Financial institutions such as banks and other for-profit organizations tend to have financial statements except that they slightly differ. For instance, banks do not have the net sales or revenue part, which other non-financial firms have; instead they have income from interest earned and non-interest income like withdraw charges, overdraft charges, and others. Banks’ main costs come through holding people’s deposits. In the balance sheets, banks have loans as their larger part of assets and deposits, as the largest part if their liabilities. This article analyses the financial statements of banks with data from the central bank of Zambia. The data from the Bank of Zambia shows consolidated banks’ financial activities from Jan 2005 to the end first half of 2020.
Beginning of the first half of 2020 the cumulative loans and advances income of about K468M was earned by the banks in Zambia and by the end of it, those earnings rose to K2.97b. During that same period, total deposits had increased from K70b to K80.4b. Since deposits are a direct source of loans that banks issue, it would be right to say that the increase, from K35.8b to K38.7b, in the amount of gross loans and advances issued, from January 2020 to June 2020, was as a consequence of an increase them. A closer look at these financial statements in first half 2020 will also show an increase in the fear of loan losses, by the management of these banks. This fear is seen in the increase of the Allowance for loan losses from K2.98b to K3.6b. Perhaps this could be the fact that most businesses have been adversely affected by the impact of Covid 19, as a result many of them are likely to end up defaulting on their payments.
Another notable item in these financial statements is the cash; denoted as ‘Notes and Coins’. This item is very important to shareholders; an increase in it, tells them that the bank has enough funds to either buy back some shares or increase dividends payout. Data from central bank of Zambia does actually suggest that there was an increase in ‘notes and coins’, from K3b to K6b, from the beginning to the end of the first half of 2020.
The Bank of Zambia has been adjusting downwardly, its monetary policy rate from the 11.5% at the beginning of 2020 to 8% when it last announced its MPC statement in the 3rd quarter of 2020. A reduction in the central bank’s policy rate will entail a reduction in the commercial banks’ lending rate. This might be good for the borrowers but it is not particularly very good for the banks that give out loans. Since banks earn most of their income through the interest they charge on loans, a reduction in interest rates will entail a reduction in their earnings. However, on a plus side, commercial banks should just increase their mortgage loans since interest rates have gone down, investments in building new homes becomes cheaper and as a consequence, demand for home loans is likely to go up. It would be equally wise to increase allocation to the agriculture sector since it is one sector that has not, in relative terms, been affected much by Covid 19 and it could be one way of promoting economic diversification. Other Personal loans, at the moment, are a bit more risky due to the fact that most people have lost jobs and as result the chances of defaulting have gone a bit higher.