69809 v. 4 Demand-side analysis of access to financial services for businesses in Zambia June 2010 Illana Melzer, Reut Agasi and Harry Botha About this publication This report forms part of the findings of the Zambia Business Survey (ZBS). The ZBS comprised two separate surveys. The MSME Survey was a nationally representative survey across all nine provinces of individuals who owned and ran their own businesses and employed up to 50 individuals. The supplementary Large Business Survey (LBS) was a survey of 161 large enterprises employing 51 or more individuals. The results of the ZBS are in the main summary report, The profile and productivity of Zambian businesses. Analysis of the data resulted in four technical papers, including this one. The other papers cover: • The business landscape, which looks at the environment in which Zambian businesses operate (The business landscape for MSMEs and large enterprises in Zambia) • Productivity, which examines the productivity of Zambian enterprises (Who’s productive in Zambia’s private sector? – Evidence from the Zambia Business Survey) • The Business Facilities Measure, a model that groups enterprises and divides the market into more manageable segments (Segmenting the market into powerful pictures: Application of the Business Facilities Measure - BFM) These reports are available via the web or from the offices of the four partner agencies that produced this work: Zambia Business Forum (www.zbf.org.zm, secretariat@zbf.org.zm); Private Sector Development Reform Programme (www.psdrp.org.zm); FinMark Trust (www.finmark.org.za, julietmunro@iconnect.zm); and World Bank Zambia Country Office (www.worldbank.org/Zambia, Pyramid Plaza, Plot No 746 Church Road, Lusaka. Tel: 260-1 252 811). Acknowledgements This report was prepared by Illana Melzer, Reut Agasi and Harry Botha of Eighty20. The authors wish to acknowledge the generous input and assistance of Roland V. Pearson, Jr. of Siana Strategic Advisors, Juliet Munro of FinMark Trust and consultant Bwalya Chona. Other members of the review team were George R. Clarke, Texas A&M International University, Manju Kedia Shah, research economist and consultant at the World Bank in Washington DC, Marie Sheppard, World Bank Group, Zambia, as well as members of staff of the Private Sector Development Reform Programme and the Zambia Business Forum. 2 Contents EXECUTIVE SUMMARY ..................................................................................................................... 5 Access to banking products ............................................................................................................ 6 Access to credit ................................................................................................................................ 7 Access to insurance .......................................................................................................................... 8 Conclusion ........................................................................................................................................ 8 1. INTRODUCTION………………………………………………………………………………………………………………...9 1.1 Primary focus and data sources ............................................................................................ 9 1.2 The importance of access to finance .................................................................................... 9 1.3 Measuring access: An overview of the Access Frontier Methodology…………………….……. 10 2. AN OVERVIEW OF THE FINANCIAL SECTOR IN ZAMBIA…………………………………………….…….12 3 ACCESS TO BANK ACCOUNTS…………………………………………………………………………………….…...16 3.1 Banked: The current market……………………………………………………………………………………….…..17 3.1 Unbanked: An introduction............................................................................................... ..24 3.2 Unbanked: The supra-market zone.................................................................................... .25 3.3 Unbanked: The market development zone ........................................................................ 25 3.3.1 Physical proximity............................................................................................................ 25 3.3.2 Affordability ..................................................................................................................... 28 3.3.3 Formality and access to documentation ......................................................................... 32 3.3.4 Financial literacy, knowledge and awareness ................................................................. 33 3.3.5 Lack of trust ..................................................................................................................... 34 3.4 Unbanked: The market enablement zone .......................................................................... 35 3.5 Banking access frontier summary ....................................................................................... 35 4. ACCESS TO CREDIT……………………………………………………………………………………………………………38 4.1 The current market: Credit usage by businesses in Zambia ............................................... 39 4.2 The supra-market zone ....................................................................................................... 42 4.3 The market development zone ........................................................................................... 42 4.3.1 Collateral ......................................................................................................................... 42 4.3.2 Group-based lending ....................................................................................................... 43 4.3.3 Loan affordability and client eligibility ............................................................................ 43 4.3.4 Physical proximity............................................................................................................ 44 4.3.5 Documentation................................................................................................................ 45 4.3.6 Financial literacy and awareness ..................................................................................... 45 4.4 The market enablement zone ............................................................................................. 46 4.5 Credit access frontier summary .......................................................................................... 46 5. ACCESS TO INSURANCE……………………………………………………………………………………………………51 5.1 Insurance: The current market ........................................................................................... 51 5.2 The uninsured ..................................................................................................................... 53 6 CONCLUSIONS AND RECOMMENDATIONS……………………………………………………………………. 55 3 Abbreviations ATM Automated teller machine FSAP Financial Sector Assessment Programme FSDP Financial Sector Development Plan GPRS General Packet Radio Service KYC Know your customer LBS Large Business Survey MFI Microfinance institution MSME Micro, small and medium enterprise NAPSA National Pension Scheme Authority NBFI Non-bank financial institution POS Point of sale Zanaco Zambia National Commercial Bank ZBS Zambia Business Survey 4 Executive summary The Zambian financial services sector comprises 16 commercial banks and 71 non-bank financial institutions (NBFIs), among which are 15 microfinance institutions (MFIs) and 11 leasing and finance companies1. The Government of the Republic of Zambia’s Financial Sector Development Plan (FSDP) launched in 2002 has focused on a range of interventions to enable the Zambian financial system to become a “stable, sound and market-based financial system� that supports “efficient mobilisation and allocation of resources necessary for economic diversification, sustainable growth and poverty reduction�. There have been noticeable improvements since the launch of the FSDP including an increase in domestic credit to the private sector, an expansion of the footprint of banking services, improvements to the national payments system, and the launch of the first credit reference bureau. Nevertheless a recent review of these reforms noted that further efforts are required to counter the “tendency of the Zambian financial sector to participate in but not help drive market-based economic growth�2. Data from the Zambia MSME Survey highlights very limited use of formal financial products. Overall, using the most liberal definition of banking access, no more than 10% of micro, small and medium enterprises (MSMEs) in Zambia are banked. Less than 2% of MSMEs say they currently have a loan for the business, other than for starting the business. Insurance product penetration for MSMEs is extremely low. According to the survey, access to finance is perceived by more than 20% of MSMEs as a “very severe obstacle� to the current operations of the business, while a further 29% rate it as a “major obstacle�. It is noteworthy that large enterprises similarly rate access to, and cost of, finance as serious obstacles to doing business in Zambia. It is crucial to acknowledge that, in the face of other significant barriers to business development, finance on its own is unlikely to engender growth. Still, an exploration of the nature and magnitude of the factors that inhibit access to finance can yield important insights into interventions required to foster market development. The primary emphasis of this study is to explore demand-side data relating to access to financial services. While some reference is made to existing supply-side analyses of the financial sector in Zambia, this paper does not incorporate a comprehensive supply-side review. Researchers note the difference between usage, which is directly observable, and access, which is not. By definition those who use a product have access to it. The converse, however, does not hold. Non-users may in fact have access to a product, but may choose not to use it for a range of reasons. From a policy perspective it is critical to explore this nuance. In addition, it is useful to identify and where possible quantify the nature and magnitude of the various constraints to access. These include barriers such as affordability, distance from banks and lack of knowledge of banking products. The Access Frontier Methodology, developed by David Porteous3, facilitates this analysis effectively when rich demand-side data is available. The detailed analysis of access to banking and credit therefore makes extensive use of this framework to explore ZBS data. 1 As at June 2009. 2 Supply-side study of the inclusiveness of Zambia’s financial system. Report for FSDP Implementation and Steering Committees, Oxford Policy Management with PMTC Zambia, November 2007. 3 The access frontier as an approach and tool in making markets work for the poor. David Porteous, 2005. See http://www.finmarktrust.org.za/Documents/AccessFrontierTool.pdf. 5 The Access Frontier Methodology takes into account the specifications of a particular product such as pricing, minimum deposits, distribution channels, service channels and marketing approaches. This is used to derive a set of criteria that delineate the profile of potential users from those who would be excluded from accessing the product by design or omission. The analysis in the report covers access to three primary financial product types: banking products (transaction and savings products), unsecured credit, and insurance. 1.1 Access to banking products The analysis highlights that while access does vary depending on product specifications, even in the best case 85% of MSMEs cannot access the banking products reviewed. The survey finds that 62% of unbanked MSMEs cite limited income as a reason for not having a bank account. It is not clear whether this reflects perceptions relating to supply-side or bank-stipulated balances or usage thresholds, possibly because of poorly informed perceptions about the potential benefits of having a bank account, or a considered and entirely rational trade-off made by the business owner. To assess this more rigorously, a set of assumptions about an affordability threshold and a typical usage profile together with data on fee structures has been used. According to this analysis, more than 70% of MSMEs would be unable to afford the most cost-effective product reviewed. High banking fees have been highlighted in several studies on the financial sector in Zambia. The Oxford Policy Management’s 2007 supply-side analysis of Zambia’s financial system notes that a “heavy reliance on fees, net liquidity and high spreads results in the very high costs for users of basic bank deposit and transaction services whether they are individuals or enterprises�. The report notes that “deposits are clearly priced to carry all operating costs� and that “three times as much is charged in fees on deposit accounts as is paid out in total deposit interest�. In part this reflects the limited economies of scope4 that characterise the industry. Bank lending activity is limited and by implication contributes marginally to overheads. The report also suggests that banks are unwilling to lower fees, because they simply do not believe a market for the product exists beyond the formally employed and large enterprise market they currently serve. Further, significant changes to operating models are needed to serve lower-income market segments profitably. Aside from affordability barriers, physical access barriers are also significant. There are 15 districts, home to almost 13% of MSMEs, where there are no bank branches at all. The introduction of cellphone-based banking in Zambia can potentially enhance access. According to the survey around 40% of unbanked MSMEs own or have access to a cellphone. However, solutions introduced by existing banks rely on traditional banking infrastructure to facilitate transactions such as deposits and withdrawals. In that sense current solutions can be characterised as ‘additive’ in that they enhance existing solutions by providing customers with an additional channel for transacting rather than fundamentally transforming them. For cellphone banking to be ‘transformational’ and open up services to currently unbanked people banks would need to focus less on enabling cellphone devices to act as additional channels and more on leveraging the cellphone network to facilitate the secure exchange of transactions data. 4 Economies of scope relate to efficiencies achieved as a result of changes in the number of products marketed. For instance a network of branches selling only one product is likely to be less efficient than the same network of branches selling many products. 6 GPRS-based5 correspondent banking models where local retailers are used as bank agents to facilitate cash deposits and withdrawals have been introduced successfully in Kenya (M-Pesa) and the Philippines (G-Cash), and offer significant potential to enhance access to banking in Zambia. A recent pilot of a solution of this nature by Mobile Transactions Zambia Ltd (formerly Zoona) is now rolling out nationwide. This solution has the potential to significantly enhance access, although its current pricing structure would still place it beyond the reach of many MSMEs. Demand-side constraints such as financial literacy and awareness also impact on access. Data in the survey highlights limited familiarity with basic terminology. While over 90% of the unbanked say they know what a bank is, less than half are familiar with terms such as “savings account� or “current account�. For the banks reviewed as part of this study all application forms, statements, ATM menus and other formal communication material are available only in English. Data from the survey indicates that around 40% of the unbanked cannot read English. 1.2 Access to credit The access to credit analysis indicates that there is limited scope to expand the current market using available solutions. Between 0.3% and 0.5% of MSMEs appear to have access to business loans offered by lenders such as Pelton Finance and Barclays. This is primarily because turnover thresholds are well above the reach of most MSMEs. In addition, the requirement that businesses be formally registered (in the case of SME loans provided by Barclays) and that businesses retain financial records are additional barriers. Like access to banking products, physical access constraints are also noticeable, as are demand-side factors such as awareness. The analysis highlights the importance of co-ordinated interventions that address obstacles systematically to enhance access in a sustainable way from the perspective of potential borrowers (to avoid overindebtedness), lenders (to prevent losses but at the same time to increase product usage), and the financial system as a whole. Low levels of access may not reflect problems of access within credit markets themselves. Indeed, quite the opposite – higher levels of access may simply be unsustainable, ultimately leading to instability within the financial sector. In some cases factors that inhibit access reflect problems of access. Alternatively they might be entirely appropriate (for example poor capacity to repay limiting scope for further borrowing) or symptomatic of other significant deficiencies within the business. Efforts to expand access to credit without the development of accessible savings products may create a host of additional access problems. Data from the survey highlights that while savings is a critical source of capital for MSMEs,6 formal savings activity is currently limited. Eight percent of MSMEs save through informal savings clubs known as chilimbas, while the most frequently cited savings mechanisms include illiquid savings through agricultural products, land and livestock. Already there may be cause for concern that with the fairly rapid growth of the personal credit market, the balance between credit and savings is already out of kilter. Access to basic savings products provided by banks appears to be limited by high threshold costs, high minimum balances and high penalties, and competition may be limited by restrictions on deposit-taking activities of MFIs and the small contractual savings industry. Providing credit is unlikely to help MSMEs grow if other requirements for success are absent. This suggests the need for a more targeted strategy to facilitate the growth of MSMEs – with finance 5 GPRS (general packet radio service) is a type of telecommunications technology that allows fast connectivity at a relatively low cost and can be used in areas where there is a cellular network but no landlines. 6 Almost two thirds of the MSMEs that needed start-up capital relied on personal savings. 7 playing a critical, but integrated role. For example, deeper analysis of this terrain may reveal scope for industry-based value-chain solutions (such as outgrower schemes), as these schemes typically provide other key inputs required for success. 1.3 Access to insurance Insurance product penetration for MSMEs is extremely low. Less than 1% of MSMEs have vehicle insurance, the most popular insurance product. In contrast, 96% of large businesses currently have insurance for business purposes. For those MSMEs that do not have insurance, over half say they do not understand what insurance means. Data elsewhere in the survey corroborates this; 58% of MSMEs that do not have insurance say they do not understand or have never heard the word insurance. Clearly distribution models that rely on unassisted sales will be ineffective, unless greater awareness of insurance is developed. That so few MSMEs are banked presents another obstacle to access; premiums for life, health and funeral insurance are mainly collected monthly by debit order or direct salary deduction. General insurance premiums are often paid once a year in a lump sum, which presents its own access challenges – the ability to generate a sufficiently large lump sum to afford the product. 1.4 Conclusion The MSME and large business data from the ZBS probably confirm much of the knowledge and many of the assumptions about access to finance for businesses in Zambia that key stakeholders may have had prior to conducting the survey,. In general, MSMEs show extremely low levels of access and usage, with no more than 10% (using the most liberal definition) having any access to any formal financial service product. On the other hand, all of the large enterprises surveyed reported having at least one formal financial service product, with many having multiple banking relationships and using multiple products. The data points to many deficiencies in, and barriers to, the products offered. At the same time, examination of the MSMEs themselves reveals intrinsic demand-side problems too. At least two- thirds of all MSMEs are single-person entities, which are often indistinguishable from the household, and in many cases appear to be survivalist rather than viable commercial entities. Among these single-person entities, 40% generate less than $2 a day in turnover. Excluding those MSMEs which refused to answer or did not know turnover figures, only 15% of MSME owners report a turnover of $200 a month or more. The vast majority of MSMEs operate very simple and mostly agricultural related businesses (i.e. grow and sell). Overall most Zambian MSMEs would be difficult to serve, even with the cheapest and most widely dispersed products. And while the potentially transformative aspects of good financial services are acknowledged, it seems unlikely that such transformation would happen without serious investment in building the basic capacity of MSMEs and the development of other supporting infrastructure to facilitate access to markets, information and other critical inputs. 8 2 Introduction 2.1 Primary focus and data sources This study summarises the findings of an extensive analysis of recent demand-side data relating to usage of, and access to, financial services for businesses in Zambia. It forms part of a broader study of businesses in Zambia. The principle data source for the study is the 2008 Zambia Business Survey (ZBS) which comprises a nationally representative survey of 4 800 MSME7 businesses and a survey of 161 large businesses8 which is not nationally representative. In addition, data from the FinScope Zambia 2005 household survey9 have been used where appropriate. While that survey is a consumer survey, the data can be useful for characterising access and living standards for those businesses that could perhaps be better described as household-based enterprises as opposed to self-standing entities. As with all surveys, both sampling and non-sampling errors may impact on findings. Further, FinScope surveys are, by design, surveys of perceptions. In some cases this may limit the objective veracity of the data – aside from cases where respondents prefer not to disclose some issues, they may fully and truthfully report a perception that is not based on fact10. Through the analysis, data from other sources are used to highlight areas where this might have happened. The primary emphasis of this study is to explore demand-side data relating to access to financial services. While a cursory overview of the supply-side conditions of the financial services industry is included in Section 3, the study does not incorporate a detailed assessment of the regulatory, institutional and competitive forces that shape the financial sector in Zambia. The study should therefore be viewed as a point of departure for further discussion and research on the issue of access to finance for businesses in Zambia, incorporating the findings of other recently conducted supply-side studies, analyses of additional supply-side data (such as spatial mapping and comprehensive product data), as well as rich qualitative demand-side studies to explore specific issues. 2.2 The importance of access to finance The importance of access to financial services in fostering growth has been noted by researchers and policymakers. In Zambia the Financial Sector Development Plan (FSDP) has identified specific initiatives to deepen and broaden the financial sector to “support efficient mobilisation and allocation of resources necessary for economic diversification, sustainable growth and poverty reduction�. The Ministry of Commerce, Trade and Industry, in its Micro, Small and Medium Enterprise strategy notes that “Finance is a crucial input for the creation, expansion and development of MSMEs�. The ZBS also highlights access to finance as a critical obstacle that hampers business success. Access to finance is cited by over 20% of MSMEs as a “very severe obstacle� to the current operations of the business, while a further 29% rate it as a “major obstacle�. The cost of finance is also highlighted as an obstacle, although it is less frequently cited as a severe or major obstacle (11% and 15% 7 An MSME business is one that has up to 50 employees. 8 A large business is one that has more than 50 employees. 9 This survey of 3 998 adult respondents provides a detailed overview of perceptions of, attitudes to and stated usage of financial services. It also contains detailed demographic data to enable a rich assessment of access. 10 Where these perceptions inhibit product adoption this can constitute an access barrier. 9 respectively). Large businesses are more likely to cite the cost of finance as a very severe or major obstacle, as compared to access to finance11. It is crucial to acknowledge that in the face of other significant barriers to business development, including low skills and limited access to information, markets and other factors of production, finance on its own is unlikely to engender growth. Nevertheless an exploration of the nature and magnitude of the factors that inhibit access to finance can yield important insights into interventions required to foster market development in that specific sphere. 2.3 Measuring access: An overview of the Access Frontier Methodology12 Survey data typically provides useful information on product usage or take-up. Researchers, however, have noted the distinction between usage and access. Porteous (2005) notes that many more people may have access to a product than those who choose to use it. The focus on access as opposed to usage helps identify what proportion of the target market can obtain or use a specific product, if they choose to do so; and what proportion of the market is unable to use the product because one or more aspects of the offering effectively exclude them. The distinction between those who have access and those who do not is crucial for both policymakers who wish to encourage increased usage of what are thought to be merit goods, and product providers that seek to increase the addressable market for purely commercial purposes. An analysis of access is more complex than a review of usage. As noted, usage is directly observable either using survey data or using data from various product providers. Access, by contrast, is not. The Access Frontier Methodology described by Porteous is a useful framework to guide an analysis of access. The methodology explores the degree of congruency between product-level supply factors and demand conditions. Key aspects of the offering defined by product providers are overlaid against the characteristics of the market to determine how many businesses could use a product as it is currently configured. The Access Frontier Methodology enables access barriers to be identified and quantified. It is a particularly useful framework for analysing demand-side data where access is the key consideration13. It is noted that the framework is more commonly applied to products targeting individuals rather than businesses. However, given the profile of the vast majority of business enterprises in Zambia, the methodology remains particularly effective in unpacking access constraints, although in some instances its application has been modified in line with the profile of enterprises as opposed to individual end-users. The access frontier methodology uses a market map, comprising a number of market zones corresponding to various levels of access: • The current market: This zone comprises those enterprises that currently have or use the product (who, by definition, have access to the product). 11 4% of large businesses say access to finance is a very severe obstacle while 21% say it is a major obstacle. 6% say the cost of finance is a very severe obstacle to doing business while 27% say it is a major obstacle. The most frequently cited severe obstacle to doing business for large businesses is electricity (14%). 12 This section of the document is based on a paper by Illana Melzer entitled Access to Savings in LSMs One to Five. The framework described is in turn based on the Porteous (2005) paper. 13 Of course a comprehensive supply-side analysis of access is critical to identify underlying drivers at a macro, meso and micro level that give rise to the status quo. It is noted that this paper is principally an analysis of demand-side data. Different, and no doubt complimentary, conclusions would arise from a supply-side analysis. 10 • The market enablement zone: Those that are within reach of the market, given the parameters of an existing product, but do not currently have the product lie in the market enablement zone. This zone can be further sub-segmented into those enterprises that actively choose not to have a product, and therefore lie beyond the natural limits of the market, and those that have not yet purchased the product but are candidates for doing so. • The market development zone: This zone comprises those enterprises that cannot currently access the product but who may well be able to access the product in the near-term, given changes to the product, product innovation and/or changes in market dynamics, such as innovations in cellphone banking or changes in know your customer (KYC) requirements. • The market redistribution zone or supra market zone: In Porteous’s original paper this zone comprises individuals who lie beyond the reach of the market mechanism because they are too poor. People in this zone typically require non-market interventions to enable them to access the product under consideration. In other words, the state may be required to intervene, either on the supply or demand side (or both sides) of the market to close the gap between the reasonably lowest cost provision of the product or service and the reasonably highest price at which the product or service could be bought. The identification of enterprises (as opposed to individuals) in this zone presents a number of challenges. While there is no data in the survey to assess poverty levels of the individual MSME business owner, data from the survey confirms that many MSMEs are very small; over one quarter have monthly sales of less than K100 000 or around US$20, using an exchange rate of K5 140 to the US Dollar14. However, it can be difficult to determine where the cut-off between small but viable, and small but barely survivalist lies. Further, the delineation of this zone clearly differs by product. For example, credit products can fundamentally shift the capacity of the enterprise to generate surpluses, which can in turn be used to finance the loan. Further, the way products are priced is critically important. With banking products, pay-per-use solutions can be accessible even to those who are very poor, if they have access to a lump sum at some point. In addition, product cross-subsidies from credit products for instance to transaction banking or savings products can result in very low fees. The determination of the supra market zone therefore differs by product and is described in more detail in the analysis of individual products discussed in later sections15. 14 As at October 5, 2009 15 No doubt a strong argument can be made for some form of intervention to enable such small entities to access various financial products. However, just because a market redistribution zone exists, it does not mean that intervention of any kind would be optimal. Aside from demand-side considerations incorporated in this report, supply-side considerations including the capacity of the state to intervene in markets effectively and efficiently would need to be considered. In addition, given that there are competing claims on state resources a case would need to be made that direction of funding towards some form of intervention would yield higher returns than an investment in other areas. For example, greater economic returns may be gained through investments in physical capital (e.g. roads and electricity) and human capital (e.g. education), as opposed to directly underwriting the sale and usage of a particular financial product. 11 3 An overview of the financial sector in Zambia The Zambian financial services sector comprises banks and non-bank financial institutions (NBFIs). As at end June 2008, there were 14 commercial banks (as at December 2010 there were 17 registered banks) and 71 NBFIs, including 15 microfinance institutions (MFIs) and 11 leasing and finance companies. The balance sheet of the banking industry and NBFIs (excluding the Bureaux de Change) for 2008 is shown in Table 1. Table 1. Financial Institutions Balance Sheet as at June 30, 2008 Assets Loans Deposits K’million % of K’million % of K’million % of total total total Banking industry 14 465 045 5 973 786 9 970 266 Leasing and finance companies 195 381 17% 156 806 21% 28 033 9% Building Societies 256 618 22% 122 622 16% 120 247 40% Savings and credit banks 168 405 15% 79 237 10% 127 193 42% Development finance 165 031 15% 90 031 12% N/A N/A institutions Microfinance institutions 351 727 31% 308 811 41% 27 461 9% Total 1 137 162 100% 757 507 100% 302 934 100% K = Kwacha Source: www.boz.zm, (Kalyalya, 200816) As part of a broader poverty reduction strategy, the World Bank and International Monetary Fund in 2003 conducted an assessment of the financial system (the Financial Sector Assessment Programme or FSAP) which identified a number of weaknesses in the Zambian financial sector. The Financial Sector Development Plan (FSDP), launched in 2004 in response to this analysis, has focused on a range of interventions to enable the Zambian financial system to become a “stable, sound and market-based financial system� that supports “efficient mobilisation and allocation of resources necessary for economic diversification, sustainable growth and poverty reduction�. These include: • Fostering macroeconomic stability, • Developing a sound regulatory framework, • Creating a “viable pro-poor and effective� rural finance system that provides affordable financial services, • Developing “an insurance sector that adequately protects business and individuals from catastrophic events�, 16 Financial Access and Sustainability of Financial Services in Zambia. Paper Presented by the Deputy Governor – Operations, Bank of Zambia, Dr. Denny H Kalyalya at the Zambia Institute of Chartered Accountants Annual Business Conference, August 7-8, 2008, Livingstone. 12 • Deepening and broadening the non-banking financial sector to “create a more balanced financial structure and promote competition�, and • Strengthening the credit culture17. There have been notable improvements in the financial sector in recent years. Domestic credit extended to the private sector has increased sharply from US$260 million in 2004 to US$1 128.9 million in 2008, an average increase of over 44% per annum18. The number of bank branches increased from 173 in 2004 to 223 in 2008, and the number of ATMs increased from 54 to 295 over the same period19. Two banks, Barclays and Zanaco, now offer Point of sale (POS) services, with 633 POS locations in Zambia; and two banks have recently launched cellphone banking services. Improvements to the national payments system and the launch of the first credit reference bureau are also significant developments. Nevertheless, demand-side data highlights the significant challenges that remain, particularly with reference to micro and small businesses in Zambia. These challenges are likely to have been exacerbated by the recent turmoil in global financial credit markets and the slowdown in economic growth in Zambia. While relatively few MSMEs are involved in export activity, employment in the mining industry has declined and remittance inflows are likely to have fallen, affecting domestic demand. These developments, however, came after the fieldwork for the Zambia Business Survey was completed20. Data on financial product usage from the recent ZBS highlights very low usage of formal financial products by MSMEs, as illustrated in Figure 1. The Figure summarises usage of four product types: transaction products (including bank accounts and money transfer services), savings (including bank accounts and other savings products), credit and insurance (including asset and life insurance) for both MSMEs and large businesses surveyed. Only 11% of MSMEs make use of transactions products compared to 97% of large businesses surveyed and only 2.3% of MSMEs use credit products compared to 45% of large businesses. The contrast between MSMEs and large businesses is most striking with insurance products. Less than 1% of MSMEs have any insurance products, compared to around 97% of large businesses. 17 Section 1, Background to the FSDP, FSDP main report. 18 Bank of Zambia. 19 Financial sector development and poverty reduction, Presentation to the Zambia UN Country Team Annual Retreat, Dr Caleb M Fundanga, Governor, Bank of Zambia. January 23, 2009, Siavonga. 20 For example, recently published data from the Bank of Zambia indicates that credit extended by commercial banks to the private sector experienced three consecutive months of contraction between April and June 2009. 13 Figure 1. Product usage: Enterprises in Zambia An alternative summarised representation of product usage is the financial strand (see Figure 2). Figure 2. Financial strand: MSMEs in Zambia – banked for business Total 7% 6% 6% 80% Urban 20% 8% 13% 59% Rural 5% 5% 6% 85% 0% 20% 40% 60% 80% 100% Percentage of MSME owners Banked for business Other formal Informal Financially excluded Source: Zambia SBS 2008 The strand segments the market into those that have one or more bank account; those that have one or more other formal products such as insurance or credit products, but no bank account; those that have informal products only; and those that have no financial products at all. Note that only those MSMEs that say they use a bank account for their businesses are regarded as being banked. 14 The data clearly shows the discrepancy between urban and rural MSMEs. Twenty eight percent of MSMEs in urban areas are financially included – that is they have either a bank account or some other formal financial product. The corresponding percentage for rural areas is 10% (see Figure 2). A slightly (but by no means dramatically) more positive picture emerges if personal bank account usage is included in the definition of banked, as illustrated in Figure 3. Figure 3. Financial strand: MSMEs in Zambia – banked for business or personally banked Total 10% 6% 6% 78% Urban 27% 7% 13% 53% Rural 6% 5% 5% 84% 0% 20% 40% 60% 80% 100% Percentage of MSME owners Banked for business or personally banked Other formal Informal Financially excluded Data on usage strongly suggests that access among MSMEs is limited. The balance of this report explores access to specific products in more detail and identifies, and where possible, quantifies the magnitude of access constraints. The analysis covers access to three primary financial product types: banking products (transaction and savings products), unsecured credit, and insurance. Other important financing and financial mechanisms – including capital market instruments, secured finance and various non-bank savings products – are not explored in this study. This mainly reflects the nature of the demand-side data that is available. The survey probes usage of, and attitudes to, a core set of fairly basic financial products. Usage of these products by the large businesses surveyed tends in most cases to be high (although in some categories there is scope to increase product penetration). The analysis of access to finance is therefore skewed towards smaller enterprises. The analysis covers products targeting businesses as well as those targeting individuals. Research from various countries highlights the importance of personal financial products in funding businesses. With banking products, according to the ZBS, of those MSME owners who use a bank account for business, 80% use their personal bank accounts for this purpose. At a more fundamental level, many of the MSMEs surveyed appear to be inseparable from the household. A range of indicators from the survey illustrate this. Only 7% of MSME owners say they pay themselves a salary, 15% operate from home, and 56% say they employ family members. The following sections focus on the three core products. The sections on banking (Section 4) and credit usage (Section 5) begin with a brief overview of features of the products under consideration and then explore the current market, characterising users and commenting on available survey data relating to product usage. The barriers to access that prevent potential clients from accessing the product under review are then explored. The discussion on insurance in Section 6 is more general. 15 4 Access to bank accounts Detailed product information was gathered on a set of basic banking products offered by the most widely used institutions: the Barclays SME Current Account; savings accounts from Zanaco, Finance Bank and Zambia National Savings and Credit Bank (NatSave); and the newly introduced Xapit product offered by Zanaco. The basic features of these offerings are summarised in Table 2 Table 2. Banking product description Barclays SME Finance Bank Zanaco Savings Natsave Ordinary Zanaco Xapit Current Account Savings Account Account Savings Account Documentation: Documentation: Documentation: Documentation: Documentation: Company Identification Identification Identification Identification Requirements registration document document document document to open an documents Proof of address Proof of address Proof of address Proof of address account Identification 2 reference letters 2 reference letters Reference letter 2 reference letters document Other: Application letter Proof of address Mobile phone Opening balance: Opening balance: Opening balance: Opening balance: Opening balance: Small: K500,000 to K100,000 K200,000 No opening K40,000 K1 million Fees: Fees: balance. Need a Fees: Medium: K1m to Monthly fee: Monthly fee: starter pack for Monthly fee: K6 million K2,500 K13,500 K30,000 K20,000 Large: Above K6m Cash deposit: Cash deposit: Fees: Cash deposit: Fees: Branch only - free Branch - free Monthly fee: None Branch - free Monthly fee: Cash withdrawal: Cash withdrawal: Cash deposit: Cash withdrawal: K100,000 Branch - K10,000; Branch - K30,000; Branch only - free Branch - K3,000 Cash/cheque own/other ATM - own ATM - K2,500; Cash withdrawal: Debit order: Threshold deposit: Branch K2,000; POS – other ATM – ATM only: own - K50,000 costs and only - K10,000 K10,000 K7,000 K2,500; other - Transfer: K30,000 selected fees Cash withdrawal: Debit order: Debit order: 1% of K7,000 Statement: Branch - K10,000; K2,000 total No debit order Scheduled - free own/other ATM – Transfer: Branch – Transfer: Between Transfer: Mobile Penalty fee K7,500 1% of amount Zanaco – free Zanaco – K3,000; K15,000 if bal. Debit order: Statement: Statement: mobile other –