Effects of CoronaVirus on Financial Services Sector in Zambia- Tips for Investment Clubs in Zambia

 

 

White paper by ZANAICA

Disclaimer. The opinions expressed herein are not professional legal, medical or financial, advice. Please contact your consultants for the above should you need them.

Corona Virus pandemic has had the effect of locking down the entire globe, and some countries for longer than others, with some countries suffering also, more than others.

In the case of Zambia, we had complete lockdown lasting 78 days from march to June 8^th, and from then, partial lockdown, with curfew running from 9pm to 5.30am, and some key sectors still locked down, such education, entertainment, and religious services.

This paper will analyse a few effects with regards to the financial services sector.

Enhancing Adoption of Digitization of Transactions

The corona virus pandemic has led to rampant digitization of transactions in the financial services sector. We have seen institutions move towards complete e-service offering, such as NSSF Zambia collections and account opening; most banks have aggressively promoted in app transactions and robust online transactions; and even industry associations, like the Zambia securities exchange, has launched a platform for purchase of stocks and bonds online. Insurance companies have also aggressively adopted e-mode of transactions, with motor vehicle third party insurance now almost exclusively being bought online via USSD transactions.

The ones left behind here seem to the licensed fund managers who have not offered any e-supported system. Also, URA still requires long lines to make payments, and even to change some basic items like email addresses. Maybe they should adopt 2-factor authentication, to allow for increased security, and then, go fully digital. Maybe Zambia company registry, URSB, also needs to adopt full online registration process, and allow for payment of assessed fees online, to further take advantage of populations openness to adoption of e-processes. Similarly, the Zambia Registration Services Bureau communicated a service suspension during the lockdown period.  Should the lockdown period be extended, statutory time limits imposed by the Companies Act, 2012 may be flouted. COVID-19 interruptions should form a valid basis for extension of time. However, extension of time should be sought timely to ensure competing creditors do not register their interests first and attain priority. Engagement of the Zambia Registration Services Bureau to provide a general waiver on penalties for late registration should be considered.

Fintech companies, meanwhile, are well-placed to deal with digital demand and remote working requirements, although some are facing funding uncertainty in a volatile period. Many are offering their services to consumers and businesses for free, or innovating to create new products that meet a specific need, while the coronavirus crisis is ongoing.

Savings Deposits & Investments

Whereas one would have expected the lockdown effect on monthly incomes, due to lost jobs, to lead to reduced savings and deposits, the effect of the virus has led to increase in deposits for savings. This is a show that the citizenry saw need to save and prepare for even worse situation. This money, according to Bank of Zambia, increased from 6.9 billion in March to 7.2 billion shillings in May 2020.

Reduced lending

The reduced business activities during the lockdown led to reduced loans lent out. The executive director of Zambia Banker’s Association (UBA), told reporters this week that banks only managed to lend 1.1 billion shillings in April 2020. Some industry analysts have indicated as much as 10% reduction in loans. Further, shelter-in-place and social distancing requirements mean that few customers are able to be served in a physical branch, and hence, onboarding of new clients was affected. The corona virus disruption of global supply chains, especially that from China, which is Zambians biggest trading partner, led to reduced uptake of trade financing, both from commercial, as well as tier 3 financial institutions. Further, about 42% of all the tax collected in Zambia is from international trade. This tax is mainly in the form of VAT and import duty on imports, and excise duty on the importation of petroleum products. A slowdown in international trade as a result of the coronavirus is likely to have a massive negative impact to tax collections this year. The situation will be made worse by the reduced economic activity in the retail and trade, services, hotels, tourism and manufacturing sectors which will translate in both reduced VAT remittances and corporation tax payments to the URA. All these lead to reduced borrowing. Further, the reduced working hours coupled with suspension of branches in certain locations all lead to significant negative economic effects, financial institutions will have to further re-evaluate operations and focus on trimming non-essential spending on low-impact and low performing operations.

Rescheduling of Loans, Reduced Loan Income

The Minister of Finance in Zambia reported that the ministry projected that if NPLs in these sectors increase by 50% due to fallout from the COVID-19 outbreak, the ratio of non-performing loans to total loans would worsen from 4.7% to 5.9% One other effect of the virus has been reduced income from loans products, due to non performance, and led to rescheduling of loans. The bank of Zambia asked the commercial banks to lower their rates, and went ahead to lower is own basic lending rate by over 700 basis points to 7%. These non performance also affected sector specific practitioners like products of bodaboda loans, which were rendered non performing due to restriction on operations of boda bodas. The non performing loans loans due to collapsing business enterprises will further contract the economy due to the decline in aggregate demand, the dearth of economic activity. The Material Adverse Change (MAC) clauses have kicked into effect, leading to lenders declaring default, and in some cases, imposing draw-stop requirements on commtitments. The pandemic may hence be utilised as leverage in negotiations with the borrower including to support requests for additional security and cancellation or postponement of unutilised commitments. The legal provisions that provide protections to the borrower against action by lenders are usually limited to breach of contract by the lender, illegality, fraud and unconscionable bargains. It is unlikely that COVID-19 effects would form grounds for a court to protect a borrower against action by its lender. Even then, it is expected that many borrowers will seek court protection as a way of delaying their loan obligations. Bank of Zambia, by its communication dated 20 March 2020, undertook to waive limitations imposed by the Financial Institutions (Credit Classification and Provisioning) Regulations, 2005 on restructuring of credit facilities that may be at risk of going into distress. Bank of Zambia has also indicated that it will grant exceptional permission to supervised financial institutions to restructure loans of corporate and individual customers, including a moratorium on loan repayments for borrowers that have been affected by the pandemic on a case-by-case basis at the discretion of the supervised financial institution. This exceptional waiver period will last for 12 months with effect from 1 April 2020.  However, these are not affecting the current loan contracts.

 

Crowding Out of Private Sector Credit

The banks, due to reducing activity in lending, are investing more and more in the government bonds, and this leads to contraction of private sector credit all resulting into general poor economic health. This can be seen from the last two auctions of the bonds which were all oversubscribed. There is demand for safe homes for capital, and government bonds are taking funds which would go to businesses. Bank of Zambia in its Monetary Policy Statement for April 2020 noted a deterioration in macroeconomic conditions and adopted measures that are aimed at ensuring continued access to credit. The measures include a reduction in the Central Bank Rate (CBR) by 1 percentage point (to 8%) and provision of liquidity assistance for financial institutions that need it. This was further reduced to 7%, but still, banks are choosing to invest more in bonds. This even led the Bank of Zambia to threaten to cap interest rates, so as to enable many affected businesses to access credit.

Tier 4 Effects

One sector in financial services sector largely affected was also the tier four financial services, the saccos and money lending operators. There was increased digitization of products, with market leaders offering loan services over USSD and mobile apps. There was also marked increase in withdrawals from saccos. This, coupled with loss of jobs, has led to many Zambians falling outside the financial inclusion bracket.

…………..

ZANAICA is promoted and hosted by Twende, an on-demand platform and Zambia’s first superapp, that also offers motorcycles (bodabodas) and tricycles (tuktuks), on lease to own, hire purchase model. Twende promotes investment clubs as an initiative to promote savings and investment culture in Zambia. To get free investment club training, do not hesitate to contact us on facebook at https://wa.me/+254103242604, or https://chat.whatsapp.com/HNosGG0OmdWHvXnFHVSLoh or email us at zanaica@twende.store or visit Twende offices at Manda Hill, Plot 271/C.