAMBIA ECONOMIC BRIEF—FINANCIAL SERVICES: REACHING EVERY ZAMBIAN mobile money remains low; agents are little encouraged competitors to enter the market. used, poorly incentivized, and often illiquid; Another approach slowly being introduced in and both players have reportedly had plat- Zambia is the use of mini-POS systems that form problems. A few banks have introduced merchants and other vendors can use to eas- low-fee, low-KYC accounts that are proving ily take card payments.17 popular with consumers, but these types of Shared agent networks will be critical to services are not being broadly rolled out. allow broad coverage for financial service Other banks are looking to facilitate bulk providers. Reaching the many under- and mobile money payments to their corporate unserved rural areas of Zambia is an impos- clients who need to pay rural employees, sible task for any one player to achieve cost- which will play an important role in develop- effectively. Rather than competing for the Shared agent ing a viable system, but success will be highly same limited number of promising agents in networks will be dependent on the mobile money provid- a sparsely populated area, service providers critical to allow broad ers having a wide enough network of liquid can explore ways to cooperate at the agent agents in the areas served. level. Not only would this spread the costs coverage for financial It is critical that banks and mobile money of agent management across more provid- service providers providers work together to ensure a smooth ers, but it would also enhance the business rollout of such services. Use of mobile money case for the agents themselves, who will have and money transfer services for bill payments more services to provide to their customers. in Lusaka is gaining ground, but it is too early There are multiple ways of developing shared to say whether this will lead to greater use of agents beyond the use of retailers: the estab- mobile money or e-payments for person-to- lishment of service centers in district head- person money transfers, purchases, or savings. quarters where various e-government and An important payment service that has financial services can be accessed; enlistment not yet been properly developed in Zambia of selected teachers as reward for superior is low-value merchant payments, which con- performance; partnerships across various sumers interact with on a daily basis. Even agricultural dealers, unions, and coopera- consumers who use mobile money or bank tives; and shared use of a mobile banking van cards tend to cash out at an agent or ATM, that can visit the most remote areas regularly. and then use the cash to purchase goods. Government payments can play a cata- Achieving scale for a sustainable e-payments lytic role in providing volume and scale in sector will require convincing consumers as rural areas for financial service providers. well as merchants and retailers to use new The volume of government payments, from e-payment systems at the point of purchase, salaries to pensions and social cash transfers, and doing so will often involve links to exist- has the potential to add significant volumes ing POS and sales-tracking systems (for of transactions to service providers, and can larger merchants) and simple receipt-print- make a critical contribution to commercial ing capabilities (for smaller merchants). Few viability in rural areas. The Ministry of Com- merchants want to spend time and energy munity Development’s plan to start paying building up such capabilities, certainly not social transfers electronically is a welcome before seeing evidence of customer demand start. Currently 60,000 households in 18 dis- and benefit to their business. tricts are benefitting from the K70 or K140 One approach that has worked well in monthly transfers depending on eligibility, Kenya is the use of a third-party merchant with the target of reaching 189,000 house- payment company Kopo Kopo,16 which holds in 50 districts by the end of 2014. Trans- enables merchants to accept mobile money fers are currently entirely in cash and taking payments from multiple service providers, place bi-monthly to reduce transaction costs. and handles all back-end integration and Funds are transferred to a bank branch in settlement services on the merchant’s behalf. the district, to be picked up and distributed The use of payment aggregators like Kopo by school teachers. This is not only costly but Kopo has led to rapid uptake of mobile also time-intensive for the school teachers money for merchant payments in Kenya, and 17. ZipZap Mobile Payments, http://www.zipzap. 16.  Kopo Kopo, http://kopokopo.com. co.za. 26 The Connected Farmer Alliance as an example of digital financial services in Box agriculture 2.4 The Connected Farmer Alliance (CFA) is a public–private partnership that seeks to promote commercially sustainable mobile agriculture solutions and increase productivity and revenues for 500,000 smallholder farmers in Kenya, Mozambique, and Tanzania, including 150,000 women. It also aims to increase revenues for agribusinesses and agriculture value-chain service providers. Launched in 2012, CFA is a partnership between the U.S. Agency for International Development, Vodafone, and TechnoServe. It works with farming communities and supply-chain businesses to develop and scale mobile applications that will enable rural households to make and receive payments securely, access other financial services such as microinsurance, and connect to local and multinational agribusinesses, especially those working in priority value chains of Feed the Future, the U.S. government’s global hunger and food security initiative. CFA’s workstreams include developing business-to-business services that lower transaction costs and reduce risks for agribusi- nesses to source from smallholder farmers; designing, testing, and launching new mobile money services to allow farmers to save and invest their money; and helping farmers fully use the business-to-business and mobile money services developed in the first A determined two phases by developing a new generation of mobile value-added services targeting agriculture. government effort is To date, CFA is facilitating communications and transactions for some 6,300 smallholder farmers and three agribusiness needed to move its clients. In Tanzania, the program is working with a flower seed exporter and a rice processor to facilitate management and financial transactions disbursement of loans to farmers and outgrowers. And in Kenya, it is working with a multinational beverage firm to manage information and communication with around 5,000 mango and passion-fruit farmers. from cash to electronic to reach the “last mile” and involves considerable insecurity when could provide examples for Zambia in the funds are picked up and stored in the developing solutions (box 2.4). Indeed, schools before they are distributed. Inter- similar ICT-based innovative products are national experience suggests that electronic piloted in Zambia by SANGONeT, a South government transfers are especially powerful A frican nongovernmental organization, if they come with the additional feature of a and International Development Enter- basic bank account that can be used for sav- prises (iDE)-Zambia, with the support of ings and, eventually, credit. It is important, the Gates Foundation. “Lima Links” is the however, that these accounts are not associ- name of the mobile application launched in ated with fees or minimum balances. 2013 providing a wide array of information Electronic payments in the agriculture to vegetable farmers, from weather data to sector could contribute to the move from market prices, to help raise their agricul- cash to electronic payments. Smallholder tural productivity and bargaining power. farmers, who number 1.2  million house- The Ministry of Agriculture and Livestock holds, typically operate entirely with cash, plans to pilot an e-voucher system in the from input payments to receiving payments coming months under the Farmer Input for their products (CSO 2011). Not only Support Program. does this entail costs of cash distribution A determined government effort is needed for agricultural companies, it also presents to move its financial transactions from cash risks to recipients in terms of safety and to electronic to reach the “last mile.” Efforts security. Some firms have experimented here should in the long run include incom- with vouchers for smallholder payments, and ing payments, such as taxes and fees, as well some efforts are under way to engage agro- as outgoing government-to-person payments, dealers in digital payment services, but it is including pensions, grants, and salaries. unclear how successful these programs will Some initiatives have started, such as the be or whether they will tie in to the greater Revenue Authority’s efforts at e-payments national payment system. and Kitwe City Council’s project with MTN Some specialized programs in this area to collect levies from bus operators and trad- have been launched in other countries, ers via mobile money, but it would be useful such as the Connected Farmer Alliance18 in for national and local governments to work Kenya,  Mozambique, and Tanzania, which together on developing uniform solutions. The Single Treasury Account being set up at 18. Connected Farmer A lliance, http://w w w. the real-time gross settlement system to facili- technoser ve.org/our-work/project s/connected tate government payments will be useful for -farmer-alliance. that. (See annex B.) 27 ZAMBIA ECONOMIC BRIEF—FINANCIAL SERVICES: REACHING EVERY ZAMBIAN From payments to other financial services collected by M-PESA, Safaricom and Com- New payment service providers can be impor- mercial Bank of Africa launched M-Shwari, tant in fostering financial inclusion.  For a product that allows M-PESA customers to many of the unbanked, money-transfer and save and borrow. The loan underwriting is payment service providers will be their first— entirely based on the M-PESA transaction often only—link to the formal financial sys- history of the customer. With about 33,000 tem. As payments are typically made at a local loans approved every day, more than 2 mil- agent equipped with either a mobile phone lion subscribers, and nonperforming loan or some form of payment terminal, users can rates of 2–3 percent, it is clear that there is easily send cash to far-flung contacts and pay demand for such products and that they can their key bills, such as utilities. What is criti- be commercially viable. In addition, Econet With their widespread cal is the trust that these agents and payment in Zimbabwe has recently announced its own presence in rural services have built up within their commu- credit product alongside its mobile wallet and poor areas, nity; people often know the agents, who may savings service for EcoCash customers. (Eco- be local retailers or other trusted individuals, Cash Save and EcoCash Loans are offered in post offices can and the service itself is straightforward, fast, partnership with Steward Bank.) be among the convenient, and low cost. When it comes to Leveraging existing infrastructure such leaders in increasing addressing the specific needs of users—in as post offices also provides opportunities to financial inclusion this case for simple, reliable, and cheap pay- increase financial inclusion cost-effectively. ments—mobile operators and newer, smaller With their widespread presence in rural and players such as Zoona and Kazang typically poor areas, post offices can be among the do a better job than traditional banks at leaders in increasing financial inclusion. In understanding their customers. Zambia, ZamPost has the physical infrastruc- Providing basic payment services can ture to reach individuals in rural areas cur- be the first step into the financial system rently not served by commercial banks, and and open access to other financial services. can leverage its popular domestic remittance Kazang has introduced a stored wallet prod- service (SwiftCash) and its recently acquired uct, although it is too early to know what deposit-taking MFI license to start offering the uptake will be. In 2012 Zoona started additional financial products to its clients. to offer a payment solution to distributors Provision of financial services through the of SAB Miller, the national brewing com- post office does not necessarily have to be pany. The distributors, who are small and through a fully fledged postal bank but can medium enterprises, can deposit funds at take several forms, including a partnership Zoona agents or participating banks. Zoona model with a commercial bank, as in Brazil is planning to add other distribution chains (box 2.5). This is based on the concern that and start servicing the distributors’ suppliers. post offices may not have the right skills or To support the business of the distributors, capacity to create a postal bank or to develop Zoona has started to partner with financers and manage financial products, especially to offer working capital and expansion loans. credit products, themselves—but partner- The data that Zoona and other payment pro- ship models can often help. At the moment, viders are collecting on payments made by ZamPost’s microfinance subsidiary primarily its users are a powerful means for assessing offers salary-backed loans with low default creditworthiness for financial institutions as risk, but as it plans to expand its loan prod- they allow them to track incoming and out- ucts its credit risks will likely increase. For going payments on a daily basis. ZamPost it would be worthwhile assessing the Another example of data use comes from options. Tanzania, where First Access developed a platform that collects mobile payment data to Agency banking predict credit risk for borrowers in informal Agency banking provides an opportunity markets and to create a credit score, as an for financial institutions such as commercial alternative to records from credit bureaus.19 banks to extend financial services into rural Based on the extensive mobile money data areas cost-effectively. Given the high cost of establishing bricks-and-mortar branch net- 19.  First Access, http://www.first-access.org/. works, it is more sensible for banks to partner 28 Partnership models can be successful for increasing financial inclusion through Box the post office 2.5 Post offices around the world have adopted different business models and different types of financial services. Most of them provide some cash-merchant services, including remittance services either on behalf of remittance service providers or using their own proprietary product. In some countries, post offices also offer financial services beyond cash-merchant services, includ- ing deposit and savings accounts and credit products. To offer those products post offices can either go alone or partner with a commercial bank (Berthaud and Davico 2013). The most successful postal financial inclusion model on the number of unbanked people eventually entering the formal financial system is Banco Postal in Brazil. More than 10 million accounts were opened between 2002 and 2011 after Banco Postal was set up under a partnership with an existing financial institution (Ansón and Bosch Gual 2008). This partnership model provided Brazilian Post with financial sector expertise and an investor in modernizing its network and infrastructure. It also allowed Brazilian Post to earn fees and commissions on financial products offered—without taking on the risk. An appropriate consumer protection with a third-party retailer or company autho- has pursued a “test and learn” approach to framework is rized to provide a select number of services digital innovation in financial services and necessary to ensure on behalf of the bank. These services typi- is now formalizing the regulatory framework cally start with simple payment services but to create clarity for all participants. It will be public trust in an can also include account opening and depos- important to ensure that bank and nonbank e-money ecosystem its as well as loan repayments. In Kenya, service providers are treated equally so that the agency banking model, as pioneered by there will be a level playing field for third- Equity Bank (box 2.6), has proved success- party agents conducting similar functions. It ful in extending financial services to the will also be important for BoZ to balance the rural and lower income population, profit- need for new payment providers to be viable ably. In Zambia several financial institutions and suitably risk averse, while not unduly bur- are considering—or starting to be engaged dening them with excessive capital require- in—agency banking. Although BoZ consid- ments and fees that will keep smaller—often ers approval for agency banking case by case, more innovative—players out of the market. a clear regulatory framework will be impor- An appropriate consumer protection tant in creating a supportive environment framework is necessary to ensure public trust in the future. And for agency banking to in an e-money ecosystem. Government and have considerable impact on financial inclu- financial service providers need to make sion, banks will need to engage closely with sure that individuals are educated about their new potential customers, understand their options and clear on dispute-resolution their lives and needs, and design products procedures, and that appropriate safeguards accordingly. are in place to address (among other ele- ments) data privacy and security concerns. Toward a viable e-money ecosystem This is especially important as the expansion A clear and conducive regulatory framework of e-money and e-payments will bring those is important for e-payments to grow. BoZ with weaker financial capabilities into the Box How Kenya’s Equity Bank was successful at reaching the lower end of the market 2.6 Equity Bank was founded as Equity Building Society in 1984. Its transformation from a technically insolvent mortgage financer in 1993 into a fast-growing microfinance bank and then a commercial bank now listed on the Nairobi Securities Exchange and Uganda Securities Exchange has attracted widespread attention. Its growth was due to an innovative business model that focused on providing financial services to underserved segments largely ignored by traditional commercial banks. It succeeded by tailoring its products to its customers, including being less restrictive on collateral for small loans and moving its branches and, later, agents—existing businesses licensed to provide selected products and services for the bank—closer to its customers. Refocusing its operations around this new customer base and bringing in new standards of service won Equity Bank a large and loyal customer base. In expanding financial inclusion across Kenya, it also generates sustainable profits. Equity Bank agents today can perform a range of services on behalf of the bank, including opening accounts, accepting deposits, paying out withdrawals, and accepting bill payments. In recent years, Equity Bank has expanded beyond Kenya into other East African countries. Source: World Bank 2013a; information at http://www.equitybank.co.ke/. 29 ZAMBIA ECONOMIC BRIEF—FINANCIAL SERVICES: REACHING EVERY ZAMBIAN financial system. Without such a framework participants in the new regulations if it in place, consumers could lose trust in the wants to see the sector grow. From the gov- system. ernment side, signaling its commitment to Addressing the lack of financial services e-payments—by way of supporting digital sig- in rural areas will require the full interoper- nature programs and urging large-bill recipi- ability of bank and nonbank financial service ents such as utilities to accept digital receipts providers. Beyond BoZ’s large-value real-time as proof of payment—has powerful potential. gross settlement system, the ZECHL clear- The national identification system being ing house, and the ZAMLINK ATM switch developed also has great potential if it is for some of Zambia’s smaller banks, there is made easily available online to all service pro- no interconnection between financial ser- viders in the country. While the vast majority Addressing the lack vices providers. BoZ’s planned national pay- of Zambians have a National Registration of financial services ments switch has the potential to address Card, the cards are not easily verified and are in rural areas will this interoperability challenge, but must susceptible to fraud. By developing a robust, fully include nonbank payment service pro- online database of secure identification require the full viders. Cost-effectively serving low-income, cards that can be easily verified, financial interoperability of rural populations will need to include access service providers can much more easily—and bank and nonbank not just to new technologies such as mobile cheaply—conduct KYC and credit checks financial service phones, ATMs, POS devices, and online ser- on potential customers, streamlining the providers vices, but also across the many parties that account-opening process and making access people want to deal with financially, whether more convenient to users. The greater effi- friends and family, employers, merchants, ciency can also go a long way in reducing the schools, utilities, or government. No one pro- cost of service provision. vider or sector can justify an investment in all these elements or handle the contractual Conclusions requirements of dealing with so many play- Technological innovations and payment solu- ers. Rather, multiple players must be able to tions will be an important enabler in bridg- interconnect where necessary to provide citi- ing the last mile in financial inclusion in zens with a wide range of services, and must Zambia, one of the least densely populated be able to do it on fair and equitable cost and countries in Sub-­ S aharan Africa. Establish- access terms. Having a national payments ing bank branch networks across the coun- switch that all players can connect to will also try will not be realistic beyond a certain aid service providers in establishing partner- point given the need for economies of scale. ships for developing solutions by removing Instead, new developments in the payments the need for customized, and costly, platform landscape—mobile financial services, agency integration efforts. It will also be important banking, the leveraging of access points set for the national switch to be able to route and up by payment providers or the post office, track transactions based on mobile phone government payments—can all help address numbers, for those users who do not have for- this challenge. Electronic payments are often mal accounts with standard routing numbers. the first entry point into the financial system, Government can support broad-based and the data generated by them can be pow- financial inclusion and electronification erful for accessing other financial products. of payments by clearly committing to these It will be important to support these innova- goals. BoZ’s plans to adopt a tiered KYC tions and the development of added services framework, agency banking regulations, through an enabling regulatory framework and a new e-directive are positive moves for that is sufficiently clear and that provides a furthering financial inclusion, especially level playing field between bank and non- in rural areas. However, all these initiatives bank service providers. Implementing the have been in the making for a relatively long agency banking regulations, the e-directive, time. It will therefore be important that they and the tiered KYC framework will be impor- move toward fruition without further delay. tant here. As indicated by several private players, it will Zambia has potential for growth in elec- also be important for BoZ to consider all tronic payments, which will play a key role in third-party players as valid payment-system financial inclusion, but this growth will not 30 necessarily occur on its own without a mul- Leveraging existing infrastructure such tipronged approach to establishing a robust as post offices also provides opportunities to and sustainable ecosystem. Although elec- increase financial inclusion cost-effectively. tronic payments were introduced in Zam- ZamPost has the physical infrastructure to bia in 2001—six years before M-PESA was reach individuals in rural areas unserved by launched in Kenya—Zambia lags its neigh- commercial banks, and can leverage its pop- bors in the growth of electronic payments. ular domestic remittance service (SwiftCash) Still, the country shows signs that the tide and its recently acquired deposit-taking MFI may be turning. The increase in cellphone license to start offering additional financial use and airtime sharing even in rural areas products. The provision of financial services and the growing popularity of cash trans- through the post office does not necessar- fer providers and payment services, such as ily have to be through a full-fledged postal Zambia stands Zoona and Kazang, demonstrate that users bank; it can take several forms, including to benefit from a are willing to try new technologies if the a partnership model with a commercial coherent approach to value proposition is favorable. Yet service bank. This is based on the concern that furthering financial providers, regulators, and policymakers all post offices may not have the right skills or have to ensure that an enabling environment capacity to create a postal bank and develop inclusion by developing is developed. A key element of sustainability and manage financial products, especially a national financial will be in achieving scale, which will require credit products, themselves, while partner- inclusion strategy more interconnection and cooperation than ship models can often be advantageous. For seen right now. Moving forward with the ZamPost it would be worthwhile to assess the national switch project will be crucial in options. achieving greater interconnection and scale. Zambia stands to benefit from a coherent The development of shared agent networks approach to furthering financial inclusion through different strategies will further sup- by developing a national financial inclu- port financial service providers reaching sion strategy. While the regulatory stance of under- and unserved rural areas. BoZ has been broadly helpful, a clear over- The government has a catalytic role to play all framework would be beneficial. In other in furthering financial inclusion by moving cases, as for ZamPost and NatSave, it appears its financial transactions from cash to elec- that the government is essentially investing in tronic payments so as to provide the needed competing financial service providers. While scale to electronic payments. The sheer vol- multiple players can of course be supported, ume of government payments—from sala- the government should be strategic in how ries to pensions and social transfers—can these players use public funds to tackle the make a key contribution to the commercial low-income market, ensuring they comple- viability of financial services in rural areas, ment rather than cannibalize each other’s and can help them reach low-income house- efforts. Such a strategy would therefore help holds especially. In the long run, incoming the government think through long-run deci- payments, such as taxes and fees, should also sions, and could also help define a national be moved to the electronic channel. In the coordination structure for implementing the meantime, support can be provided for digi- financial inclusion agenda and an appropri- tal signature schemes to allow companies to ate monitoring mechanism to measure these accept digital receipts as proof of payment. initiatives’ success. 31 ANNEX A Economic Data Table Growth by main sectors, 2005–13 A1 (percent of GDP, unless otherwise stated; constant price = 2010) 2005–10 2011 2012 2013 Primary sector 6.8 0.6 1.7 –0.6 Agriculture, forestry, and fishing –2.0 8.0 6.8 –7.4 Mining and quarrying 20.5 –5.2 –2.7 5.9 Secondary sector 6.6 8.5 10.3 8.4 Manufacturing 4.5 8.0 7.2 4.5 Electricity, gas, and water 3.1 8.2 4.1 5.9 Construction 9.2 8.9 13.6 11.4 Tertiary sectora 9.5 7.8 7.1 8.6 Wholesale and retail trade 6.8 7.5 4.0 5.2 Restaurants, bars, and hotels 5.4 7.9 –2.6 2.2 Transport, storage, and communications 23.1 13.7 12.8 12.4 Financial institutions and insurance –0.2 4.9 12.0 12.2 Real estate and business services 7.8 2.9 3.7 3.1 GDPb 8.5 6.3 6.7 6.7 GDP less mining 6.6 7.0 7.0 6.1 Memorandum items (ZMK billions) GDP at current market prices 63,511.6 115,352.8 128,370.1 144,775.4 GNI at market prices 52,656.2 109,737.3 126,653.6 140,615.6 a. Includes community, social, and personal services and others. b. Includes taxes and less financial intermediation services indirectly measured. Source: Zambian authorities, IMF, and World Bank staff estimates. Table Central government finances, 2010 –14 A2 (percent of GDP, unless otherwise stated) 2014 2014 2010 2011 2012 2013 budget projected Revenue 15.6 17.5 19.1 18.9 19.0 19.2 Tax 13.1 15.6 15.0 14.7 14.7 15.6 Income taxes 7.1 9.2 8.0 6.8 6.5 7.2 Value-added tax 3.2 3.4 3.7 5.1 4.9 5.2 Excise taxes 1.4 1.4 1.7 1.6 1.9 1.8 Customs duties 1.3 1.5 1.6 1.2 1.4 1.3 Nontaxa 1.1 1.3 2.4 2.2 3.1 2.8 Grants 1.4 0.6 1.7 1.9 1.2 0.8 Expenditure 18.1 19.3 22.3 25.5 24.0 23.9 Current expenditure 15.5 15.9 16.2 18.8 18.1 19.1 Out of which wages and salaries 6.5 6.4 7.3 8.2 9.3 9.3 Out of which interest payments 1.4 0.9 1.4 1.5 1.8 2.1 Out of which Farmer Input Support Program 0.6 0.8 0.7 0.8 0.3 0.8 Out of which Strategic Food Reserve 1.2 1.5 0.2 1.6 0.6 1.2 Out of which fuel subsidy 0.1 0.2 0.6 1.1 0.0 0.0 Capital expenditure 2.6 3.4 6.2 6.7 5.9 4.8 Changes in balance/budget carryovers — — — — — 0.8 Overall balance (including grants)b,c –2.4 –1.8 –3.2 –6.6 –5.0 –3.8 Financingb 2.4 1.8 3.2 6.6 5.0 3.8 External (net) 0.2 1.0 3.1 1.9 1.1 2.3 Domestic (net) 2.2 0.8 0.1 4.8 3.9 1.5 a. Includes mineral royalties. b. Less expenditure on financial assets; see table 1.1 in the main text. c. On cash basis, including budget carryovers. Source: Ministry of Finance, IMF, and World Bank. 32 Table Financial soundness indicators, 2008 –14 A3 (percent) 2008 2009 2010 2011 2012 2013 Sept. 2014 Capital adequacy Regulatory capital to risk-weighted assets 18.6 22.3 22.1 19.2 21.3 26.8 26.2 Tier 1 regulatory capital to risk-weighted assets 15.7 18.9 19.1 16.8 19.4 24.5 23.9 Capital to total assets 9.9 11.2 10.4 10.2 12 14.1 14.9 Asset quality Past due advances (NPLs) to total advances 7.2 12.6 14.8 10.4 8.1 7.0 6.4 Loan loss provisions to nonperforming loans 104.6 86.6 80.3 76.7 73.5 83.2 77.4 Bad debt provisions to advances 6.1 10.9 11.9 8 6 5.8 4.1 Loan concentration Households 30.1 30.9 32.2 30.8 34.3 34.5 33.2 Government and parastatals 1.9 3.1 4.6 4.7 3.9 2.1 2.9 Agriculture 16 19 17.6 17.7 22.6 20.2 17.7 Mining 5 4 3.2 4.2 5.7 6.6 6.5 Manufacturing 11 12 12.7 12.2 11.3 9.5 12.2 Construction 4 3 5.8 4.2 3.7 3.5 3.1 Services 9 8 7 7.1 3.9 4.1 2.4 Others 23 20 16.9 19.1 14.6 56.1 58.0 Earnings and profitability Return on average assets (cumulative) 3.6 2.1 2.9 3.7 3.9 3.4 3.9 Return on equity (cumulative) 20.8 9.4 12.1 25.5 20.8 18.2 19.0 Gross interest income to total gross income 66.6 65.1 58.6 59.3 61.3 64.5 65.5 Gross noninterest income to total gross income 33.4 34.9 41.4 40.7 38.7 35.5 34.5 Net interest margin 10.4 10.7 9 8.1 8.4 8.3 8.3 Liquidity Liquid assets to total assets 35.5 38 43.8 40.3 36 38.9 34.7 Liquid assets to total deposits 49.9 52.6 58.5 53.3 49 52.6 48.2 Advances to deposits ratio 66.3 60.1 53.1 57.1 66 61.4 64.1 Exposure to foreign currency Foreign currency loans to total gross loans 42.1 36.4 32.8 39.1 28.7 25.6 28.4 Foreign currency liabilities to total liabilities 35.8 38 39.6 39 22.9 30.4 33.3 Net open position in foreign exchange to capital 6.9 2.5 4.1 5.5 2.8 3.6 3.8 Source: BoZ. 33 ZAMBIA ECONOMIC BRIEF—FINANCIAL SERVICES: REACHING EVERY ZAMBIAN Table Selected balance of payments indicators, 2009–14 A4 ($ millions, unless otherwise stated) 2013 2014 2009 2010 2011 2012 preliminary projected Current account 538.5 1,144.4 705.0 775.0 194.0 –139.3 Trade balance 829.4 2,704.0 2,206.0 1,437.0 1,451.0 1,459.7 Exports 4,242.8 7,414.0 8,660.0 9,363.0 10,646.0 9,868.8 Out of which copper 3,179.3 5,767.9 6,660.2 6,294.0 6,911.0 7,664.6 Out of which nontraditional exports 899.7 1,190.0 1,596.6 2,693.5 3,312.0 2,097.3 Imports –3,413.4 –4,710.0 –6,454.0 –7,926.0 –9,195.0 –8,628.2 Out of which petroleum –535.8 –618.1 –530.5 –930.6 –1,200.5 –1,441.5 Services (net) –464.5 –628.1 –723.6 –783.4 –874.3 –880.2 Income (net) –418.7 –1,363.0 –1,155.3 –333.5 –770.9 –1,046.7 Current transfers (net) 516.0 431.8 378.0 454.0 389.0 327.3 Capital and financial account –154.8 –1,301.3 –384.7 104.7 –474.0 633.9 Capital account 237.3 149.7 151.3 222.7 295.0 169.0 Financial account –392.1 –1,451.0 –536.0 –118.0 –769.0 465.0 Out of which FDI and portfolio investments 350.4 707.5 1,180.6 3,332.0 1,720.0 2,274.6 Overall balance 540.1 115.0 202.0 727.0 –345.0 467.7 Financing: change in NIR (minus indicates an increase) –540.1 –115.0 –202.0 –727.0 345.0 –467.7 Memorandum items Current account (percent of GDP) 3.5 5.6 3.0 3.1 0.7 –0.5 Gross international reserves 1,758.4 1,896.5 2,166.9 2,457.0 2,251.0 2,535.0 In months of prospective imports 3.7 3.0 2.8 2.8 2.6 2.7 GDP 15,328.3 20,265.4 23,731.9 24,940.8 26,830.1 26,894.0 Source: Zambian authorities, IMF, and World Bank staff estimates. 34 ANNEX B Overview of Payment System Infrastructure Zambia Interbank Payments and Settlement a bank switch owned and mainly used by System (ZIPSS) is the real-time gross settle- six relatively small banks. Interoperability ment system run by the Bank of Zambia with larger banks through Zamlink involves (BoZ). It was launched in 2004 to reduce switching through VISA International, with credit and settlement risks in the banking clearing infrastructure located outside the sector. But it is not widely used partly because country. Monetary and time costs dissuade of high fees charged by some banks. Zambia larger banks from using this switch. Zam- Electronic Clearing House Limited (ZECHL) bia is pursuing a national switch. ZECHL is jointly owned by BoZ and commercial and BoZ are currently in the second round banks and clears checks and electronic inter- of the procurement process to progressively bank direct debit and credit debit transfers. develop interoperability of ATMs and POSs, It has one daily interaction with ZIPSS, and mobile banking, and branch banking. BoZ is operated through a manual process leav- estimates to complete these three phases by ing room for errors and delay. Zamlink is end of 2016. P aym e n t s ys t e m P aym e n t s ys t e m Planned link Legend Pay me n t sy s t e m business p a r t i ci p a n t s Existing link C le a r i n g Clearing PI C an d D D C C PIC and DDCC ZECHL Ba n k s Banks not lin ke d t o l i n ke d t o Za mlin k Zamlink Settlement net p o s i t i o n s f ro m Settlement PIC and DDCC Z I P S S t r a n s fe r s I n t e rb a n k swit c h in g C l e a r i n g V I SA ZIPSS ( RT G S ) t r a n s a ct i o n s Za mlin k Settlement VISA t r a n s a ct i o n s C le a rin g V I S A F u t u re L u S E , G R Z , ZRA t ra n sa ct i o n s d i re ct l i n k Bi g co r p orat i ons VISA International M o b ile p aym e n t M o b i l e t r a n s fe r p rov ide r s p rovi d e r s Source: Bankable Frontier Associates. 35 References Allen, Franklin, Asli Demirguc-Kunt, Leora Demirguc-Kunt, Asli, and Leora Klapper. 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