Low competition levels in the Banking Sector, a source of worry-CUTS

Consumer Unity and Trust Society (CUTS) International commends the observation made by the Bank of Zambia Governor Dr. Caleb Fundanga in the Monday edition of the Post Newspaper dated 4th July, 2011 regarding low competition that has charactorised the banking industry in Zambia.

This comes at the backdrop of the organisations continued calls for a critical analysis of the sector to ensure that there are reciprocal gains between the consumer welfare and the players in the sector.

Notably, the Banking sector is non-exceptional to the economic transformations that ensued in the early 1990s and players in this sector are required to play a huge role in the economy. A snapshot of the banking sector shows that there is an average of about 18 banks to date of which 4 or 5 are big banks based on the current trends with an average market share of 15% each (measured by their balance sheets). The remaining 13 or so are have also managed to grab expansion opportunities and are able to provide a formidable or significant competition by any measure.

Therefore, analysing the status of competition using the number of players as a variable to measure, one is tempted to conclude and rationally assume there is competition in the banking sector in Zambia. However, to get a clear understanding on whether effective competition has ensued or not, it will also be good to analyse the sector by looking at two variables namely, price and non-price competition.

Analysing the latter, it is evident from the recent data and seminal reports produced and released that there have been a proliferation of banks and banking products and services such as ATMs, mobile banking etc which on one hand steers non price competition. However, the source of worry has remained with the pricing structure of these services which hinge on the price competition variable.

Currently, it is only the banking sector in Zambia whose operations are contrary to the laws of supply and demand. Despite a surge of banking services and product, on the back of a relatively stagnant demand side, prices or banking charges have remained high.

According to the FINSCOP 2009 Zambian study, out of nearly 7, 000, 000 from the 3.4 million Zambians are possible adults who could use banking services. However, only 42% are financially included and this phenomenon has not changed much since 2005 despite a surge in the number of banks and products available.

This reflects a general increase in supply at each and every level of demand of the banking services which was supposed to trigger a price gradual shift downwards to promote and increase consumption of these banking services and yet what is exhibited are high and stick charges that have failed to come down.

Further, it is worth wondering why interest rates and most of other charges charged by commercial banks are the only variable that appears not to be responding to the much talked about improved and sustained macroeconomic environment in Zambia. For instance, inflation has remain in the single digit rates and this should influence a reduction in some of the charges in the sector beyond what is pertaining, irrespective of the alleged high commercial bank operational costs.

Cognisant of the general relationship of interest and inflation in an economy, the Quantity Theory of Money equation was supposed to hold true even for Zambia. Real and nominal Gross Domestic Product (GDP) has been growing on the back of a relatively constant velocity of circulation meaning that money supply was supposed to increase proportionally. However, one is tempted to say banks have to some extend sabotaged the economy due to their failure to inject enough liquidity in circulation due to high interest rates making the whole phenomena a paradox.

In summary, for a vibrant, dynamic and competitive market system to be effective, it requires a sound regulatory framework that ensures that the tenets of competition benefits the competitive environment and the consumer welfare vis a vis promote economic growth.

In this regard, we prod the competition commission and the Bank of Zambia (BOZ) to future diagnose the bottlenecks that halt the progressive realisation of the competitive fruits of such a healthy, promising and lucrative sector and institute proper remedial measure that will held redress the situation. There is need to crack down exploitative and possible looming exploitative or abusive behaviour which retard effective competition.

Lastly, Zambia recently passed an elaborate competition policy and law and this should be not just a luxury to be enjoyed, but should be made into a real necessity for creating democratic markets, not just in the banking sector, but in the economy as a whole.