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October 2014

OVERVIEW OF THE MICROFINANCE SECTOR IN ZAMBIA Presentation by BANK OF ZAMBIA (ABTON NG’OMBE) SENIOR ANALYST- REGULATORY POLICY DIVISION. October 2014. 1. OUTLINE OF PRESENTATION. Registered financial service providers Microfinance sector in Zambia

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October 2014

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  1. OVERVIEW OF THE MICROFINANCE SECTOR IN ZAMBIAPresentation byBANK OF ZAMBIA(ABTON NG’OMBE)SENIOR ANALYST- REGULATORY POLICY DIVISION October 2014 1

  2. OUTLINE OF PRESENTATION • Registered financial service providers • Microfinance sector in Zambia • The Development of the Microfinance Regulations • Features of the Banking and Financial Services (Microfinance) Regulations, 2006 • Benefits of Microfinance Regulations • Proposed amendments to the Microfinance Regulations • MFI Statistics and Trends • Challenges ahead 2

  3. ZAMBIAN FINANCIAL SECTOR- REGISTERED INSTITUTIONS AS AT 31 AUGUST 2014

  4. MICROFINANCE SECTOR IN ZAMBIA Customer Purpose CustomerScreening Loan Type Major Players Salary-backed Loan Segment A • Salary-backed Loan • Control cash flow (education, fertilizer, etc.) • Bayport • Blue • MFinance • Company name • Individual • Expand business B Individual Entrepreneur Loan Segment • Pulse • Business performance C • Group Loan • Education • Start / Expand business Group Loan Segment • Vision Fund • MBT • FINCA • Group members screen themselves

  5. MICROFINANCE SECTOR IN ZAMBIA Collateral Repayment Profitability Purpose Salary-backed Loan Segment A • Salary • Automatically deduct from Salary Business High B Individual Entrepreneur Loan Segment • Guarantor • Car, furniture, etc. • Customers put money in their accounts C Group Loan Segment • None • Collective responsibility (Social Collateral) • Compulsory savings • Loan officers / chairperson collect money at the site Development Low

  6. INITIAL SITUATION FOR MICROFINANCE IN ZAMBIA • IN THE 1990s, access to financial services was limited and difficult for the low income population. • Because they were considered a risky, unbankable clientele. • Furthermore, financial sector reforms in 1991 liberalised the financial sector in Zambia. • The major aim was to enhance effectiveness and efficiency and turn the economy back to a sound economic footing. • To fit within the liberalised environment, some state-owned institutions (SOI) and banks had to realign their strategies.

  7. INITIAL SITUATION FOR MICROFINANCE IN ZAMBIA • Immediate impact was the significant contraction of branch network in rural and peri-urban areas by some banks as well as closure of SOIs such as LIMA Bank and Cooperative Bank • This left many rural districts without any financial services. • This situation made the activities of NGOs offering microfinance services more prominent and encouraged the emergence of MFIs to fill the gap created by the closure of these branches and institutions.

  8. THE DEVELOPMENT OF MICROFINANCE REGULATIONS • Following the rapid increase in the number of MFIs in the mid-1990s, there was an industry-led drive for legitimacy and recognition through regulation. • In September 2000, amendments to the BFSA empowered the BoZ to regulate and supervise MFIs. • In order to promote sustainable microfinance sector growth and protection of deposits, BoZ, in consultation with stakeholders developed the Banking and Financial Services (Microfinance) Regulations (MFRs).

  9. THE BANKING AND FINANCIAL SERVICES (MICROFINANCE) REGULATIONS, 2006 • Definition of Microfinance Services • Regulation 2 defines microfinance service as: • The provision of services to small and micro enterprises and to low income customers and includes: • Provision of credit facilities usually characterised by frequent repayments; • Acceptance of remittances & any other services that the BoZ may designate.

  10. THE BANKING AND FINANCIAL SERVICES (MICROFINANCE) REGULATIONS, 2006 • Categories of MFIs • The BoZ regulates microfinance business under a tiered (layered) framework: • Tier 1- Deposit taking MFIs (DTMFIs); • Tier 2- Non-deposit taking MFIs (NDTMFIs); and • Tier 3- MFIs with less than K100,000 capital which operate under the Money Lenders Act and other pieces of legislation. These are not subject to the MFRs. • However, the BoZ in consultation with stakeholders is developing a regulatory framework for delegated supervision of Tier 3 MFIs.

  11. CATEGORIES OF MFIs Source: BoZ 11

  12. SUPERVISION OF MFIs (contd.) • Classification and provisioning of Loans • By definition microfinance portfolio is characterized by short-term loans. • Their non-collateralized lending warrants more strict provisioning policies than those of banks. • The MFRs on asset quality therefore stipulate that MFIs need a shorter duration when recognising problem loans, e.g. starting at 29 days past due whereas banks are required to start at 90 days as illustrated in the Table on the next slide.

  13. BENEFITS OF MICROFINANCE REGULATIONS • Promotion of Competition • The licensed MFIs have increased from 3 as at 31 January 2006 to 33 at 31 August 2014; • Minimum bank charges reduced from around K750 to as low as K20 • Interest rates for credit have also been reduced. • Governance Structures • Shareholding is limited to 25% of the minimum capital, an improvement from previous cases of only 2 owners; • Strengthened board of directors; • Most MFIs are now incorporated companies limited by shares as opposed to being limited by guarantee. 13

  14. PROPOSED AMENDMENTS TO THE MICROFINANCE REGULATIONS • Included provisions requiring: • Disclosure of interest rates and charges • Publication of financial statements in the media; • Prohibition of unfair business practices; • Prohibition of irresponsible lending; • Unfair debt collection practices; • Confidentiality of customer data; • Establishment of procedures for dealing with customer complaints; • Prohibition against penal interest and charges on prepayments; • Prohibition of coercive behaviour and unfair contract terms (not done in good faith or to the detriment of the customer); and • False or misleading representation.

  15. MFI STATISTICS AND TRENDS

  16. CHALLENGES AHEAD • The major constraint for the BoZ is the supervisory challenge in dealing with the unique characteristics of microfinance operations. • A number of MFIs operate in an unregulated environment or under other statutes which require harmonisation with the BFSA to minimise regulatory arbitrage. • Organising the supervision of different categories of MFIs needs to be accompanied by economic considerations of its relative costs and benefits. • To take on the challenges, the BoZ is reviewing the financial sector laws under the FSDP, building capacity for supervision of MFIs and developinga framework for delegated supervision of Tier 3 MFIs. 16

  17. THANK YOUTWALUMBA

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