13 Zambia

Omotunde Johnson, Jean-Marc Destresse, Nicholas Roberts, Mark Swinburne, Tonny Lybek, and Richard Abrams
Published Date:
March 1998
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Zambia, a low-income country, had a population of 8.5 million in 1993. The country has a land area of about 290,000 square miles, and in 1992 per capita GNP was around $370 (World Bank, 1995). The communications and transport infrastructure has significant technical deficiencies, especially outside the main centers, and these are an important reason for long delays in clearing payments. A ten-year plan to upgrade and extend general telephone services began in 1992.

Overview of the Economic and Financial System

After a period of economic stagnation, high and accelerating inflation, and the accumulation of substantial arrears in its external debt, in 1989 Zambia began an economic stabilization and reform program. The pace of reform picked up with a change of government in 1991, and significant financial sector reforms began in mid-1992. These reforms centered on the removal of controls on bank interest rates, and a move toward market-oriented monetary policy instruments, to allow a more effective anti-inflation policy and to rebuild confidence in the national currency (the kwacha).

Until recently, Zambia’s formal financial sector was severely repressed; the ratio of M2 to GDP fell, in the face of rapid inflation and disintermediation, to a very low 17 percent in 1992, less than half the figure of a decade earlier.94 Notwithstanding past financial repression, the financial sector features a relatively large number of mainly privately owned commercial banks. At the end of 1994, there were 19 commercial banks. The financial health and the quality of management in these banks are uneven. While there are major players in the system that are healthy, there are a number of (mostly small) banks whose financial positions are a source of concern. In 1995, three banks were closed, and others received support from the Bank of Zambia (BOZ) in the form of overdraft: loans.

At end-1994, there were two specialized banks and a number of near-bank and nonbank financial institutions (NBFIs). The growth of some of these NBFIs—leasing companies in particular—had been encouraged by controls over bank interest rates, as well as very high statutory reserve and liquidity requirements for banks.

Although both shorter- and longer-term debt securities existed before the financial reforms, yields on government securities were well below market levels and were held mainly by captive institutions for liquidity requirements and similar reasons. With the move from tap to auction sales in January 1993 and a successive tightening of the securities rediscounting facility at the BOZ, securities yields rose significantly and became attractive for voluntary purchasers. Along with this strengthening of the new issues market for treasury bills and bonds, a nascent secondary market in these securities also emerged.

From late 1993 and in the context of the broader financial and economic reforms, the BOZ and commercial banks turned their attention to the cash and noncash components of the payment system. This reflected a greater awareness of the risk and public policy aspects of existing payment arrangements, as well as narrower aspects of economic efficiency and customer service. Proposals for reforms of the check payment system, in particular, were developed after discussions within the BOZ and between the BOZ and commercial banks. The proposals were reviewed by external consultants in early 1995, with a view to their finalization and implementation beginning in late 1995, supported by external project financing.

Institutional and Organizational Framework

The Main Organizations

The main organizations responsible for the operation, oversight, and reform of the payment system in Zambia are the BOZ and the Bankers Association of Zambia (BAZ), through a technical subcommittee. The BOZ established an internal, cross-departmental Payment System Review Committee (PSRC), which initiated the 1993 report on existing payment arrangements, prepared a proposed redrafting of clearinghouse rules, and liaised with the BAZ. By early 1995, however, changes in the membership of the PSRC, including loss of its chairman, posed a risk that momentum might be lost. A formal reconstitution of the PSRC, with a broad mandate for promoting reforms, appeared desirable, as did a more formalized coordinating and decision-making committee, incorporating senior level representatives of the BOZ, commercial banks, and the Ministry of Finance (given its role as a major user of the system).

The Legal Framework

The BOZ’s mandate to take a leading role in oversight and regulation of the payment system derives from its governing legislation, in which the BOZ is given the responsibility to promote “a stable and efficient payments mechanism,” as well as “the liquidity, solvency, and proper functioning” of the financial system. At the operational level, the BOZ’s legislation empowers it, in conjunction with financial institutions, to organize payment clearing services, as well as the standard central banking functions of monopoly currency issue and provision of settlement accounts to financial institutions.

There are important shortcomings in the legal framework governing payments in Zambia, including the lack of significant penalties for check fraud and other abuses and a lack of adequate provision for electronic payments. Clearing and settlement rules for payments are established on a contractual basis through the Zambia Bankers Clearing House (ZBCH). These rules were revised toward the end of 1995; the revised rules became effective on January 1, 1996.

Major Providers of Payment Services and Operators of Payment Systems

Both banks and nonbank financial intermediaries in Zambia provide payment services to their customers; the nonbank intermediaries, not generally having settlement accounts at the BOZ, clear and settle through the main commercial banks. The ZBCH, located in the BOZ, is the only payment clearinghouse organization in Zambia; aside from the BOZ, 18 of the commercial banks and one of the specialized banks are full members.

Payment Instruments

Most transactions by the general public are in cash, with occasional use of drafts and bankers’ checks. The enterprise sector uses checks, bank drafts, and cash, while government ministries use mostly checks. Traveler’s checks are also used. There are no statistics available on the use of different payment instruments in Zambia.

The cash payment system also needs major improvements (but see the final section, below). In particular, there have been large backlogs of unprocessed and unverified currency in BOZ vaults, some dating back to 1993 (when there was a new issue of notes) and earlier. These backlogs may have provided cover for counterfeiting activity, which is reportedly quite significant in Zambia. Given the length of the delays, the BOZ may not be able to charge counterfeit notes back to the submitting banks and may also have to absorb any counting errors in the currency returned by banks months or even years ago. Recent additions to staff and the acquisition of currency processing machines are expected to shrink the backlog over time (see the final section).

Clearing and Settlement Systems


The ZBCH is supervised by its member banks but is owned and operated by the BOZ. The main clearinghouse is in the BOZ head office in the capital (Lusaka), with a subsidiary center in the BOZ branch in a major regional center (Ndola). There is also a relatively new clearing operation in another regional center (Kitwe), operated by the local branch of one of the main commercial banks, at the request of the BAZ, which reports the net clearing position of each of the local bank branches directly to the BOZ in Lusaka. There are similar clearing operations in eight other centers.

Outside Lusaka, the clearing process starts at 9:00 a.m. on working days, with bank representatives meeting in the local clearing center to exchange paper collected the previous day. Net positions are calculated, agreed, and faxed or telexed to Lusaka for the main clearing settlement, which begins at 10:00 a.m. Multilateral net positions are determined, agreed, and debited or credited to BOZ accounts usually within an hour.

The total time for completion of a check transaction can be up to 4 days within Lusaka and from 7 to 21 days outside Lusaka. These delays reflect both infrastructural weaknesses and the banks’ own internal systems and transport choices. The BOZ reports that the delay, and in some cases uncertainty, in clearing times has been hindering economic and financial integration, distorting interbank relations, and penalizing banks with widespread branch networks. Check float mainly works to the advantage of collecting banks, which can invest funds for 4 to 21 days before crediting their customers, and to the disadvantage of paying banks, which will be out of funds for the same period before returning a check as unpaid because of insufficient funds being held on the drawer’s account.

Risk controls are being strengthened in the check payment system. For instance, under the new (revised) rules, if a bank is showing an overdrawn balance on its current account (from the previous day), before commencement of the morning clearing session, such a bank will be suspended from participating in that morning’s clearing and future clearing sessions until such time that it regularizes its overdraft.

Large-Value Transfer System

There is no specific large-value payments facility in Zambia. Some banks will send payment instructions by fax or telex if requested, but banks are cautious about using such processes because of security concerns. Same-day interbank clearing and settlement does not occur at present but could if the daily clearing and settlement time were moved to a later hour. Arrangements to have a second clearing (at about 3:30 p.m.) for large values (K 100,000 and above) have been worked on, with a view to implementing them by end-1996.

There are currently no banks acting as clearing banks for smaller banks and NBFIs. However, the current rules of the ZBCH do permit indirect clearing.

Role of the Central Bank

As noted, and within the framework of its existing legislation, the BOZ has recently assumed a more active leadership role in payment reforms, with initial investigations and reform proposals for the check system formulated by an internal committee. Reforms of the cash payment system are also largely the direct responsibility of the BOZ.

Final settlement of multilateral net clearing positions is posted to the clearing accounts at the BOZ of the members of the ZBCH. Each bank also has two statutory reserve accounts at the BOZ: one for local currency deposits, and the other for foreign currency deposits. Reserve deposits are not averaged and are frozen—that is, they cannot be used for settlement purposes. The reserve requirements, however, are relatively low.95 Where banks are in deficit as a result of daily clearings, there is a penalty discount rate applied to discounting of treasury bills required to clear the overdraft. The rate is adjusted daily on the basis of market movements. In addition, the BOZ offers short-term deposits in market operations to absorb surplus balances, at a rate that in principle is lower than interbank rates so as not to unduly discourage reallocation of surpluses to deficit banks where appropriate.

Major Ongoing and Planned Payment System Projects

From early 1995, the BOZ began developing proposals for the reforms needed in both the cash and noncash payment systems. On the noncash side, near-term reforms are focusing mainly on improving the existing paper-based system, while in the longer run priority will be given to strengthening the processes for cooperative formulation of a broader strategy for developing payment systems. A fully electronic payment system, especially for large-value payments, is likely to be some way off, although there is ample scope for increased automation of key parts of the current system.

As a result of recent efforts in the cash payment system, the backlog of unverified cash held at the BOZ has been greatly reduced through recruitment of additional labor; new currency processing machines are currently being installed that will increase output and efficiency; and higher denomination notes (K 10,000, K 5,000, and K 1,000) were introduced in June 1996, which will reduce the quantity of notes in circulation and will contribute to note-processing efficiency. Also, in the noncash payment system, a National Payment Systems Committee (NPSC) has been formed to oversee the reform process, comprising representatives from the banking community, BOZ, and the Ministry of Finance. The NPSC currently has two working groups reporting to it; the first working group is examining the introduction of MICR as a national standard, and the second is examining communication systems with a view to recommending improvements. There is also a working group currently reviewing the clearinghouse rules to facilitate a second clearing for large values (mentioned above) and to work out modalities for moving ownership of the clearinghouse from the BOZ to the commercial banks.

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