The Zambian banking landscape is highly competitive. At their core, banks are known to create value or make money by lending money at rates higher than the cost of the money they lend. More specifically, banks collect interest on loans and interest payments from the debt securities they own, and pay interest on deposits and short-term borrowings. Sophisticated banks go further by offering wealth management, investment banking and playing on the capital markets.
In 2019, the Zambian banking story will be very different albeit difficult. The Bank of Zambia, which is charged with the responsibility of ensuring sound business practices and consumer protection mechanisms in the financial sector by the provisions of the Banking and Financial Services Act, No. 7 of 2017 (BFSA), was at the centre of controversy (with commercial banks) when they “heard the cry” and passed the “BoZ Prohibition Against Unwarranted Charges and Fees Directive of 2018”.
According to the Government Gazette published on 31st August 2018, the Central Bank determined that “the imposition of unwarranted charges and fees on the members of the public was an affront to the rights of the consumer of financial services. Furthermore, the Bank believes that the said imposition of unwarranted charges and fees threatened strides being made towards financial inclusion in the country”.
It was at this moment that the Central Bank threw the Banking ecosystem into delirium. Until this moment, many banks considered themselves firms that provided services. They would invest in the experience of banking. You could see it from their adverts (advertising budgets) that showcased an ultra-modern, out of this world experience if a consumer chose to place their money with a particular bank. However, with the directive came a censure on 26 charges that were currently prevalent in many banks.
The number of charges scrapped, at face value, appears to be a blanket removal of surcharges that the banks had carefully crafted based on the different products they offer. It is no secret that consumer banking is one of the biggest value drivers for banks in Zambia. However, although many agree on the argument of financial inclusion, standing on the fence of alternate opinion would argue against this being a progressive move as dubbed by Zambia Consumer Association (ZACA) statement quoted in lusakatimes.com. This is because the majority of value creation mechanisms for the services that they provide were whipped out. Neutrals would further argue taking a leaf from Finance Minister Honourable Margret Mwanakatwe statement to parliament prior to the censure where the former banker signalled treading very cautiously by calling to book exorbitant charges. She never mentioned scrapping but expressed concern at the high charges.
Bank CEOs and their management teams are now walking into 2019 knowing that implementation of the directives is paramount. However, astute CEOs through their stakeholder management mechanisms with the Central Bank will consider engaging Governor Dr. Denny Kalyalya’s team. This can be anticipated because in February 2018 Bankers Association of Zambia CEO Leonard Mwanza insisted that it was the responsibility of consumers to “shop around” for banks with lower charges. He further argued that commercial banks investment in technology and brick and mortar made it prudent for them to design products that were priced according to the investment made on infrastructure. Although this was prior the directive, we believe many CEOs have pondered over this during the Christmas period.
Spelling out the operations and maintenance costs of running banking infrastructure was one way of making the argument. However, there are banks among the 17 that have built their entire business models around technology and services that are powered by the same. Placing charges in that ecosystem would mean that enforcing the directive limits their value creation preposition. If the argument is financial inclusion, it becomes a difficult balancing act which sees consumers on the one hand raising concerns of charges but demanding for a plethora of products and on the other hand banks with advanced banking systems that now face opportunities to create value being whipped out hence being forced to pull back on the number of products that they believe would attract and benefit consumers.
Financial Insight believes that common ground will be struck if the directive is to be revisited by applying the economic theory of economies of scale and scope. The Central Bank wishes to achieve scale in terms of financial inclusion. For this, they need the commercial banks to innovate and have reach through their branches (brick and mortar) so that no citizen is left behind. The Commercial Banks possess scope through the technology that allows them to have a plethora of products that can be priced at economic fair value. Hence why further consideration around Fintechs that have brought about a revolution that has now seen the unbanked in Zambia taking part, albeit through money transfer, in the financial system. With formidable players such as ZOONA, it will only be a matter of time that banking licenses around this other ecosystem are issued allowing for more access to the numbers that the Central Bank wishes to include.