It was a storm that nobody in the entire banking sector saw coming and 4th September 2018 will always be remembered with a pinch of malevolence, a dark Tuesday of some sort. On this day, the Bank of Zambia announced a sweeping statutory instrument that banned unwarranted charges on non-funded income in the banking sector. A move by the regulator to curtail the number of charges banks impose on their customers in a bid to reduce the cost of banking services in Zambia and consequently promote greater financial inclusion.
Banking executives were taken unaware by a move that would shelve a significant portion of their income. Estimated income loses for the “Big Five”, a name that is affectionately used to refer to the top five banks by assets and revenues, stood at K250 million as at year-end according to insiders although some independent analysts have rebuffed these figures and have instead projected conservative income loses of K150 million for the top 5 and around K300 million for the entire industry comprising 18 banks. Needless to say, non-funded income grew at 10.9% year on year from K1.97 billion in 2017 to K2.19 billion in 2018 although there was a drastic reduction in this rate of growth in the last four months of the year coinciding with the policy directive.
In light of the foregoing, banking executives feared the worst of what 2019 had in stock for them as it would be the year when a full autopsy of the directive is measured. It’s no little wonder that when 2018 gave way to 2019, there weren’t many tossing of champagne glasses with most banks suspending their gluttony laced year-end parties.
In an environment that had become challenging with increased competition from Fintechs, cybercrime and increased credit risks due to a sluggish growth in the economy of a paltry 3.7% in 2018. The statutory instrument was indeed an unwanted ingredient in the bitter cocktail and this has presented a brave new world for Zambian banks. This was altogether acknowledged by PwC in their survey report on the Zambian banking sector; of the five pressing concerns in 2018 shared by industry executives, abolishment of unwarranted charges was the fourth most pressing concern.
Fast-forward to half-year results for 2019, the effects of the abolishment of unwarranted charges was crystal clear as the 18 member industry had a 9.4% haircut for non-interest income which stood at K1.7 billion and is projected to continue sliding in the short term. However, despite this misfortune, half-year after-tax profitability for the 18 member industry grew a healthy 13.3% and interest income was bullish at 29.0% growth. The other major concern of this bullish growth apart from the slide in non-funded income was that 72% of industry income was generated by the big five, a story for another day but something to put the competition commission on notice
Therefore, in this brave new world, banks that want to survive and thrive have no choice but to innovate, redesign their business strategies and rein in on their costs. It’s also a chance for the banking sector to step up and come up with novel financial products that are justified in their fees. This will definitely go a long way in developing the relatively undeveloped financial and capital markets in Zambia. More importantly, it is also hoped the directive will force banks to unlock their liquidity taps by booking more loans to allow interest income more than makeup for the losses in commissions. This win-win act increases both the consumption and investment arms of GDP and is an extra boost for more growth at a macro level.
On another brighter side, greater financial inclusion envisioned by the regulator might harness and move a good chunk of over 600 million dollars that according to FinScope projections lies outside the formal financial system. This increased liquidity will be a shot in the arm for the banking sector as they will have resources to increase their lending and ultimately increase their asset base and interest income. There is a silver lining in this storm after all, it’s for the brave and prepared to take note of great opportunities inherent in it. As Franklin D Roosevelt once stated, a smooth sea never made a skillful sailor. It is hoped that the banking sector will emerge from this conundrum bigger and better. And if the half-year results can show us a thing or two, it’s that some banks have long since moved on and have taken this directive as just a minor bump on the highway.
Katandula Chitika is an Economist and Writer. The views expressed in this article are solely mine and do not represent the views of my employer, church and any other organization I am affiliated to.