The exclusive interview excerpted hereunder relays Dr. Chipimo’s insight into the complexities of monitoring the operations of Zambia’s central bank and the country’s growing financial sector, including non-bank financial institutions.
The Bank of Zambia Act, effective a year ago, enhances the Bank’s operational autonomy and establishes the Monetary Policy and Financial Stability Committees. How would you appraise the overall impact of the Act on the activities of the Bank?
The Bank of Zambia Act Number 5 of 2022 has significantly strengthened our regulatory framework with the formal establishment of the Monetary Policy Committee (MPC) and the Financial Stability Committee (FSC). The Act accomplished several things: First, Zambia’s constitution was amended in 2016, and in this amendment, the independence of the Bank of Zambia was formally established. This required that the subsidiary legislation governing the Bank needed to be amended to recognise this independence, and this is the first point. The second point is that while the price and financial stability mandates of the central bank were reaffirmed, the new Act emphasises the primacy of the price stability mandate with the provision that, in circumstances where the two mandates were in conflict, the price stability mandate would take precedence. The new Bank of Zambia Act also strengthened governance arrangements within the Bank, relating to matters such as the composition and authority of the Board and Board Committees; security of tenure for the Governor and Deputy Governors; issues relating to financial independence; and strengthening the oversight of regulated entities. An overarching theme of the reforms was not just strengthening governance arrangements, but also increasing transparency. In this regard, the Monetary Policy and Financial Stability Committees both publish quarterly reports after their meetings, which strengthen communication with the market.
As Registrar of Financial Service Providers, how have you ensured the proper supervision and regulation of Zambia’s banks and other financial service organisations under this framework?
The new Act has strengthened the regulatory framework significantly—particularly aspects relating to financial stability. First and foremost, as I already stated, we have established the Financial Stability Committee. This Committee brings together all the regulators in the financial sector, that is, the Pensions and Insurance Authority; the Securities and Exchange Commission; and the Bank of Zambia. In addition, it includes a representative of the Ministry of Finance as well as members from the private sector. This has enabled us to look at issues of across-risk in the financial sector. This is important because some financial institutions regulated by the Bank of Zambia—specifically the non-deposit-taking non-bank financial institutions—also have a leg in the capital market, given that they often raise capital through capital market instruments regulated by the Securities and Exchange Commission. The composition of the Financial Stability Committee now enables us to address regulatory gaps and assess industry-wide risks in a holistic way.
Could you elaborate?
Well, as alluded to in my earlier comments, a good example are microfinance institutions, which are regulated by the Bank of Zambia and play an important role in lending to small and microenterprises. Microfinance institutions often raise capital through the issuance of capital market instruments that are regulated by the Securities and Exchange Commission, such as long-term notes. Many of these institutions are non-deposit-taking institutions. These institutions therefore have responsibilities to two regulators, and when things are going well, there is usually no problem. However, when institutions face difficulties, the resolution process requires coordination between the different regulators. Prior to the revision of the Bank of Zambia Act, there was no formal obligation for us to cooperate, although we had a long-established Memorandum of Understanding to facilitate cooperation. Internally, the Act has also enabled us to be more focused on the regulatory framework in three ways: First, we have established a Financial Stability Department, focusing specifically on financial stability matters, and this department also serves as the secretariat to the Financial Stability Committee. We then have the Prudential Supervision Department, which supervises all deposit-taking institutions, including deposit-taking microfinance institutions. The Prudential Supervision Department is also responsible for overseeing the management of cyber security risks across the financial sector. The third point is that we have also enhanced our focus on matters relating to consumer protection by establishing the Financial Conduct Supervision department. This is important because the strength and efficacy of consumer protection regulations have an important bearing on faith and trust in financial services and the financial sector as a whole. We also know that financial conduct can be a source of financial stability risks.
A final point is that in our set-up, issues relating to anti-money laundering, countering the financing of terrorism, and proliferation financing (AML/CFT) have a dedicated division and staff in the Financial Conduct Supervision Department. So, we now have these clear tasks and structures, which we believe make us better equipped to manage risks facing the financial system holistically.
The Bank of Zambia and the financial sector in general have successfully migrated to the new ISO 20022-standard for electronic data exchange. To what extent has this impacted the sector and, by extension, the economy?
We recently successfully migrated to the ISO 20022 messaging standard, becoming one of the few countries that have done so on the continent. I believe that the primary goal of the ISO 20022 Standard for Electronic Data is to provide us with richer data in messaging. The G-20 first promoted this in 2020 by focusing on cross-border payment methods. As a result, it provides a considerably richer supply of information in the messages that we send, allowing us to improve efficiency in certain areas. For example, while performing KYC (Know Your Customer), this message can contain a large amount of information, and when performing payment reconciliation, it can have even more information. So, in this area, the system as a whole can be far more efficient. It also opens up the possibilities of automating a lot of tasks. For example, AML/CFT issues are an important area of risk in the financial sector, and if you do not deal with them appropriately, you can suffer significant consequences, such as the loss of correspondent banking relationships. But how do we deal with all these issues at the international level, where sanctions are in place for various entities and individuals? This requires improvements in processes if the financial sector is to be efficient, and this is done through automation. So, we believe that this new payment standard, which allows us to have more data relating to payment instructions, is really crucial for us. It allows us to develop a much more resilient system.
The Bank of Zambia recently released Foreign Exchange Market Guidelines aimed at enhancing the transparency, efficiency, and effectiveness of the domestic foreign exchange market in Zambia. How would you appraise the implementation so far in terms of actualising the objective of the whole exercise?
The fundamental objective of the recent guidelines was to improve the operation of the foreign exchange market in terms of enhancing transparency and efficiency. As you know, foreign exchange markets in African countries, including Zambia, are frequently marked by high levels of volatility. This is partially because our economies are generally dependent on commodities; certain sectors dominate supply, and our markets are not very well developed or deep. Because of these reasons, amongst others, our markets are very susceptible to any kind of shock, during which period normal market mechanisms tend to break down. Given that shocks to the economy now seem to occur on an ever more regular basis, we have realised that in order to deal with the various shocks we experienced—such as the financial crisis, the decline in copper prices, the drought, and so forth—we needed to take action by addressing practices in the market whilst maintaining the fundamentals of a flexible exchange rate regime and an open capital account.
To elaborate, the Bank has always had clear authority to regulate authorised dealers (commercial banks). However, the new Bank of Zambia Act explicitly expanded this mandate to include oversight of the whole foreign exchange market—that is, including the actions of non-bank players, whether corporates or individuals. So in the new forex market regulations, one of the things we did was to mandate that all foreign exchange transactions in the market had to be conducted through an authorised dealer. Secondly, we mandated that trades below a certain threshold (currently one million US dollars) were to be consummated at the board rates of each authorised dealer. However, for trades above one million US dollars, parties could negotiate rates. Prior to this directive, we observed that even small trades of US$10,000 could significantly move market rates, contributing to the volatility of the market as a whole. The foreign exchange offshore market was another area of concern for us in that there was a lack of visibility on the trades taking place and there were periodic divergences between onshore and offshore rates that were difficult to explain. We have therefore stipulated in the regulations that all brokers used by our authorised dealers need to be registered with us and that they provide information on market trades. The requirement that all entities generating foreign exchange from Zambia trade through authorised dealers in Zambia also strengthened transparency. As a result, we have witnessed two key things since these regulations were introduced. Firstly, the spread between on-shore and off-shore spreads appears to have narrowed, and secondly, on shore, the margins between the buying and selling rates have narrowed, dropping below the maximum allowed spread of 2%, indicating competition on spreads.
Is there any process to attract more foreign currencies from Zambia’s Diaspora?
Yes. We believe that the fact that we have maintained a highly open system—in fact, one of the most open—is critical to allowing increased investment to occur from Zambians in the diaspora. Secondly, we are developing mechanisms, such as the investor portal for government securities, where Zambians in the diaspora can more easily participate in government securities through electronic platforms. We continue to look at other avenues that could facilitate the participation of Zambians in their economy, and this includes continuous improvement in the payment system channels and in reducing the costs of cross border payments and remittances.
What other ways do you plan to attract and retain foreign currency to lubricate liquidity?
First, promote Zambia as an important destination for foreign direct investment as well as Zambians in the diaspora investing in Zambia, and this is one aspect that the government is pursuing. The government is also exploring how we can take advantage of the Africa Continental Free Trade Area to promote increased trade and investment with our neighbours. On the financial front, you are correct that we must think more creatively about how to attract and retain foreign currency. In this regard, one of the things we have done in the recent past is to improve the information we collect on our financial transactions with the rest of the world. This is because when we got rid of exchange controls in 1994 (completely liberalised the capital account), we lost access to a lot of information. So, in 2019, we implemented what we call the electronic balance of payments system to enable us to better capture financial inflows and outflows through the banking system. This system has two features: the first is that it captures from the core banking systems of the commercial banks all inflows and outflows. The second feature is the requirement that all export earnings need to be repatriated to Zambia through a local bank account before they are spent. Prior to this, we had to capture information through surveys, and respondents were not always forthcoming. Companies and individuals were also sending out funds for purposes for which we did not know. Therefore, this system has helped close some of these gaps. We intend to extend the system by tracking and reconciling flows related to imports and services. However, we know that there is still a lot of work to be done to earn and retain more foreign currency as a country, and promoting diaspora linkages is one avenue.
Digital currencies have been regarded as an idea whose time has come. How prepared is the Bank of Zambia to embrace this?
I think digital financial services, in general, are an idea that has come of age. For instance, I look at CBDC (Central Bank Digital Currency) as simply one component of the constellation of possibilities presented by the digital age we are living in. In thinking specifically about CBDCs, the key question we are asking is: What is the use case? Because you must understand this before you can embrace CBDCs. And what is the benefit that CBDCs will bring? Of course, when it comes to establishing CBDCs and other initiatives, resources, both human and financial, as well as extensive interactions with the financial sector, are all involved. We have conducted numerous consultations to gather ideas and explore the potential of CBDC in digital financial services in Zambia. Digital financial services and related developments in the payment system are already playing an important and effective role in areas such as mobile payments and instant payments, allowing Fintechs to work with financial institutions and non-banks to transmit money instantly across the country. We are therefore examining the use case of CBDC in countries like Barbados, where some success has been observed, especially for individuals already financially included, to see what we can learn and determine where the real value addition lies. Maybe the real value is in the application of the underlying blockchain technology rather than the specific form of a digital currency.
What measures has the Bank adopted to tackle the emerging issue of cyber risk?
Cyber risks are real and present danger in our financial sector, and we have had numerous and increasing incidences of attacks. To an extent, this is to be expected as we expand the use of digital financial services and as the world gets more integrated digitally. We therefore have to learn to live with this risk but manage it by being more vigilant. From our perspective, because this is where many frauds originate, we need to recognise the fundamental importance of having proper digital (biometric) identification (ID) in preventing frauds, as a lack of a proper ID system compromises KYC (Know Your Customer) and wider issues around safety and security. So, one of the things the government is doing is developing a national biometrics ID. The second point is to adopt and develop up-to-date tools to manage cyber security. In a world that is being made ever more complex by AI capabilities, we have no choice but to make the investments that ensure we are not left behind. You also need to invest in people, systems, and AI itself. Collaboration is another factor, and we are currently in the process of working with the financial sector to implement a financial sector cyber incidence response team that will allow us to share information in real time when cyber incidents occur.
Generally, it’s expected that there is more financial awareness in urban centres than in rural areas. What steps is the Bank taking to incorporate more rural dwellers into the financial system?
Financial inclusion is a task that needs to be addressed at multiple levels. At one level, the rural-urban divide in terms of inclusion mirrors or reflects a broader developmental issue. In Zambia today, there is a stark divide between rural and urban poverty. Whilst overall poverty levels are around 60 percent, rural poverty accounts for perhaps 70 percent, while urban poverty is 30 percent, and that is partly because of disparities in financial infrastructure. To address this, bridging the infrastructure gap between rural and urban areas, particularly in technology, is crucial. Additionally, one of the major factors that has allowed us to improve formal financial inclusion from roughly 59 to 69 percent is, quite simply, mobile money. However, more needs to be done to reach our goal of reaching 80 percent in terms of formal financial inclusion over the next five years, and this requires that we address issues relating to the “last mile.”. In our case, this means onboarding merchants to enable them to accept digital payments (especially mobile money) wherever they operate, be it in urban markets or remote rural areas. In this regard, we are promoting a project to introduce a national QR code to facilitate fast payments. We also remain focused on financial literacy and education more generally. This includes promotion of financial literacy early in the education ladder by incorporating materials into the curriculum and financing local language publications. This approach aims to ensure children grow up with financial inclusion, making it an inbuilt aspect of education and hopefully of our financial lives. We also sponsor and collaborate with other partners in promoting financial literacy through local radio programmes that broadcast financial inclusion messages in local languages. Based on what we’ve seen so far, these interventions are quite effective, and we’re getting positive feedback.
Briefly, what will you describe as the unique attraction of Zambia’s financial sector on the global stage?
In my opinion, Zambia’s financial sector presents a unique opportunity for investment given that we have retained an open current and capital account for over 30 years. We have a regulatory framework that is being modernised and adapted to meet the new challenges of the digital world we now live in and which fosters competition. We are also encouraging closer regulatory collaboration between all financial sector regulators, which is a positive for financial stability and growth. More broadly, Zambia has eight neighbours, and this offers access to a much broader trade and investment market and is well placed to operate as a central hub for the logistics industry and financial services associated with this. Our regulatory framework is also encouraging innovation, through the operation of a sandbox regulatory framework as well as opening up payment systems platforms such as the National Financial Switch to a wide array of payment service providers. This also fosters competition and innovation. We believe we are developing a very strong regulatory environment because we work closely with the financial sector, which may not be as collaborative in other jurisdictions. Simply put, Zambia has one of the freest markets in Africa. In this regard, Zambia has a very proven track record of remaining consistent even in the most trying circumstances, such as the global financial and commodity price crises. In fact, we are building resilience because we are improving our regulatory and legal framework.