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									ZAMBIA MICROFINANCE SCAN




       MICRONED
          LUSAKA
         MAY 2008
                                        Cover painting: Market by Japau
     Work of this and other young Zambian artists pictured in this report is available through www.kachaka.com


ZAMBIA MICROFINANCE SCAN - MICRONED                                                                              2
TABLE OF CONTENTS




                           Market by Steven Mbazi



      INTRODUCTION                                   4

1.    GENERAL INFORMATION                            6
1.1   History                                        6
1.2   Current Developments                           7

2.    THE FINANCIAL SECTOR                           9
2.1   General Overview                               9
2.2   The Banking Sector                             9
2.3   The Microfinance Sector                       11

3.    MICROFINANCE SERVICES                         13
3.1   General Characteristics                       13
3.2   Microfinance Suppliers                        15
3.3   Support and Funding Needs                     19
3.4   Donors and Investors                          20
3.5   Support Gap Faced by MFIs                     21
3.6   Support Gap Faced by Clients                  25

4.    ACTORS ON SECTOR LEVEL                        28
4.1   Microfinance Support Industry                 28
4.2   Sector Needs                                  28
4.3   Future Perspectives                           29

5.    CONCLUSIONS AND RECOMMENDATIONS               32
5.1   Conclusions                                   32
5.2   Recommendations                               33

6.    RESOURCES                                     35




ZAMBIA MICROFINANCE SCAN - MICRONED                  3
INTRODUCTION




                                       The Market by Francis Mwanza



This Microfinance Scan on Zambia is a working paper based on literature review and
interviews of key stakeholders in mid May 2008. It was prepared by Herman Abels and
Henry Oketch of Blue Rhino Consult BV in close cooperation with Webby Mate of the
Association of Microfinance Institutions of Zambia (AMIZ) and David Musona, an
independent Zambian consultant, who wrote the main text on cooperative and informal
microfinance providers.

The scan was commissioned by MicroNed, a network organization established in early 2006
by Cordaid, Hivos, ICCO and Oxfam Novib in order to strengthen and coordinate the joint
contribution of Development Finance Organizations in the Netherlands to the microfinance
sector. As only less than 20% of the poor have access to financial services MicroNet
members aim to increase their efforts to supporting new and emerging MFIs. Furthermore
MicroNed aspires to strengthen national microfinance sector interventions, geared to the
development of an enabling environment. Coordination and collaboration in countries and
regions as well as on specific themes play a central role. MicroNed will not provide direct
support to retail MFIs; this remains the domain of its member organizations. MicroNed will,
however, harmonize its members’ activities as far as grant support for sector development in
selected focus countries is concerned. Each focus country has a coordinating member
organization responsible for developing a country sector development strategy paper serving
as the basis for coordination between the four MicroNed members. For Zambia Cordaid is
the network coordinator. This Zambia scan is the latest in a range of country overviews
commissioned since the inception of MicroNed. Already completed scans can be downloaded
from the network’s website: www.micro-ned.nl.

The microfinance sector in Zambia is relatively young and overall service and outreach
capacities are still limited. Under microfinance regulation the country acknowledges two
types of MFIs: credit companies and so-called development MFIs. The latter category is
older but financially more volatile and has been surpasses in client numbers by the former.
Development MFIs concentrate on urban informal sector workers but find it hard to retain
their clients. Most struggle with inadequate retail capacity and lack of entrepreneurial spirit,
which is partly the result of the absence of client feedback mechanisms.

Against the background of disappointing performance as regards outreach and sustainability,
the recently introduced microfinance regulation is often perceived as a threat, whereas the
opportunities offered at the same time are hard to grasp by many MFIs.

It is difficult to break through the current pattern of stagnation by merely focusing on
capacity building for individual MFIs. What is required, instead, is a national consensus on
minimum performance standards that allows development MFIs to grow and strengthen their
ZAMBIA MICROFINANCE SCAN - MICRONED                                                           4
institutions and the Bank of Zambia, the regulator and supervisor, to assess performance
against standards that are meaningful and supportive for the development focused segment of
the microfinance sector. Such an over-arching supervisory framework could then function as
the standard against which individual capacity enhancement efforts can be modeled and
assessed.

In that context it is quite fortunate that MicroNed has embarked on a support strategy that
aims to strengthen the microfinance sector at large by zooming in on the sector’s meso level.
That kind of support is much needed and would be widely appreciated by Zambian
stakeholders.


Lusaka, Utrecht,


May 2008,

Herman Abels
Henry Oketch
Blue Rhino Consult BV




ZAMBIA MICROFINANCE SCAN - MICRONED                                                        5
1. GENERAL INFORMATION




                       Tambalala Market by Steven Mbazi



1.1.   HISTORY

Zambia is a large country with a land area of roughly 750,000 km2 on the South-Central
African plateau. Its 11 million inhabitants mainly live along ‘the line of the rail’ that was
built to connect the capital Lusaka with the resource-rich Copperbelt mining province in the
north and Zimbabwe in the south-east. Due to this population concentration Zambia is one of
the most urbanized countries in Africa with only 60% of all Zambians living in rural areas.

Zambia was inhabited by Khoisan hunter-gatherers until the 4th century after which migrating
tribes started coming in, particularly Bantu speaking peoples from the east. The Tonga people
were the first to settle. The Nkoya people were early settlers arriving from the Luba-Lunda
kingdoms in southern Congo and northern Angola. Much later, 18th century, they were
followed by the Nsokolo people settling in the north of the country and in the 19th by the
Ngoni from the south. By the late 19th century most immigrant people had occupied the
regions where they still live today.

Its landlocked geographical position has kept Zambia largely free from foreign interest until
the 19th century, except for incidental explorers such as Franscisco de Lacerda in the 18th and
David Livingstone in the 19th century. In 1888, however, the British South Africa Company
of Cecil Rhodes managed to obtain mineral rights from the Litunga, the king of the Lozi, for
the areas later to be named North-Western Rhodesia by the British. More to the east similar
rights were obtained from King Mpezeni of the Ngoni, after he was defeated in battle, and his
kingdom was renamed as North-Eastern Rhodesia. Both separately administered territories
were merged in 1911 to become Northern Rhodesia.

In 1923 the British government decided to void the Company’s charter and a year later
Northern Rhodesia was brought under the administration of the British Colonial Office.
Thirty years later Northern Rhodesia was brought together with Southern Rhodesia
(Zimbabwe) and Nyasaland (Malawi) in the Federation of Rhodesia and Nyasaland, against
the wish of most of the population. Especially in Northern Rhodesia this forced union led to
turmoil and crisis that eventually erupted in the emergence of a strong independence
movement initially led by the African National Congress (ANC) of Harry Mwaanga
Nkumbula and later by the United National Independence Party (UNIP) of Kenneth Kaunda.
Calls for secession from the Federation resulted in its collapse in December 1963 and
Northern Rhodesia became the independent Republic of Zambia on 24 October 1964 with
Kaunda as its first president.



ZAMBIA MICROFINANCE SCAN - MICRONED                                                          6
1.2.    CURRENT DEVELOPMENTS

Upon independence Zambia was a relatively prosperous country due to its mining-based
economy. Mining revenues were used to finance public sector companies, social services,
agricultural subsidies, public infrastructure and regional industrial development; all priorities
under the country’s central economic planning model. By 1975 the country had achieved
substantial progress: per capita income and life expectancy had increased yet two-thirds of
the population continued to live in poverty. By the early seventies economic growth started
slowing down because of Zambia’s isolated position as most of its neighboring countries
were involved in independence or anti-apartheid struggles.

Since 1975 per capita income started to drop due to various inefficiencies resulting from
economic policies and a collapse in copper prices in the world market. Overall deterioration
forced the government to implement a range of restructuring measures in the 1980s,
culminating in a comprehensive reform package in 1991 which also affected the political
system. The single party system was traded for multi-party democracy and the old
government party (UNIP) had to make way for the new MMD, which also managed to have
its leader Frederick Chiluba succeeding President Kaunda. Whilst the MMD pursued liberal
economic policies, the impact thereof was quite limited due to large-scale corruption and
mismanagement. Not until the turn of the 21stcentury did the economy recover.

Since 1999 Zambia has recorded positive and uninterrupted GDP growth in combination with
lower inflation rates (currently 11%) and diversification of economic investments. The fastest
growing sectors now are mining, energy (hydro power), construction, agriculture and
tourism. In 2005 Zambia benefited from significant debt relief under the Heavily Indebted
Poor Countries initiative (HIPC) and the Multilateral Debt Relief Initiative (MDRI).

In spite of the new tidings, Zambia COUNTRY STATISTICS                     2006   2005    2000
only ranked 165th out of the 177 Land surface (sq. km)                  752,600 752,600 752,600
countries monitored in the Human Population growth
                                        Population
                                                                          11.7M
                                                                           1.9%
                                                                                  11.5M
                                                                                   1.8%
                                                                                          10.5M
                                                                                           2.2%
Development Index in 2006. Infant Life expectancy (years)                   41.7    41.0    39.6
mortality rates are amongst the worst Mortality rate (under 5 per 1000)    182.0  182.0   182.0
                                        Primary school completion rate    84.0%  82.7%   60.1%
in Sub Sahara Africa. UNAIDS reports Secondary school enrolment           36.1%  30.4%      23.1
that 920,000 Zambians are HIV Girls-to-boys ratio                         95.9%  92.7%   91.3%
infected and that 89,000 deaths per GNI (USD)
                                        GNI PPP (USD)
                                                                            7.4B
                                                                           13.4B
                                                                                    5.7B
                                                                                  12.3B
                                                                                            3.1B
                                                                                            9.0B
year can be attributed to HIV/Aids. GNI per capita (USD)                     630     490     300
One in five mothers is HIV positive GNI PPP per capita (USD)               1,140  1,070      860
and the country counts 630,000 Aids GDP (USD)
                                        GDP growth
                                                                           10.7B
                                                                           6.2%
                                                                                    7.3B
                                                                                   5.2%
                                                                                            3.2B
                                                                                           3.6%
orphans. Roughly 65% of all hospital Foreign debt (USD)                    575M    262M    121M
beds are occupied by people with ODA                                     1,400M    935M    794M
HIV/Aids related infections. Other World Bank April 2007
main causes of death are malaria at 50,000 victims per year, tuberculosis, diarrhea,
pneumonia and other preventable or treatable infections. Life expectancy at birth is only 42
years mainly because of HIV/Aids, which prevalence among the adult population is 21.5%
and the fourth highest in the world.

The majority of Zambia’s labor force, persons of Employment Formal Informal            Total
15 years and older, is working in the informal Male              330,109 1,611,710 1,941,820
sector, predominantly made up of the small scale Female          131,383 2,058,329 2,189,820
                                                     Total       495,784 3,635,747 4,131,531
and peasant farming sector. The country’s formal
sector is small and has suffered from the effects of downsizing, privatization and in some

ZAMBIA MICROFINANCE SCAN - MICRONED                                                            7
cases the liquidation of state-owned enterprises (SOEs). In 2005 employment in the formal
sector was approximately 500,000 against 3,600,000 in the informal sector. The
unemployment rate stands at 16%. More women are employed than men and they represent a
greater share in the informal sector and a smaller one in the formal sector.1

According to the Living Conditions Monitoring Survey (LCMS) of 2004, 68% of the
population fell below the national poverty line; a small decrease from the 73% measured in
1998. Extreme poverty, measured by a lower poverty line reflecting minimum requirements
of food only, dropped from 58% in 1998 to 53% in 2004. The slight decline in poverty was
primarily driven by rising per capita consumption and evenly distributed over rural and urban
communities. This represents a departure from the experiences of 1991-1998 during which
time non-farm poverty rose sharply.




1
    2005 Labour Force Survey.

ZAMBIA MICROFINANCE SCAN - MICRONED                                                        8
2. THE FINANCIAL SECTOR




                                In the Market by Japau




2.1.   GENERAL OVERVIEW

The formal financial sector in Zambia is made up of the central bank, 13 commercial banks,
with just over 200 branch offices collectively, insurance companies, pension funds, the
capital markets and a range of non-bank financial institutions. These include three building
societies, 12 MFIs, the National Savings and Credit Bank (NSCB or NatSave), the
Development Bank of Zambia (DBZ) and 37 bureaus de change and leasing companies.

The recently privatized Zambia National Commercial Bank (ZNCB) and the foreign banks
dominate the financial sector. Commercial banks hold about 90% of all assets in the financial
sector. Foreign ownership accounts for three quarters of the banking sector’s capitalization.
There are five larger commercial banks: Barclays, Standard Chartered, Citibank, Stanbic and
ZNCB.

The insurance sector is very small, contributing only 1.5% of GDP in premiums in 2000, and
is dominated by an insolvent public sector institution, the Zambia State Insurance
Corporation (ZSIC). The pension sector consists of the National Pension Scheme (NPS),
which is mandatory for all employees in the public sector, and a few smaller private sector
outfits.


2.2.   THE BANKING SECTOR

Zambia embarked on financial sector reform and liberalization in the early nineties to create a
more competitive and market-driven financial system. In the mid nineties the country
counted six foreign banks accounting for 67% of assets, 76% of loans and 64% of deposits in
the system. The influx of foreign banks, however, did not translate in any significant form of
financial deepening. In 2005, after 24 years of reform, the amount of credit delivered to the
private sector only represented 8% of GDP, which is lower than the percentage registered in
1990. Only 5000 people held 90% of all loans and only 8% of the adult population had a
bank account in 2005. Rural service delivery steadily declined until very recently and the
microfinance sector by 2005 only reached 50,000 clients or 0.005% of the population.

Major reasons for the low level of access to financial services are the high cost of service
delivery, the small branch network of banks, unavailability of suitable products and services
for low-income people, and general neglect of the same by regulatory entities. Average
annual interest rate was nearly 50% in 2005 against a prime rate of 20% and a similar
inflation rate. A small number of large corporations and exporters borrow at lower rates, but
ZAMBIA MICROFINANCE SCAN - MICRONED                                                          9
most small and medium enterprises pay close to 50% or more. Also the costs of savings and
deposits are high. Generally no interest over savings is offered by banks although
administrative charges are applied and most banks require minimum savings amounts to be
maintained and penalty payments are due in case of non-compliance.

An additional reason for low credit delivery to the private     CURRENTY REGISTERED BANKS
sector was the fiscal deficit run by the government which       African Banking Corporation Zambia Ltd
compelled banks to lend to the public rather than the private   Bank Of China (Zambia) Ltd
                                                                Barclays Bank Zambia Plc
sector. This trend has largely waved in the most recent         Cavmont Capital Bank Ltd
years as the fiscal deficit dropped from 6% of GDP in 2003      Citibank Zambia Ltd
                                                                Finance Bank Zambia Ltd
to just over 2% in 2005. At the same time, however, 90% of      First Alliance Bank Zambia Ltd
all land is still collectively owned which complicates          Indo-Zambia Bank Ltd
collateral requirements in absence of land titles to be         Intermarket Banking Corporation Ltd
                                                                Investrust Bank Plc
pledged.                                                        Stanbic Bank Zambia Ltd
                                                                Standard Chartered Bank Plc
In retrospect, the financial sector reforms did not yield       Zambia National Commercial Bank Plc

expected results, partly because market liberalization preceded the introduction of a legal and
regulatory framework for the banking sector as a result of which nine out of the country’s 18
banks crashed between 1995 and 2001, with estimated losses to tax payers and depositors
equivalent to 7% of GDP. By the end of 2005 non-performing loans in the banking sector
still represented almost 9% of the total loan portfolio. High loan default rates and arrears
made many banks focus on government bonds, establish very high collateral requirements or,
in the case of Barclays Bank, refrain from new lending at all for several years.

Following poor performance after liberalization, Zambia introduced various quality
improvement trajectories. A major effort was the Financial Sector Assessment Program
(FSAP) conducted by the World Bank and the International Monetary Fund (IMF). It
identified a range of sector weaknesses, the more salient of which were the insolvency of
nearly all public sector financial institutions; the high interest rates and underlying high
operational costs of banks; and the high risks associated with the structural weaknesses of the
Zambian economy such as the dependency on copper. Others included the lack of a financial
safety net leaving the general public highly exposed to bank failures; inadequate supervision;
the conflicting roles of the government as regulator and supervisor, but also as the owner of
various banking institutions and the main borrower in the market; and the significant
reduction of the amount of loanable funds in the market due to persistent fiscal deficits.

Based on the findings of the FSAP, the government formulated the Financial Sector
Development Plan (FSDP) in 2004, which is a comprehensive strategy to strengthen the
financial system and has a six years life line (2004-2010). The FSDP is managed by a
National Committee representing the Bank of Zambia (BoZ), the Securities and Exchange
Commission (SEC), the Development Bank of Zambia (DBZ), the Bankers Association of
Zambia (BAZ), the Association of Microfinance Institutions in Zambia (AMIZ), the Ministry
of Finance and National Planning (MoFNP), as well as various other local stakeholders. The
IMF and the World Bank are involved in an advisory capacity.

The FSDP aims, amongst others, to restore sustained economic growth and macroeconomic
stability; install an effective and efficient legal and regulatory framework; deepen the
financial market; develop a viable pro-poor and effective rural finance system; boost the
insurance sector; deepen and broaden the non-banking financial sector; and contain
deterioration of the public financial sector. To do so, the FSDP is expected to be harmonized
with other national development efforts such as the Poverty Reduction Strategy, the
Domestic Debt Strategy, the Capital Market Development Strategy and the Rural Finance

ZAMBIA MICROFINANCE SCAN - MICRONED                                                                10
Program sponsored by the International Fund for Agricultural Development (IFAD) and
other cooperating partners.


2.3.    THE MICROFINANCE SECTOR

Performance
Zambia’s microfinance sector is quite small, even by CURRENTLY REGISTERED MFIs
African standards. Regulation identifies microfinance as a Bayport Financial Services Limited
sub-sector of the non-banking slot under the Banking and Microfin Africa Zambia Limited
Financial Services Act (BSFA). It is comprised of two Blue Financial Services Zambia Limited
                                                                Nedfin Limited
types of service providers: common MFIs and credit and Butala Finance Limited
payroll lending institutions. The first category is widely Elpe Finance Limited
                                                                Royal Microfinance of Zambia Limited
referred to as development MFIs and the second as credit Letshego Financial Services Limited
MFIs or simply as moneylenders. The latest count by the Capital Solutions Limited
Bank of Zambia identified 12 registered MFIs, 11 of Unity Finance Limited
                                                                Mtawila Financial Services Limited
which are credit institutions, many of which are FINCA Zambia Limited
subsidiary companies of South African outfits. FINCA
Zambia is the only registered development MFI. There are actually more genuine MFIs but
these are still in the process of converting into regulated institutions; which is to say that
nearly all have applied for registration in 2007 but are still awaiting the decision of the Bank
of Zambia.

AMIZ has 18 member organizations and these include all so-called development MFIs. There
are only six with a client base of more than 1000. These are FINCA (12,200), MBT (5500),
PRIDE (4500), PULSE (3356), CETZAM (3200) and HARMOS (3100). Overall outreach of
the microfinance sector is approximately 120,000 clients, LIST OF AMIZ MEMBER MFIs
the majority of which are being served by credit Pulse Financial Services Ltd
companies. The largest player in the field is Microfin Micro Bankers Trust
                                                             PRIDE Zambia Ltd
Africa with 58,000 clients, followed by Capital Solutions Christian Enterprise Trust of Zambia Ltd
with 18,800. The total outstanding portfolio of all AMIZ FINCA Zambia Ltd
                                                             Harmos Microenterprise Development Ltd
members is roughly ZMK 98.5 billion or USD 30M (EUR Ecumenical church Loan Fund (ECLOF)
19.5M). Actual figures of both clients and portfolio value African Housing Fund
are higher as not all members report to AMIZ.                National Trust for the Disabled
                                                                  National Savings and Credit Bank
                                                                  Women Finance Cooperative
AMIZ’s ongoing scanning of the market indicates that at           Lutheran World Federation
                                                                  Peoples Participation Service
least 300 entities are involved in microfinance. Apart from       YWCA – Lusaka
both types of MFIs (development MFIs and credit                   YWCA – Mongu
companies), the country is host to a range of savings and         Evangelical Fellowship of Zambia
                                                                  Salvation Army-Lusumpuko
credit societies, development NGOs that implement some            Keepers Zambia Foundation
sort of microfinance program, and a rapidly growing               Zambezi Youth Organization
number of Community-Based Finance Institutions                    Celim Italian Volunteers Microcredit Fund
                                                                  Christian Business With Intergrity
(CBFIs). To date 25 organizations have applied to the             Meanwood Finance Corporation Ltd
Bank of Zambia for being licensed as a MFI, 19 of which           Capital Solutions Ltd
have followed up by submitting their formal application           Microfin Africa Zambia Ltd
                                                                  Royal Microfinance of Zambia
documents.                                                        Butala Finance Ltd


The same scanning indicates volatility of portfolio quality throughout the development
segment of the microfinance sector. The six development MFIs with a client base of more
than 1000 show portfolio-at-risk (30 days) indicators between 5.1 and 68.0%; half of them
running double digit numbers. Although consumer companies generally perform much better,


ZAMBIA MICROFINANCE SCAN - MICRONED                                                                     11
they also occasionally complain about high number of non-performing loans, even though
these are secured by clients’ salaries.

Regulation
In January 2006 the Government of Zambia gazetted the Banking and Financial Services
(Microfinance) Regulations as further implementation of supervisory responsibilities of the
Bank of Zambia as laid down in the overall BSFA. As in other countries in the region the
Regulations differentiate between deposit taking and non-deposit taking MFIs. Those of the
first category (DTs) are licensed for credit facilities, linkage banking, in-county transfers and
savings. Non-deposit taking institutions (NDTs) can only provide credit.

Regulation was inspired by a major survey of the microfinance sector in 1999 which
identified several major weaknesses: service delivery was not efficient, transparent and
sustainable; external reporting to clients and investors was erratic or non-existent; there had
been cases of fraud; investors were insufficiently monitoring their investee MFIs; and there
was inadequate disclosure to clients regarding services, requirements and costs. Regulation
was thought necessary to bring about stability in the financial sector and growth and
deepening of financial services.

Licensing requires minimal capitalization levels of ZMK 250 and 25 million for DTs and
NDTs respectively; equivalent to USD 73,500 (EUR 47,500) and USD 7,350 (EUR 4,750),
which is well below the capital requirements for a Non-Banking Financial Institution (NBFI)
as recognized under the general BSFA (ZMK 2 billion; USD 606,500; EUR 392,000). MFIs
can adopt any legal form and there are no limitations for shareholders as regards ownership
or control except in case a company format is opted for in which case both are limited to 25%
per shareholder. In case MFIs were already collecting mandatory savings as part of their
lending methodology, these MFIs would be classified as NDTs.

Stakeholder consultation prior to the formulation of the Regulations in general was favorable
as it was widely considered a necessary or at least useful instrument to mainstream
microfinance in the country. Criticism was basically limited to a number of implementation
modalities such as the annual costs of licenses, transformation period allowed, functioning of
boards, etc. Of a more principle nature was the observation that the poverty alleviation roots
of microfinance were not acknowledged in the Regulations and the implicit assumption that
all MFIs by definition were profit oriented whereas most existing MFIs are not-for-profit
institutions.2




2
  Information in this chapter based on on-line information from the Bank of Zambia, FSDP documentation,
AMIZ information and, particularly section 2.2, on José de Luna Martínez, Access to Financial Services in
Zambia, World Bank Policy Research Working Paper 4061, November 2006. Regulation issues are well
covered in Chiara Chiumya, The Regulation of Microfinance in Zambia, March 2006, from which essay is
freely quoted in the text above,

ZAMBIA MICROFINANCE SCAN - MICRONED                                                                   12
3. MICROFINANCE SERVICES




                       Leaving to Look for Food by Francis Mwanza




3.1    GENERAL CHARACTERISTICS

One reason for the relatively slow advance of the microfinance sector in Zambia is that until
liberalization of the banking sector in 1991 rural finance was dominated by a range of public
sector and semi-public agricultural support institutions which invested in agricultural
production and marketing. In the course of the nineties the unsustainable patterns of their
services gradually led to their closure. This has left a main service gap in rural areas which
was aggravated by a gradual withdrawal from the commercial banking sector because their
rural operations insufficiently contributed to the banks’ financial bottom lines.

This rural service vacuum is now well recognized. Zambia’s Poverty Reduction Strategy
Paper and the National Agricultural and Cooperatives Policy (2003-2015) both stress the
importance of stimulating community-based finance in rural areas. The basic merits thereof
are formulated in terms of introducing a savings culture and to link the smallholder
population with the formal financial system. The Rural Finance Program (RFP), a USD 17.5
million investment facility, largely financed through a concessional loan from IFAD, is a first
major effort to implement the new strategy.

The urban market is dominated by banks and MFIs, particularly credit companies, that
overall reach a rather limited number of clients, currently just around 120,000. There are
various factors contributing to this low level of sector maturity. A major one is the late
emergence of modern MFIs, related to the predominant position of public sector credit
facilities deep into the 1990s. As a result the nascent microfinance sector could not benefit
from generous donor support facilities in the nineties that have helped many MFIs to levels
of maturity elsewhere in the region. The microfinance sector in Zambia essentially still is an
emerging sector, but donor products and services tailor-made to support emerging MFIs are
largely absent or very small.

Another explanation may be that overall donor support to Zambia over the last years was
primarily focusing on two issues widely considered of overall importance: HIV/Aids and
debt reduction, leaving relatively little space and budget for deepening financial markets.
Moreover, as far as financial market development was concerned, nearly all attention was
directed to improving the performance of the formal banking sector and bringing regulatory
and supervisory systems up to standard. Now that microfinance regulation has been finalized,
however, the country may attract more interest from international and domestic investors, the
former facilitated by lack of major obstacles towards foreign investments, ownership and
control.



ZAMBIA MICROFINANCE SCAN - MICRONED                                                         13
Most development focused MFIs face strong challenges to become self-sufficient. Low
capital levels lead to low outreach figures and small margins, which in turn do not really
allow for major capacity building investments and robust growth strategies. They also face
rapidly increasing competition from credit companies that appear to successfully cream off
the urban microfinance market. These companies currently service well over two thirds of the
urban market already. Credit companies work with larger operational margins than
development MFIs because they charge higher interest rates, up to 75% per annum and face
lower transaction costs as they focus on salaried customers using their income as collateral.
This may explain why they, overall, are in better financial condition than development MFIs.

As far as overall performance indicators are concerned, no comprehensive data base exists as
the Bank of Zambia only publishes aggregated financial data of regulated MFIs. AMIZ
members voluntarily report to the network but this information base in rather incomplete and
not necessarily accurate. The latest tally is from end-of-year 2007 and of the 28 member
organizations only 11 reported their data and only five in a complete way. Below the figures
of the larger development MFIs are presented: Micro Bankers Trust, PRIDE Zambia,
CETZAM (affiliated with Opportunity International), PULSE (associated with CARE),
FINCA Zambia, and HARMOS (World Vision). Together they represent some 20% of the
microfinance market and the bulk of the development focused segment thereof.

MFI          Clients    Women      Portfolio Outstanding       Average Loan Size      PAR>90          OSS            FSS
                                      in ZMK      in USD       in ZMK     In USD
MBT            5,519        68%        2,663M        761K         428K        138            21%     38%            58%
PULSE          3,356        50%        3,088M        880K         920K        260            30%    125%           114%
PRIDE          4,492        48%        2,785M        796K         620K        177            81%      NA             NA
CETZAM         3,219        62%        8,071M      2,306K       2,507K        716             5%    130%           104%
FINCA         12,217        87%        5,357M      1,531K         439K        125             5%      NA             NA
HARMOS         3,170        60%        1,626M        465K         503K        144             4%     35%            31%
Totals        28,617                 20,502M       5,858K
Ind. Avg.      4,189        63%                    1,146K                      330           16%           99          85
Reg. Avg.      7,786        59%                    2,360K                      208            1%           90          78
Zambian figures from AMIZ; industry and regional averages from the MIX.

Going by these unverified and possibly incorrect self-reported data, these MFIs generally do
appear to delivery on the development promise as indicated by women participation and
average loan size, but are challenged in the areas of outreach, sustainability and, in some
cases, portfolio quality as well. Of these six main MFIs only PULSE and CETZAM appear to
meet sustainability objectives although their OSS and FSS figures may not have been
corrected for subsidized income as per industry conventions.

To balance the outreach picture, it is important to notice that various development MFIs have
played a facilitating role in rural finance by promoting CBFIs of which there are hundreds
now in the country. Overall, however, the retail client base of development MFIs is mainly
constituted by the urban self-employed whereas the credit companies focus on the urban
salaried workers.
                                                                 Income Regulated MFIs              ZMK               USD
                                                                 Interest income              205,333M            58,667K
The Bank of Zambia is composing overview                         Interest expense             - 27,172M           - 7,762K
performance data of all non-banking financial                    Net interest income          178,162M            50,903K
                                                                 Other financial expense      - 33,013M           - 9,432K
institutions and reports separately on the                       Total net interest income    145,149M            41,471K
accumulative income statement of most regulated                  Non-interest income            - 1,509M            - 431K
                                                                 Financial income/loss        146,658M            41,902K
MFIs, including only one development focused                     Operating expenses           - 68,809M         - 19,660K
institution. These data indicate good profitability              Net operating income           77,848M           22,242K
prospects as the eight MFIs involved pocketed a                  Non-operating activities     - 12,803M           - 3,658K
                                                                 Net income                     65,045M           18,584K
net income over 2007 of USD 12.5 million.                        Taxation                     - 21,381M           - 6,109K
Unfortunately the BoZ does not provide ratio                     Net income after tax           43,664M           12,475K



ZAMBIA MICROFINANCE SCAN - MICRONED                                                                                   14
analyses or portfolio characteristics and these can not be reconstructed without the
availability of the annual statements of the participating MFIs. The trend among commercial
privately owned MFIs is not to disclose all financial information to outsiders for reasons of
competition. Likewise, there are few microfinance rating reports of Zambian MFIs publicly
available that could be used for benchmarking purposes.


3.2.       MICROFINANCE SUPPLIERS

General Overview
Suppliers      Number     Distribition   Outreach      Products        Volume USD             Developments
  Banks          13         National      1 million       All           Assets 2.3B         One leading bank has
                                                                       Deposits 1.6B       declared to downscale
   Public         3         National      200,000          All          Assets 63M            All brought under
institutions                                                           Deposits 3.4B         supervision by BoZ
   NGOs        Unknown     Regional      Unknown      CBFI finance       Unknown          NGOs now need license as
                                                          Other                             MFI for retail finance
                                                         services
 Develop-      Over 20     Regional,      50,000        Savings,        Assets 11.4M      MFIs need to register and
ment MFIs                 urban focus                     loans                           be licensed as of 1.1.2008
Consumer          7        Regional,      200,000     Salary loans,      Assets 45M       Mergers to be expected. 1
    MFIs                  urban focus                    savings        Savings 2.9M       to become regular MFI.
 SACCOs        740 resp      Local,        13,000     Member loans       Loans 20M        Stronly promoted through
and CFBIs      unknown    rural focus     members      and savings      Savings 371K                the RFP
   Money       Unknown       Local       Thousands        Credit          Unknown         Exempt from regulation if
  lenders                                                                                 capital below MFI treshold
 Leasing          8        National,     Unknown        Leasing          Assets 57M                    -
companies                 urban focus
Insurance         7        National,      500,000       Life and      Premiums life 22M               -
companies                 urban focus       max         non-life        non-life 254M
Data compiled by AMIZ, May 2008, based on BoZ data.

The combined lists of regulated MFIs and AMIZ members presented in section 2.3 of this
report basically represent the backbone of the supply side in mainstream microfinance in
Zambia: it is were most clients shop for a loan. To be added are several up and downstream
delivery systems.

Banks and Credit Companies
Full-fledged banks are becoming increasing active in the highest brackets of the market:
SME lending, with emphasis on medium-size businesses. Expectedly Rabobank-managed
ZNCB will become a major player, albeit in terms of portfolio size rather than number of
clients, and also restructured NSCB, a state-owned non-bank financial institution, is geared to
embrace rural microfinance at scale.

Also more up-market is payroll deduction lending offered by some of the regulated MFIs.
This sector is rapidly growing, facilitated by the relatively sizeable industrial sector in
Zambia. Some credit companies may expand beyond their original niche market once
saturation sets in or when there are enough incentives to diversify their business. Microfin
Africa, for instance, is already contemplating moving into microfinance proper, but it lacks
the expertise and would rather do so outside their traditional business model.

Cooperatives
The first cooperatives in Zambia were registered in 1914, but it was not until 1947, that the
British Colonial Office allowed the establishment of African cooperatives. After
independence in 1964, the new government embarked on an ambitious program to develop
cooperatives as a means of providing services particularly in the rural areas. These


ZAMBIA MICROFINANCE SCAN - MICRONED                                                                              15
cooperatives were almost entirely formed to distribute farm inputs, provide short term credit,
mostly in kind, and purchase the produce of both members and non-members.

Cooperatives used to play a vital role in farm inputs distribution and crop marketing until the
mid 1990s when the movement collapsed, including the flagship Cooperative Bank.
Economic liberalization launched in 1991 spelt doom for the cooperative movement in
Zambia because it failed to reform mainly because of lack of genuine membership and heavy
dependence on the government funding. As of May 2008 records at the Registrar of
Cooperatives indicate that there are a total of 15,800 cooperatives but most of these
cooperatives are dormant.

SACCOs
Zambia has a long history of Savings and Credit Associations dating back to colonial times.
In 1970 the Credit Unions and Savings Associations of Zambia (CUSA) was formed as an
apex institution for the savings and credit unions in Zambia. In 1986 CUSA at government
request became involved in large scale fertilizer and seed loans, an undertaking for which it
was not prepared. Consequently in the mid 1990s CUSA collapsed due to accumulated debt.

The government has formulated the National Agricultural and Co-operatives Policy (2003-
2015) as an effort to revive the cooperative movement. The policy calls for the development
of an efficient, demand-driven and sustainable credit and rural finance system. An important
development area under this policy is group-based savings facilities in the villages. The
strategy includes means to provide not only short-term but also investment capital to
smallholders. Despite these efforts, the role of cooperatives and savings and credit
associations in rural finance has remained minor but these institutions have potential for an
increased role if properly formed and oriented. Recent efforts to resuscitate the cooperative
movement have largely failed because the approach has been top-down.

As noted above SACCOs have suffered the same fate as the rest of the cooperative
movement. By May 2008 records at the Registrar of Cooperatives indicate that there are a
total of 334 SACCOs but the number of members is not known. Northern Province has the
highest number of SACCOs, while Northwestern Province has the lowest number. Most of
the 334 registered SACCOs are not active and the Registrar is in the process of identifying
dormant SACCOs for de-registration.

Recently notable efforts have been made by CARE International and the RFP to promote the
formation of Community-Based Finance Institutions. CARE has promoted CBFIs through the
Copperbelt Urban Livelihood Project (CULP). Under the CULP CARE developed a
comprehensive cooperative training curriculum for the formation and management of
cooperatives. CULP has used this curriculum for its cooperative development initiative in the
Copperbelt Province. Of the cooperatives under promotion, rural cooperatives have shown
substantial cohesion, trust, ownership and control. Urban cooperatives, because of their lack
of mutual trust, have not performed well.

CARE Zambia promoted two types of cooperatives: Savings and Credit Unions and Farmer
Cooperatives. The Savings and Credit Unions are mainly in the peri–urban areas while the
Farmer Cooperatives are in the rural areas. Initially, CULP provided a revolving fund at the
commencement of each cooperative but this did not work well as cooperatives tended to rely
heavily on the revolving fund and were reluctant to mobilize savings among the members.
Furthermore, loan repayment was generally poor. However, under Phase II of CULP
cooperatives were required to have at least six months of successful savings and credit
operations before they can qualify for a revolving fund from CARE.

ZAMBIA MICROFINANCE SCAN - MICRONED                                                         16
By December 2003 there were fourteen cooperatives operational under this scheme, five of
which were Savings and Credit Cooperatives and nine were Farmer Cooperatives, with a total
membership of 2450. All the cooperatives were registered under the Cooperatives Act. Rural
cooperatives tend to have larger membership with an average of 200 members per
cooperative. By the same date 2003, the cooperatives had mobilized total savings of ZMK
116 million (USD 33,000); the best performing one ZMK 35 million (USD 10,000). On
average, each cooperative member saved ZMK 5000 (USD 1.43) per month. The
cooperatives use the savings to give loans to members at a rate of interest and repayment
period agreed upon by the members. The loans given are primarily, but not exclusively, for
income generating activities. Usually the loans are all short term with repayment period
ranging from one to nine months.

CBFIs/ASCAs
The Agriculture Support Program (ASP) was a five year program that started in January 2003
under the auspices of the Ministry of Agriculture and Cooperatives, funded by SIDA and
managed by a consortium of consulting companies. The ASP operated in four provinces and
marks the beginning of a larger effort to promote community-based finance. It combined
group formation with member savings and business development support. By the time of the
formal closure of the program 435 groups were operational, 300 savings and credit groups
and 234 investment groups, with a combined membership of 12,800, 55% of which were
women. The savings groups had averaged ZMK 100,000 (USD 29) in savings per member.
The ASP model is considered more successful than the attempts to revive the SACCO sector.
This is widely attributed to the fact that it follows a bottom-up planning model. At the same
time portfolio quality was a challenge with 45% of the loans being paid too late or still being
overdue.

The ASP model comes under the regionally common generic term of Accumulated Savings
and Credit Associations or ASCAs. The basic methodology is that 15-20 members form a
group and save regularly. These savings are then redistributed to group members as stiffly
priced short term loans. There are two basic ASCA systems. Village Savings and Loan
Associations (VSLAs) have a limited life line. The group discontinues after a cycle of 9-12
months, whereupon the members receive back their savings plus a share of the accumulated
interests received over the loans. Members thus get a relatively larger sum of cash at the end
of a cycle. In most cases the group then will be re-established, though membership may
change, for a new cycle. More permanent groups usually withhold some of the accumulated
capital for starting a small group-owned corpus fund to finance any sort of activity, up to the
members.

In village banking systems, such as practiced by FINCA, as well as Rural Finance
Associations (RFAs) or Financial Service Associations (FSAs) the group’s lifeline is not
limited meaning that the accumulated capital forms a gradually growing loan portfolio under
management and governance of the group. In advanced systems these assets can be leveraged
against external debt financing in the form of wholesale loans from formal financial
institutions to boost investments at community level, just as in the Indian Self-Help Group
(SGH) system.

The experiences of the CARE and SIDA supported pilot programs played a positive input in
the formulation of the government’s Rural Finance Program (RFP) with aims to promote the
formation of thousands of new ASCAs (named CBFIs). The RFP also includes facilities to
engage formal financial institutions to play a role in establishing bank linkages. The NSCB is
particularly targeted to become effective in this respect.

ZAMBIA MICROFINANCE SCAN - MICRONED                                                         17
ROSCAs
Rotating Savings and Credit Associations (ROSCAs) are locally known as Chilimba. This is
the most popular form of financial intermediation among poor market women in both urban
and rural areas. The members make a periodic collection that is pooled and given to one
member in rotation until everyone has got a chance to get her allocation. The amounts of
weekly/monthly savings vary from as low as ZMK 500 to 10,000 (USD 0.14 to 2.86). The
number of ROSCAs in Zambia is not known.

Moneylenders
Individual moneylenders are found in both rural and urban areas, but evidence from recent
research suggests that they are more common in urban communities. They are used to finance
a wide range of needs including school fees, medical fees, funeral expenses, small business
assets, food, entertainment and even servicing weekly repayments for MFI loans. In Zambia,
moneylenders are supposed to be licensed under the Money Lender Act of 1938 but only a
few are. Most moneylenders are part-time operators. They normally offer short-term
unsecured loans at high interest rates, typically at 100% per month. Repayment is generally
done by a single installment. Prospective customers who are not known to the moneylender,
must be introduced by an existing well-known customer and are in most cases required to
secure the loan with a movable collateral (radios, television sets etc.). The number of
moneylenders in Zambia is not known.

Agribusiness Advance Schemes
Of special interest are out-grower finance schemes in the agribusiness sector. Zambia has a
large international agribusiness industry and the major players usually advance credit to their
contract farmers. This system is by far the largest credit system in the country with hundreds
of thousand advances made per year: approximately 200,000 in cotton production only. The
system is fairly straightforward as credit delivery is linked to supply of harvested products
later in the season. And because international agri companies usually sell their products
before growing them they can offer fixed farm gate prices to smallholders which makes it
easy for them to calculate the affordability of the loans.

Research in 2003 and 2004 in the Southern African region indicated that portfolio
performance in these advance schemes is mostly satisfactory but that efficiency levels are
generally low. In fact, many companies lose money on their lending operations due to high
inefficiencies and high costs related to cash transactions as they often can not avail of
supportive bank services. Moreover, the companies usually monitor their smallholders
intensively to ensure that agreed quality standards are met in crop production, which drives
up transaction costs.

Various smaller efforts have been made by funding agencies, including Cordaid, to upgrade
these advance payment schemes and to use these as the backbone for product diversification
to also reach other community members. Few, to date, have produced lasting results and
impacts, if only because experiments have been conducted around crops (paprika) that came
to do less well in international commodity markets.


3.3.   SUPPORT AND FUNDING NEEDS

Core Capital
All formal MFIs, including non-deposit taking institutions, are required by law to be
registered and supervised by the Bank of Zambia. This does involve meeting minimal

ZAMBIA MICROFINANCE SCAN - MICRONED                                                         18
capitalization requirements but also the ability to submit a range of performance reports to
the BoZ on a regular basis.

As regards capitalization, the minimum capital requirements do not appear to be excessive at
ZMK 250 and 25 million for DTs and NDTs respectively, but may still be a burden for MFIs
with a client base of only a few thousand borrowers. Moreover, common wisdom requires
MFIs to have a capital base of at least two or three times the minimum requirements to create
sufficient solvency margins and debt leverage potential. An additional complication is that
Regulation seems to assume that most registered MFIs will transform into share-holding
companies that would have few problems attracting capital in the form of equity from various
parties. Some MFIs, however, are not inclined to transform in that way and need to figure out
how to combine maintaining their non-profit status with what essentially is meant to be
equity. They cannot attract real equity and are usually also not in the position to attract long-
term subordinate debt that might be considered as quasi-equity, which leaves them depending
on past and current capital grants.

Sustainability
A more urgent problem is perhaps that to date most development MFIs have not reached
financial sustainability. In fact, only two AMIZ members reported a FSS rate of just over
100% by December 2007. More worrying is that several members report portfolio at risk
rates that are a far cry from international best standards which indicates high volatility and
possibly little perspective for becoming firmly sustainable in the near future. As Regulation
essentially presupposes high financial performance, many MFI face a risk of their
applications being rejected, withheld or revoked if the BoZ is going to seriously look into
sustainability prospects; even if the MFIs would be able to meet capital requirements. In
addition, the BoZ has the option to not license MFIs that can not demonstrate operational
competence; even if they can meet capital requirements.

Most MFIs could use assistance for proper business planning in combination with a rigorous
review of their current financial and institutional performance leading to a roadmap to
sustainability. Such roadmaps for many MFIs will require the necessity to scale up
operations. In the Eastern and Southern African region a client base of at least 10,000 is
easily required to fully break even and become financially sustainable at present average loan
sizes and margins. Current outreach figures of most development MFIs leave little
perspective for reaching that objective. In fact, some of these MFIs actually have seen their
outreach figures contracting rather than expanding in the last years which brings
sustainability further out of reach.

Capacity Building
This suggests an urgent need for capacity building. Development focused MFIs by and large
share the same inter-related challenges and capacity building needs: compliance with
regulatory issues, upgrade of back-office systems and related human resources capacity,
adjustment of business plans to expansion and sustainability and all of that whilst
maintaining loyal to their developmental or social objectives and preventing mission drift.

There are few capacity building facilities in place in the country. MFIs’ margins are generally
too thin to procure support services in the market and MFIs predominantly rely on occasional
support from their donors to finance capacity building activities. This is not always
conducive for getting value for money from the MFI’s perspective as donor support may be
biased to the donor’s own priorities or linked to its in-house service capacity which does not
necessarily present the best option in the market.


ZAMBIA MICROFINANCE SCAN - MICRONED                                                           19
Some options for strengthening capacity building modalities are presented in the last section
of this country scan.

Working Capital
Zambian development MFIs have little access to low-cost debt finance and usually cannot
afford borrowing at more commercial rates in domestic and international capital markets.
They may have access to savings and deposits but volumes are too tiny to substantially
contribute to growing the loan capital available.

The domestic capital market is relatively liquid but it is not easy for banks to lend to MFIs.
The overhaul of the banking sector has resulted in tough collateral requirements which
usually can not be met by MFIs. International guarantee provision can offer a way out, as
experienced by CETZAM that secured a Cordaid guarantee for borrowing in the domestic
market, but it is not a prominent product as yet. One reason is that domestic banks tend to
carry over all investment risk to the guarantee provider and another is the demand to have the
guarantee deposited in low or no yielding accounts.

Promotional Support for CBFIs
Probably the most promising recent trend in Zambian microfinance is the renewed interest in
rural finance, which is highly appropriate considering that well over 60% of the country’s
poor are rural poor which are largely cut off from financial service delivery. All actors
involved with the emerging rural finance drive consider the growth and strengthening of
CBFIs as a key feature for success. These community groups have a potential capacity to run
simple, self-managed and self-governed microfinance initiatives which are the breeding
ground for building financial literacy and the future clientele for regulated MFIs and banks;
either as collective clients for wholesale loans or as individuals directly accessing loans from
the formal sector.

As experienced in neighboring Mozambique where community-based finance is more
advanced, it takes an effort to get to the desired results of group formation, professional
management and governance, bank linkages, and gradual engagement in non-financial
services such as business development and social services. The same experience indicates
that this pivotal enabling or promotional work is beyond commercial viability; it needs
subsidies by external parties. In Zambia some MFIs are increasingly becoming involved in
promotional work, but they may need further training and exposure to work more effectively
and at larger scale. Moreover they need operational budgets for promotional work. The RFP
provides for that but on strict project terms only. Support does rarely include overhead
compensations and costs of staff training.


3.4.    DONORS AND INVESTORS

Zambia is clearly not a favorite donor country if it comes to microfinance. This is obviously
related to limited investment opportunity in the development focused part of the sector with
just a handful of practitioners. At the same time this represents a chicken-egg dilemma. MFIs
can not grow without access to funds to boost their loan portfolios and because they are quite
small and not or only marginally sustainable they can not access the expensive and high-risk
western currency loans that dominate the supply side in the sector today. Virtually none of
the many international microfinance investment funds has an active portfolio in Zambia.

The small size of mainstream microfinance probably also contributes to the absence of
broader sector development initiatives for capacity building, improvement enhancement,

ZAMBIA MICROFINANCE SCAN - MICRONED                                                          20
deepening, outreach growth or anything else along those lines. The only larger effort going is
a regional initiative financed by DFID and implemented by FinScope: a rather detailed
inventory of demand and supply in the financial sector, not specifically zooming in on
microfinance.

The aggregated MicroNet investment portfolio is remarkably thin. Its central database only
lists eight Hivos grants to a total amount of EUR 767,000, three of which were ongoing by
year-end 2006, the latest date available in the data base. These concern grants to AMIZ,
CETZAM and CISEP. Already wrapped-up support grants were made to ZAYO, AMIZ (two
contracts), CETZAM once more and PRIDE. Other donors have contributed to MFIs, usually
with USAID or DFID funding, but presumably with relatively small grants and loans given
the small size of the MFIs.

By far the major player today is IFAD through its lending to the RFP, which is run under the
aegis of the Ministry of Finance and National Planning by a Program Management Unit
(PMU). IFAD has additional major programs under implementation in the areas of
smallholder livestock promotion and enterprise development. SIDA has invested in rural
finance by way of supporting the promotion of CBFIs but this program has recently been
phased out and is now partially incorporated in the RFP. In the same area CARE
International is preparing a lager country program likely to be implemented by CARE
Canada.


3.5.   SUPPORT GAP FACED BY MFIS

Already some gaps in funding to the Zambian microfinance sector are glaring from the
discussions under section 3.3 above. In addition some issues concern donors as well as MFIs.

Gender and Microfinance
This appears to be an area of particular relevance to MicroNed members given Hivos’
involvement in gender audits conducted in 2004 with CETZAM and PRIDE Zambia. In the
wake of these exercises Irene Mutalima, the CEO of the former MFI, wrote a most interesting
article about gender and microfinance, worthwhile to be briefly reviewed here as it gives a
number of pointers for future action in this area.

Her point of departure is mission drift that almost inevitably comes with the maturing of
MFIs in a context of more commercial focused microfinance. In Zambia she observed three
phases of donor involvement in microfinance. Initially microfinance was largely donor driven
and focused on client development in combination with outreach and impacts. Sustainability
was indeed expected and may have led to some slippage in the social performance
department, but at the time these risks could be largely managed as sustainability was
regarded to be an objective to be reached over time, not instantly. In the second phase donor
agencies became more insisting on reaching sustainability and this moved many MFIs to
focus on their financial bottom line. As a result products and processes that did not support
the bottom line were less favored if not abandoned at all. This, she observes, has had a
negative impact on gender objectives as women take smaller, lower yielding loans, and in
many cases need an additional effort by the MFIs to be reached appropriately. In the third
phase, regulation and commercialization, MFI are compelled to pursue wider financial
sustainability as they are forced to access commercially priced loans and also need to focus
heavily on improving their operational processes to meet regulatory standards. In
combination with the waning of grant funding this has relegated engagement with non-
bottom line and non-regulatory issues largely to the background.

ZAMBIA MICROFINANCE SCAN - MICRONED                                                        21
How this worked out for her MFI was shown by the gender audit: the special attention of
female entrepreneurs as a specific and priority target group had gone out of focus;
management had stopped monitoring formally targeted numbers of female clients; CETZAM
did insufficient recognize the position of women in the context of the family and levels of
loan control and ownership of assets; and, most indicative perhaps, clients had stopped
appreciating CETZAM as a favorable MFI because of the business character it had
developed.

Whilst appreciating the gender audit and client feedback that came out of the exercise, Ms
Mutalima then questioned the actual usefulness of it all. Her basic argument is that Zambian
MFIs now have to function and survive in a more competitive and commercial environment
that leaves little room for any special focus or activity if it does not directly contribute to
their bottom lines. What she is saying is that MFIs only can handle recommendations that
create a business case: “a dichotomy is essentially created where the findings call for efforts
to improve outcomes on clients’ lives, without making the link to how this will positively
impact the bottom line.”

This most pointedly pictures the challenge ahead: MFIs operating in a regulated and
commercial environment cannot easily be expected to pay prominence to social and
empowerment issues when this cannot be done in a commercially viable manner. Or put
differently: the impact weighting for the client as well as the MFI should be almost at par or
indeed infused to trigger pro-active engagements. Mutalima suggests that more efforts would
need to be financed to make struggling MFIs learn from MFIs that have successfully
integrated a gender focus impacting their bottom line and to invest more in product
development that captures the twin objective of gender focus and institutional sustainability.
These seem to be useful and practical suggestions indeed.3

HIV/Aids and Microfinance
In this arena the same basic challenge manifests itself, the combination of social and bottom
line concerns, but in addition the HIV/Aids pandemic poses a number of direct threats to
MFIs. Higher rates of delinquencies and arrears resulting from HIV/Aids may impact
sustainability; social awareness programs drive up operational costs; clients may be
prevented from taking planned follow-up loans whilst the demand for high-risk emergency
loans increases; operational efficiency can be negatively affected by lower productivity levels
of staff and absenteeism; MFIs can witness a sharp increase of the costs of human resources
and training; client groups can collapse as insufficient members are left productive enough to
service the group’s debt with the MFI, and so on and so forth.

In Eastern and Southern Africa MFIs have embarked on a range of coping strategies, ranging
from installing work floor policies, to client awareness activities and offering loan and health
insurance services such as CETZAM in Zambia in cooperation with Opportunity
International. Few, however, have developed strategies to mainstream HIV/Aids awareness
and specifically target People Living with HIV/Aids (PLHA). Apart from bottom line
considerations, also persistent stigmatization patterns and limited availability of tested
methodologies play a role. The Small Enterprise Foundation (SEF) of South Africa is a major
example of a deliberate effort to mainstream HIV/Aids awareness, but few other MFIs in the
region have followed in its foot steps to date, if only because SEF benefited from a large
scale field research project from Wits University in Johannesburg which facilities are only
rarely available in the microfinance sector. Moreover, SEF could avail of financial resources

3
    Irene K.B. Mutalima, Microfinance and Gender Equity: Are We Getting There? No place and date.

ZAMBIA MICROFINANCE SCAN - MICRONED                                                                 22
allowing it to run temporary operational deficits and negative returns to invest in social
preparation for program expansion; also such spells of sacrificing bottom line considerations
for social concerns is increasing less appreciated in the rapidly commercializing microfinance
market.4

In Zambia a new initiative has been developed to specifically mainstream HIV/Aids
awareness in microfinance. UNDP and SNV collaborate in the so-called AA4 program that is
centered around developing business development strategies rather than fragmented income
generation projects for PLHA, that generally have failed to make much impact, and to link up
with specialized BDS and microfinance institutions. In a way it is a community-based
business and finance approach that takes PLHA groups organized by the Network of
Zambian People Living with HIV/Aids (NZP+) as the point of departure. Although focused
on development of genuine business activities the program will specifically include the most
vulnerable PLHA and has been designed along the principles of gender equity. A major
constraint to date is to attract the interest of a MFI or bank daring to get involved on a
balance sheet basis (putting its own capital on the line) instead of exclusively working with
externally financed program funds.5

Interested MicroNed members could contact SNV to see if they or their MFI partners could
play a supportive role in the access to finance component of this program. Incidentally,
NZP+ is also supported by the Netherlands Government through its Embassy in Lusaka,
which plays an active role among embassies and high commissions in Zambia as regards
HIV/Aids.6

Social Performance Management
All development-focused MFIs have a keen or latent interest to install SPM systems but as
explained in the context of the gender section above they will probably insist on an
installation process that contributes to their financial bottom line.

During the last two years most MFIs have been primarily occupied with the introduction of
regulation and consequent licensing. This will expectedly carry over into the beginning of
2009, if only because the Bank of Zambia appears to experience capacity problems handling
the incoming applications. It would be reasonable to expect that as of 2009 MFIs would be
interested to discuss the introduction of SPM in detail.

Micro-insurance
Zambia is facing a considerable drop in life expectancy, down to 38 years. While the
HIV/Aids pandemic is an important factor, poor access to quality healthcare is another
important reason. So far support to the healthcare sector has been mainly supply driven.
Health insurance is increasingly seen as a more efficient system to improve the access to
services, as doctors will only be paid on the basis of care and medication provided,
promoting a more efficient delivery of care. However, the health insurance industry in
Zambia is under-developed and targets the high-end and formal sector market segment with a
limited range of services. Market penetration is very low at 2% and no products target the
low-income formal sector employees or the informal sector. The health insurance sector faces
considerable challenges because of limited medical insurance experience and poor control
systems, resulting in losses. Given the current poor performance, risks associated with low-


4
  For a recent overview of regional risk mitigation strategies see Pauline Achola (MENA), Impact of
HIV/Aids: With a Case Study on HIV/Aids Mitigation, July 2006.
5
  AA4 program documentation and additional information kindly provided by SNV’s Roy van der Drift.
6
  More information will be gladly provided by Peter de Haan at the Royal Netherlands Embassy.

ZAMBIA MICROFINANCE SCAN - MICRONED                                                             23
income clients and the risk adverse nature of the insurance sector, insurance companies are
not interested to target low-income formal sector employees and informal groups.

MicroCare Zambia was recently established to contribute to filling this gap in the market. In
Uganda MicroCare has proven that the poor are insurable if targeted in groups, products are
adjusted to the specific needs, a proper control system is put in place and last but not least
preventive healthcare is included. MicroCare Insurance in Uganda started operations in 2005
and now covers over 100,000 lives.

MicroCare Zambia expects to start operations in the second half of 2008 and plans to provide
affordable access to quality healthcare to 100,000 people in three years time. Key product
features are the offering of group policies only; targeting of informal sector households in
both urban and rural areas; affordability and sustainability of premiums; demand-driven
product design; and quality of care provision. To that end it relies on state-of-the-art
application of information and communication technologies such as smart cards, secured
networked databases, computerized point of sale terminals, and biometric identity
verification controls. All these advanced technologies can be powered by alternative energy
sources in remote locations as well.

To accelerate its own growth capacities MicroCare is looking for equity investors as well as
donor agencies to contribute to the costs of market research, client education and preventive
healthcare, particularly for reaching clients among the lowest income groups.

Another initiative was recently launched by Blue Financial Services, a South African firm
specialized in payroll lending and insurance and full owner of subsidiary MFIs in several
African countries, including Zambia. Blue Financial obtained a USD 20 million credit line
from the International Finance Corporation (IFC), the World Bank’s private sector
development wing, to link credit delivery with insurance. To date no operational details for
its Zambian operations have been disclosed.

Networking
In Africa there is a persistent pattern among donor agencies of promoting country
microfinance networks and after a while abandoning those, until another comes along in a
sort of relay race. Evidence on the ground suggests that country networks only can become
partially sustainable if they play an institutional role in regulation and supervision, as is the
case in Ethiopia and likely will be the case in Kenya before long.

Donor agencies usually work on the premise that after their initial funding the member
organizations will shoulder the costs of the upkeep of the network. Unfortunately that is
seldom the case in practice. Members need a clear rationale to financially contribute to a
network, the more so in view of tightening operational budgets associated with donor
withdrawal from MFIs. In addition, the growth of the microfinance sector in many countries
has resulted in large-scale broadening of types and sorts of MFIs which makes it difficult to
identify a commonly shared rationale for networking.

Regulation provides such as rationale but only in case MFIs continue to face similar
challenges over a longer period of time; that is beyond initial discussions over the
formulation of regulatory or supervisory requirements. In Uganda for instance this rational
was severely undercut as eventually only four out of an impressive overall number of MFIs
managed to transform into deposit taking financial institutions. In Ethiopia the quintessential
arrangement providing a longer term rationale was the policy of the supervisory agency to
have the network play a key role in compiling performance data of MFIs, which are all

ZAMBIA MICROFINANCE SCAN - MICRONED                                                           24
regulated by default. The network was consequently able to build a wider range of member
services on the backbone of this core responsibility.

In Zambia the network, AMIZ, has a non-mandatory position as regards collection of
performance data of its member MFIs which results in long delays in data submission and
issues about the verification of submitted data. As a result its data base is incomplete and
inaccurate.

At the same time the network is widely recognized as a ‘first-stop shopping option’ if it
comes to information on the microfinance sector at large and its current hot issues. And
AMIZ is quite competent and abreast of the situation. Its funding base, however, is erratic
which leads to a range of lost opportunities regarding researching and documenting such hot
issues in greater depth and detail

Two investment options could possibly be of interest to MicroNed members. First,
strengthening AMIZ to the point it could make a credible proposition to play a key role in
scanning performance of MFIs because, as in Ethiopia, all MFIs are expected to be licensed
and regulated, including non-deposit taking institutions. Second, renewed donor and investor
interest in the country will develop a growing demand for AMIZ to function as a more
profiled clearing house of information and initiatives. To prepare for such a service
enhancement strategy it could use some additional support.


3.6.   SUPPORT GAP FACED BY CLIENTS

The adult Zambian population is heavily under-served if




                                                                                                     Un-served
it comes to access to financial services: 6% rely only on



                                                                                          Informal
                                                                        Banked



                                                                                 formal
commercial banks, 5% on non-baking institutions and Financial
                                                                                 Other



                                                                                          only
11% on informal services; 6% have access to both banks deepening
and non-banking institutions (and do not access informal South Africa 50% 7% 9% 33%
services) and 5% use both formal and informal services. Lesotho       46% 16%    4% 35%
The bottom line of all this is that 66% of adult Zambians Namibia     51%  3%    1% 45%
                                                           Botswana   41% 11%    5% 41%
are not served at all, which represents by far the highest Kenya      19%  8% 35% 38%
score among six African countries researched by Zambia                15%  8% 11% 66%
FinScope, a research institution under the DFID-funded FinMark Trust, which operates from
Johannesburg, South Africa.

In actual numbers, the un-served represent 2.65 million adult women and 2.48 million men;
or 3.51 million rural versus 1.62 million urban people; or 2,41 million people in the 16-25
years age category, 1.51 million in the 26-25 brackets, 0.69 million between 36 and 45 years
of age and 0.49 million of 46 years upwards. Of these just over five million Zambians 41% is
self-employed, 12% is salaried, 27% is housewife or student and 20% is unemployed. In
addition, only 34% declare an income, 35% don’t know or don’t declare and 30% say they
have no income.

As to the principle reasons why people are not linked to the banking sector, 60% say because
they have no money to put into bank, 31% because they have no regular income and 25
because they have no job. In other words, income barriers are by far the most important
reasons for not being banked. Additional reasons include geographical inaccessibility, factors
relating to affordability of bank services and lack of interest or unwillingness. The survey
also asked what the un-banked would look for in a bank and this strikingly overlaps with
what already banked people are looking for; in order of priority: minimum balance amounts,

ZAMBIA MICROFINANCE SCAN - MICRONED                                                                      25
level of interest rates, service fees and charges, flexibility in transactions, access to loans,
location of a bank office, personalized services and various lowly appreciated considerations.

From the survey findings four key questions arrive: are 66% of Zambians too poor to have
access; are there ways that banks could reposition themselves to serve more Zambians; are
NBFIs supposed to build access actually positioned to deliver; is there a problem with branch
distribution? Follow-up research produced the building stones for answering these questions,
resulting in the following.

On poverty levels: extreme poverty is so deeply embedded and so widely spread in rural
communities that current pricing of bank accounts precludes access for almost all rural
households. At the same time, extreme poverty is less common in urban than in rural areas,
roughly 33 against 66%, and the relatively better-off poor have probably lifted themselves up
by monetary means rather than by production for own use.

On bank positioning: high operating costs drive up customer charges to levels that are even
very high in the African context, which means that service charges over savings accounts are
three times higher than the interest paid over savings. Lending is only marginally profitable
in the banking system so banks recuperate their costs by over-charging savings and deposits,
which usually is the entry point for poorer clients, which is a main reason why the highly
inflexible banks are rapidly losing terrain to commercial MFIs.

On MFIs: socially motivated MFIs hardly reach the poorest, are very costly by international
standards and are yet often still loss-making. The key problem is that operational costs are
not brought in line with the low volume of activities and small savings balances. Commercial
MFIs (largely subsidiaries of South African outfits and equally secretive about their data) do
much better financially but hardly qualify as socially motivated institutions. They have
managed to service the gap left by the formal banks but will saturate soon as there are only
450,000 salaried adults in Zambia, which constitutes their main target.

On branch networks: two concerns are at conflict here: the popular demand for more rural
branches versus to lack of qualified demand due to extreme poverty. The solution is to be
found in the promotion of low-cost non-commercial delivery systems in combination with
flexible and low-cost albeit limited penetration by the banking sector.7

If it comes to demand for insurance products, FinScope research has shown that only 7% of
the adult population has any type of insurance and only 2.1% in health insurance: 0.9% has a
health cover to pay doctors’ bills and 1.2% a more comprehensive medical insurance. One in
five Zambians often or always go without enough medicine or medical treatment. Four out of
five of those who have a cover are employed in the formal sector and more than half of those
having some cover have an income of more than ZMK 1 million per month (USD 285) and
40% of those have insufficient cover. As the insurance industry essentially targets salaried
Zambians, they miss out on self-employed persons, including those with similar monthly
incomes.8

As these FinScope surveys indicate, demand for microfinance services is much higher than
the supply thereof. And although there are various initiatives aimed at striking a dent in this
gap, the magnitude thereof is too large to expect substantial results in the short run. There are
several reasons not to be over-optimistic.
7
  FinScope: Making Finance Work in ZambiaL Issues of Demand and Supply, May 2007, by Juliet Monroe
and Stephen Peachey.
8
  FinScope: Zambia Health Insurance Analysis, April 2007

ZAMBIA MICROFINANCE SCAN - MICRONED                                                             26
•   The advancing commercial microfinance players are effectively filling a gap left by
    banks and other MFIs, but the limited market of salaried players that will saturate before
    long.
•   Socially-driven MFIs have yet to design a strategy that effectively combines large scale
    operations with low-cost service delivery that could meet the bulk of the gap: affordable,
    appropriate and accessible finance in rural areas.
•   The RFP will likely lead to a boost in community-based finance, but this drive will be
    limited by the lack of well-equipped and financed promotional agencies.
•   The formal banking sector will gradually return to rural areas but mainly focus on
    commercially viable agriculture. It will need an interface to link up with poor and
    extremely poor communities and from that perspective is challenged by the limited
    number of promotional agencies and strong rural development NGOs that could play the
    interface function.
•   Whilst this would call for sizeable investments into supporting intermediary
    organizations, realizing that objective is severely handicapped by overall donor
    withdrawal from such initiatives.




ZAMBIA MICROFINANCE SCAN - MICRONED                                                        27
4. ACTORS ON SECTOR LEVEL




                                                         Three Ladies by Japau



4.1.    MICROFINANCE SUPPORT INDUSTRY

Probably because of its small size and youthfulness, the Zambian microfinance sector has
an equally small industry support infrastructure. Zambia is one of the few countries in
Africa where, until recently no single rating of a MFI was conducted. So far, Zambia has
no specialized consulting firms, audit firms, or R&D institutions dedicated to serving
MFIs. What exist in terms of industry support infrastructure are AMIZ and several
individual consultants, and even these are not engaged in microfinance on a full-time
basis.


4.2.    SECTOR NEEDS

In addition to its small-size and limited outreach, the Zambian microfinance sector faces
many institutional and operational challenges. Lack of adequate expertise in serving the poor
and low-income households, for instance, reflects itself in relatively high portfolio-at-risk and
client drop-out rates across the sector.

Regarding high client drop-outs, the 2005 financial sector survey indicates that at least 5
percent of the households have accessed microfinance services at one time or another, but
just 1.5 percent was still an active customer at the time of study. Reasons for client drop-outs
may include failure to repay loans on time, disagreements and personal conflicts within the
groups, or even dissatisfaction with quality of services. Yet, so far, none of the MFIs
interviewed during the sector scan has engaged clients formally or systematically to find out
their level of satisfaction or dissatisfaction. In the absence of relevant market research, it is
quite difficult for MFIs to be certain if they are offering the right financial products. The fact
that none of the market leaders has conducted surveys to gauge reasons for high client drop-
outs raises doubts about their appreciation of successful business models for microfinance.

Other than the consumer MFIs, who deliberately wish to control the number of customers
they serve, the development-oriented MFIs are quick to blame exogenous factors for their
slow and unsteady growth. They complain about poor credit culture among clients, yet it is
their primary role to screen clients and assess risk before lending to them. The MFIs also
blame lack of adequate donor support for their lack of robustness, yet on their part, they have
not demonstrated good results from previous donor support accorded to them, which could
have encouraged and inspired more support. Lastly, the MFIs complain of high costs of
service delivery to a rural population that is widely scattered over large areas (especially due

ZAMBIA MICROFINANCE SCAN - MICRONED                                                            28
to poor roads and communication infrastructure) as the factors for their lackluster
performance, yet they have not adopted some of the models that have helped MFIs elsewhere
to reduce costs.

While there is some truth in some of these arguments, particularly the last one, many of these
factors prevail in other countries that have somehow witnessed impressive growth of MFIs. It
would seem therefore that lack of dynamism in Zambian microfinance sector is largely a
problem of limited expertise combined with low motivation for success among the industry
leaders. Compared to the situations elsewhere in Africa, none of the presently leading MFIs
in Zambia can claim that lack of capital has been a constraint to their growth; all have
reasonable amounts of capital to grow their portfolio and expand outreach, yet have not done
so. During interviews with the six current market leaders for the scan, none considered lack
of capital as their primary obstacle to growth.

For example, FINCA Zambia is part of a successful global franchise that boasts many strong
MFIs across Africa. Another regional franchise, PRIDE Zambia, has received considerable
bilateral donor funding through the Zambian government. Yet it also has not reached the
numbers of clients or level of operational efficiency that other MFIs of same age and
capitalization have achieved. Hivos, for instance, made a good effort to strengthen PRIDE
Zambia but today that outfit is essentially dysfunctional and nearly moribund.

Actually, CETZAM and MBT have far more resources than MFIs of similar age and
capitalization in other parts of Africa, yet both have not demonstrated the same level of
vitality and growth as their peers which poses the question if this uninspiring performance is
due to lack of pressure and motivation on the captains of the industry or to a lack of vision
and capacity.

High staff turnover is common among Zambian MFIs, possibly suggesting dissatisfaction
with the working conditions or compensation or the failure of managers to motivate and
engage their staff. Though it is widely known that loan officers are the most important assets
for successful MFIs, Zambian MFIs have made little attempts to retain their staff. An effort
by FINCA to determine market wages rates for its work force was frustrated when other
MFIs refused to collaborate and provide data to the firm it engaged for the purpose.

Zambia is unique for lacking any clear market leader in microfinance that can inspire others
to pursue their operational and institutional excellence. In the view of FINCA’s operations
manager interviewed during the scan, there is need for at least two clear market leaders that
can set the pace and demonstrate good practices, as well as an urgent sense of responsibility
in building microfinance services for the majority of the population presently excluded from
access to finance.


4.3.   FUTURE PERSPECTIVES

Expected Trends
The demand for microfinance in Zambia is huge and highly diversified, but it is also largely
unmet and it is difficult to see that situation improve for the better without major external
inputs.

The urban and peri-urban microfinance market is moving, but driven by credit companies and
expectedly by the banking sector before long. What remains a bottle neck at this level is
service delivery to unsalaried informal sector workers. Although they essentially represent

ZAMBIA MICROFINANCE SCAN - MICRONED                                                        29
the core market of the country’s development MFIs, not by intent but resulting from
incapacity to reach the rural poor, their overall progress is disappointing.

This opens the door for an influx of international investors to come aboard at retail level;
either in the form of Greenfield banks that aim for servicing the middle and higher brackets
of the urban market or for Asian MFIs and NGOs that have a stronger focus for working the
lower brackets. In both cases it is difficult to see how Zambian development MFIs will cope
with and survive such competition.

In the rural markets development MFIs have effectively sidelined themselves and the
initiative is now taken over by various efforts to promote community-based finance systems.
These will expectedly flourish without much involvement of the MFIs. For them two
strategies are open to catch up with this development. Either they become active as
promotional agencies or as second-line wholesale loan providers. Both options may be
attractive but would require substantial institutional modifications to work out well.

Development Microfinance
At the same time, the basic question remains if Zambian development MFIs cannot do better
than that. Their mandates usually focus on serving the lowest income groups at scale but they
find it hard to deliver on that promise. Continued stagnation does indeed offer opportunities
for other actors to come in, as shown already by the emergence of commercial credit MFIs in
urban settings, but may also lead to a collapse of development oriented service capacity built
over the last decade.

If that capacity is to be maintained and strengthened, if only from a social perspective, a basic
overhaul of the development focused microfinance sector needs to be put in motion. Basic
ingredients for such an overhaul are substantial efficiency gains leading to lower operational
costs and affordable pricing of products, a rigid turn-around towards demand-based service
delivery, and the design of business models that combine financial health with high portfolio
quality and convincing social performance.

It also requires the Bank of Zambia to work out supervisory rules that acknowledge the
importance of a development segment in microfinance which is critically distinct from
commercial micro-lending; rules that are designed to accommodate the advancement of that
segment of the sector.

In the area of regulation and supervision, Zambia, as Tanzania and Kenya, has adopted a
framework initially developed for Uganda and borrowing heavily from the practice in
Bolivia. This system is concerned only about the operations of deposit-taking institutions and
limited to prudential regulation to protect the interest of savers and depositors. As such it
does not provide incentives for the development and growth of MFIs and NGOs that are not-
deposit taking, but play a potentially crucial role in expanding and deepening access to
finance.

On that account, Zambia would benefit a lot by also looking at the Mozambican regulatory
system, which seems more advanced as it specifically promotes and facilitates the
development of all segments of rural finance and microfinance.

Contours of an Overhaul Strategy
To change the situation in favor of genuine development focused microfinance, a major
intervention is necessary. To succeed, this intervention must build upon explicit standards for
dynamic and sound microfinance growth and development, which the Bank of Zambia and

ZAMBIA MICROFINANCE SCAN - MICRONED                                                           30
MFIs themselves need to identify. Once established, both the association of MFIs and the
Bank of Zambia will need to work together to assist in ensuring that all MFIs meet minimum
performance standards, otherwise the regulator should be ready to suspend or even cancel the
licenses of MFIs that fall below expectation.

Along these lines, the country could use support in establishing a multi-year capacity
building project, preferably under AMIZ, which can be renewed for a further period
depending on initial results and any new sector developments. The project should have its
own lead manager in the form of an experienced microfinance consultant or executive with a
strong background in institutional development. The lead manager will report directly to an
advisory board, which can simply be an expanded sub-committee of the AMIZ board
specifically tasked with building industry standards and benchmarks. Such a committee will
need to have an additional representation from the Bank of Zambia, the Association of
Bankers of Zambia, and civil society organizations involved in poverty reduction in Zambia.

As stated earlier, the higher brackets of the microfinance market, urban SME and consumer
and payroll deduction lending, is likely to blossom in the country in the years to come. It is a
market that requires some level of specialization by well-capitalized and highly professional
institutions. Here, the Bank of Zambia indeed has a role to protect consumers from
exploitation through opaque, non-transparent pricing practices. Secondly, consumer credit,
locally more known as micro-lending, is associated with high levels of client indebtedness,
and can cause serious loan repayment problems sector-wide if not monitored closely and
controlled. Already, public sentiment against micro-lenders is decidedly negative and some
prompt consumer education and consumer protection will be beneficial to not only the
clients, but also the micro-lenders themselves as this can help avoid a consumer backlash.

On balance, some public sector and international support is necessary to develop well-
functioning rural financial markets and microfinance in Zambia. However, this public
involvement should focus on building a sector-wide infrastructure that encourages private
sector development in yet neglected areas and communities but also identifies a clear
operational leeway for non-profit and community-based institutions.




ZAMBIA MICROFINANCE SCAN - MICRONED                                                          31
5. CONCLUSIONS &
RECOMMENDATIONS




                                Drafts by Francis Mwanza




5.1.   CONCLUSIONS

The Zambian microfinance sector is well diversified but small and fragmented. Different
types of institutions serve different niche segments of the market, but outreach is still very
limited; in a comparison of six countries in the SADC region, Zambians are the most un-
banked. Yet Zambia also happens to be the poorest in the SADC region; this means that
improved access could have large impact.

For a decade, Zambia has seen the emergence of development or mission-driven MFIs.
Despite promising beginnings, their collective handling capacity appears to have stagnated
and in terms of outreach and sustainability their performance is below results achieved by
even the younger generation of micro-lending MFIs, which are hardly five years old.

This scan has found limited and unsteady growth in clients and even in the volume of credit
made by MFIs. In addition to not growing as fast as other MFIs, or reaching more people
demanding their services, the Zambian MFIs also show lack of a leading MFI that
demonstrates good practice in combination with steady growth and becoming fully
sustainable. Across the board development MFIs have limited capacity in risk analysis and
credit administration and their risk exposure is considerable, in some cases beyond any
acceptable norm. Moreover, these MFIs have come to largely abandon rural service delivery
and are plagued by high client drop-out rates resulting from lack of focus on demand and
customer satisfaction.

Development MFIs tend to work in isolation from one-another, in spite of being members of
the same association, which is expressed in unimpressive learning curves. They also have
made little progress in pioneering functional linkages with both the banking sector and the
emerging community-based rural finance sector and have done little to champion their case
as a distinct segment of the microfinance sector entitled to its own set of industry standards
and benchmarks.

In view of increased competition in their core market and performance requirements by the
Bank of Zambia some face the risk of not being able to cope and disappear into oblivion
whereas most others will likely face an uphill battle to stay in business.




ZAMBIA MICROFINANCE SCAN - MICRONED                                                        32
On balance, lack of adequate institutional capacity, which translates into high portfolio at risk
figures, high staff turnover levels, low client retention rates, and low outreach, presently
account for a large share of limited access to finance by MFIs. Without immediate prospects
for any of the currently leading MFIs to scale up outreach and improve their financial
condition, it is unlikely that Zambia can rely on private investments to improve the sector. In
this regard, there is need to help mobilize public resources to formulate a vision and long-
term development plan for the microfinance sector.

While both the government and donor agencies have previously directed their microfinance
sector support through individual institutions, it seems that a different approach could inspire
renewed interest and place the system back to growth.

Even to sustain the unfolding renewed interest in rural finance in the country, it will be
necessary to bring in more resources and have a focal point to spearhead further progress and
effectively promote community-based finance models. If encouraged and nurtured well,
linkages between commercial banks and strategically located MFIs could provide the best
option for expanding access to finance that also reaches the poor.


5.2     RECOMMENDATIONS

For Development MFIs
Poverty finance is about service delivery to the poorest and most vulnerable households
and their communities. It is unlikely that the formal banking sector in Zambia can play a
major role in this area as it requires some specialization combined with a calling. Because of
poor infrastructure and widely dispersed population, it will be a while before profit-driven
financial intermediaries can contemplate the high cost of serving poor households, which
derive a livelihood from an informal economy and unpredictable agricultural production.

To a good extent, this is also true for development MFIs. The paradox here is that the more
they act as professional financial institutions, able to meet supervisory rules and regulations,
the further they may drift away from servicing the poorest and most vulnerable households
for which they were established. This is not a necessity but comes along with the lack of a
strong demand focus and innovative skills and capabilities to stay focused.

With adequate support to the community-based finance groups and the development of
strategic linkages and MFI capacities, it is possible for Zambia to build an inclusive financial
system that takes care of the urban and rural poor. However, this requires a massive effort to
promote the concept in practice. A deliberate focal point to spearhead this revolution is
important, as it will focus the attention on specific changes and highlight the requirement for
resources. Perhaps AMIZ can provide home to such sector-wide effort. In this regard, a
Zambia microfinance capacity building project, as suggested here, needs leadership that is
enthusiastic about building inclusive financial systems that caters to the needs of the poor,
has the confidence and vision for such a system, and is vast in the knowledge of
microfinance. Although housed by AMIZ, the project would be autonomous and independent
of its operations, and would respond exclusively to the wider financial sector development in
Zambia.

Among the immediate goals of the project would be to support AMIZ and the Bank of
Zambia in developing appropriate operational standards and benchmarks for development
MFIs, and to further improve and detail the regulatory framework. To achieve its objectives,
the project would provide funds for capacity building and expertise for individual MFIs that

ZAMBIA MICROFINANCE SCAN - MICRONED                                                           33
meet the rules for participation. In this regard, only serious MFIs with a commitment and
vision of scaling up and expanding outreach should qualify for support and gain access to the
resources. Perhaps the project could give preference to MFIs that evidently aspire to extend
services to rural areas, or serve currently difficult-to-serve population segments such as
HIV/Aids affected households. Because lack of suitable financial products and service
delivery methodologies account for a major part of the current high client drop-out rates and
neglect of rural areas, the project should have a strong focus on market research and product
development. It should also have a focus on exchange of experiences and the promotion of
innovation through competitive grants.

A series of focused seminars on the special challenges faced by the Zambian microfinance
sector and its practitioners will add much value in bringing enthusiasm for microfinance, in
challenging leadership, and building confidence.

Broadly, much focus on the development of community-based financial intermediaries is
urgent and is important to improve current access. The help of the government and donor
partners will be necessary to build the capacity of MFIs to deliver services and to grow into
strong financial intermediaries. Linkages between MFIs and commercial banks and other
segments of the financial system should be encouraged and nurtured, through not only an
improved regulation and supervision environment but also direct support to players willing to
innovate and scale up service provision.

For MicroNed Members and Other Donor Agencies
At this point in time it is difficult to justify more direct investments in Zambia’s development
MFIs in view of overall unimpressive performance levels. That notwithstanding, the demand
for appropriate financial services is of a magnitude donor agencies can hardly afford to walk
away from.

In fact, the microfinance market has great potential in all its segments but it takes an effort to
unleash the potential in the poverty segments: rural and urban finance for self-employed poor
and vulnerable people. And whereas the government has made major inroads to live up to its
responsibility as regards enabling rural finance, including community-based finance, it would
be a good option for funding agencies to work with the public and civic sector to come to a
major rejuvenation of the urban finance sector and to establish effective service linkages with
the emerging rural community-based systems.

As a first step, MicroNed members could collaborate and jointly contribute to a Zambian
microfinance capacity building project as formulated above. Right now this does not take
huge sums of finance; the sector is still quite limited in size after all. MicroNed members
could be of most strategic assistance in collaborating collectively with national stakeholders
in getting the process started. Once in full swing, other agencies will expectedly come in and
also the public sector and practitioners will come to contribute once they see the process
leading to results. The quintessential recommendation for MicroNed members, therefore, is
to be instrumental in setting this process in motion.




ZAMBIA MICROFINANCE SCAN - MICRONED                                                            34
6. RECOURCES




                        Network Road by Francis Mwanza




Financial Access
FinScope Zambia in the past years has conducted a range of high caliber surveys into demand
and supply issues as regards access to finance: overall demand and supply surveys, and
detailed studies into housing, mobile banking and frontier challenges. All these reports are
available on its website: www.finscope.co.za. The same site provides access to studies
conducted in other Southern African countries. FinScope can be contacted at the Anglo
American Building, 5th Floor, 74 Independence Avenue, Lusaka or through
julietmunro@iconnect.zm (+260 211 212 103).

Other interesting overview and background studies, all downloadable from the internet, are:
• James Thurlow and Peter Wobst, Operationalising Pro-Poor Growth, A Country Case
   Study on Zambia, October 2004, a joint initiative of AfDB, GTX, KfW, DFID and the
   World Bank.
• José de Luna Martínez, Access to Financial Services in Zambia, World Bank Policy
   Research Paper 4061, November 2006.
• Republic of Zambia, Joint IDA-IMF Staff Advisory Note on the Poverty Reduction
   Strategy Paper, July 2007.
• IFAD, Republic of Zambia, Country Strategy Paper, April 2004.
• IFAD, Republic of Zambia, Rural Finance Programme, December 2004.
• Republic of Zambia, The Financial Sector Development Plan (FSDP), Main Report,
   2004.
• Nkosilathi Moyo, Microfinance and Poverty Reduction in the SADC Region, Final
   Report, February 2008, commissioned by the Southern Africa Microfinance & Enterprise
   Capacity Enhancement Facility (SAMCAF) in Harare, Zimbabwe.
• Republic of Zambia, Central Statistics Office, Zambia 2000 Census of Population and
   Housing, Housing and Household Characteristics, Analytical Report.

Regulation
Technical information is to be found at the website of the Bank of Zambia: www.boz.zm.
The site includes The Banking and Financial Services (Microfinance) Regulations, 2006, as
well as the Stakeholders Comments on the Draft Microfinance Regulations. It also offers the
full Financial Sector Development Plan (FSDP) document. In addition it gives an overview
of all licensed and supervised banks, NBFIs and MFIs and periodic aggregated performance
overviews.

Other documents related to regulation include:
• Chiara Chiumya, The Regulation of Microfinance Institutions: A Zambian Case Study,
   2006, PhD thesis submitted to the University of Manchester, UK.


ZAMBIA MICROFINANCE SCAN - MICRONED                                                      35
•   Chiara Chiumya, The Regulation of Microfinance in Zambia, March 2006, published by
    the IRIS Center under the CGAP funded Essays on Regulation and Supervision series.

Developmental Issues
As regards HIV/Aids, the usual international websites provide the latest country profiles:
UN’s www.unaids.org and the USAID’s www.pepfar.com. Most larger bilateral agencies’
sites provide summaries. Also of interest are for instance www.avert.org run by the UK
AVERT charity (Averting HIV and AIDS), www.worldgranny.nl run by the Dutch charity of
the same name, and www.artsenzondergrenzen.nl, the Dutch MSF affiliate. There are no sites
specifically devoted to the situation in Zambia, although the University of Zambia’s School
of Medicine keeps some track on in-country development: www.medguide.org.zm. An
interesting article is:
• Pauline Achola (MENA), Impact of HIV/Aids: With a Case Study on HIV/Aids
    Mitigation, July 2006.

Likewise, there is little information in the public domain on the link between microfinance
and gender in Zambia. The quoted article by Mutalima gives a good insight in operational
and institutional concerns:
• Irene K.B. Mutalima, Microfinance and Gender Equity: Are We Getting There? No
    place and date.
A rather dated by still useful more overall analysis is provided by
• Bridget Byrne, Gender Profile in Zambia, November 1994, commissioned by the
    Department of Foreign Affairs, Ireland.
Human Rights Watch recently published the interesting
• Hidden in the Mealie Meal: Gender-based Abuses and Women’s HIV Treatment in
    Zambia, December 2007.

Contact
For additional information AMIZ can be contacted Godfrey House, 6th Floor, Longolongo
Road, Lusaka, +260 1 236 268, amiz@zamtel.zm.




ZAMBIA MICROFINANCE SCAN - MICRONED                                                     36

								
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