When the Minister of Finance delivered his budget speech, he declared that the overall performance of the banking sector had received a grading of satisfactory despite increases in non-performing loans.
“Sir, the overall performance and condition of the banking sector was rated as satisfactory as at July 2020”, read the statement from Hon. Dr. Bwalya Ngandu on 25th September 2020 when he delivered the 2021 national budget to parliament in Lusaka. ”This was largely explained by the sector’s capital adequacy position, earnings performance, and improvement in liquidity”.
Non-performing loans surge
However, this is only one side of the banking sector’s story. Despite meeting capital adequacy provisions, “profitability declined due to higher provisions for non-performing loans”. Two budget cycles ago, non-performing loans were the cause of headaches for the Central Bank governor during his MPC announcements. Fortunately, towards the end of last year, the trajectory for non-performing loans was heading south. Then Covid happened. “The ratio of non-performing loans to total loans rose to 12.6 percent in July 2020 from 8.9 percent in December 2019, exceeding the prudential threshold of 10.0 percent”. The minister blamed the increase in non-performing loans to the slowdown in economic activity which negatively impacted borrowers’ capacity to meet their loan obligations.
Despite compliance by financial institutions that showed the overall performance of the non-bank financial institutions sector being rated as fair as at end-July 2020, the asset quality was poor. “This largely reflects satisfactory capital adequacy, earnings performance, liquidity position, and foreign exchange exposure, but unsatisfactory asset quality with the ratio of non-performing loans to total loans remained above the prudential maximum benchmark of 10.0 percent at 24.9 percent”.
A shot in the arm to encourage electronic transactions
With Covid restricting the movement of people and threatening commerce, the Central Bank announced measures that encouraged the increase in using digital financial services. “Sir, to encourage the use of digital financial services, the Bank of Zambia in consultation with the industry, waived charges for electronic money transfer of up to K150 in April 2020”, said the Minister during his speech. “Transactions and balance limits for individuals and enterprises were also revised upwards”. This was also extended to the processing of online settlements of payments. “In addition, the processing fees under the Real Time Gross Settlement system were reduced, leading to a significant increase in the use of digital financial services”.