THE banking sector has faced a massive challenge of trying to cushion the huge demand for dollars on the local financial market amid high inflation and the continued kwacha depreciation, says the Bankers’ Association of Zambia (BAZ).
In an interview, BAZ chief executive officer Leonard Mwanza said banks had continued to face challenges of trying to cushion the huge demand for dollars characterised by increased costs of doing business.
He added that the local currency’s value had equally come under pressure by high inflation and persistently high demand for dollars, which kept the kwacha trading at an average K21.50 per dollar.
“On one side, banks are businesses and on the other side, they are financial intermediaries; they provide transaction services, they also ensure that they provide foreign currency as demanded by the clients whenever they wish to buy things outside the country. They give dollars in the form of trade finance solutions. But there are those customers who keep their balances in kwacha or in dollars, they have the right to demand their money as and when they need it to put back in their businesses. Speaking from the perspective of how that has impacted the banking sector, I think the challenges the economy is passing through are not just for a specific sector, banking, manufacturing, tourism even individuals and households are all impacted negatively in some form or the other,” Mwanza said.
“So, when you say the kwacha depreciation, the kwacha is always a function of market forces, it is an issue of demand against supply; we have been noting the insistence for sometime now, we have had excess demand and lower supply. So, the demand is higher than the available dollar coming into the market and that is what has caused the kwacha to tumble and lose its ground and depreciate to averages of K21.50 (per dollar).”
Mwanza added that high inflation, currently at 21.5 per cent, and the continued kwacha depreciation had increased the cost of doing business.
“Ultimately, inflation affects everyone because it raises the cost of living. For companies, it’s about the materials they need to function. They need consumables. So, once you have high inflation, it means that the prices of goods increase; it means that banks or even a business have to allocate more cash flow towards something that may be costing less because of the cost-push factor induced by, first of all, the depreciating kwacha and the increased levels of inflation,” Mwanza said.
“So, everyone gets affected, so you find that everyday you are a trader, you have to cover your position when the kwacha depreciates. You can only cover your position by increasing your pricing and when inflation is going up, you only cover your position by ensuring you protect the value of your money by increasing the pricing. The impact of that is that individuals at household-level are spending more; businesses are also spending more and the pressure to spend more keeps increasing so it speaks to an environment where the cost of doing business keeps on increasing and that’s the process that puts pressure on the bottom line. So, if you put pressure on the bottom line, you put pressure on the social sector.”
And when asked if the Bank of Zambia’s (BoZ) K10 billion medium-term loan Refinancing Facility had any positive impact on the economy, Mwanza observed that the funds had been beneficial.
“Yes, there is good progress being made. I must say that the K10 billion fund is still available and banks are continuously asking for help. I think about last month from the K10 billion, K3.4 billion had already been accessed and disbursed to various businesses and households, numbering over 32,000 in the country. So, that support came in handy and money was accessed and given to the needy areas. The goodness is that even as we pass through the (COVID-19) second wave, we still have the facilities that are available. So financial services are continuously pushing in applications to try and help them navigate challengers that are COVID-induced,” replied Mwanza, a former Natsave managing director.