Livingstone, 17 April 2009

A PRESENTATION TO THE ZICA WORKSHOP

BUSINESS EXCELLENCE IN TURBULENT TIMES-IS IT POSSIBLE?

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Contents

Origins of financial crisisImpact on Zambia’s economy–Recent past–2009 & Medium Term Outlook

Recent trends in Zambian banking industryImpact of the crisis on banking industry and private sectorCorporate response to the new environmentConclusion

Origins of the global financial crisis

Global crisis-background

Low inflation and high liquidity globallyInvestors looking for higher yields in riskier assetsStrong lending growth by thinly capitalized banksSharp rise in security and house pricesOver extended borrowers and increased loan defaults (mortgages)

Sharply falling security values and forced liquidationsLarge losses at banks and banks unable to fund productive sectors

Illiquid banks nationalized/closedSharp economic slowdownRisk of self perpetuating negative spiralG20 now attempt aggressive stimulation to reduce the impact; success not guaranteed but market reactions encouraging

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Global crisis-background (cont’d)

Likely scenarios of continued high interest rates in the medium term as a result of high government borrowings globally

Impact on emerging markets;–Reduction in crude oil and primary commodity (including copper) prices

–Depreciation of all emerging markets currencies–Withdrawal of cross border investments from cash rich economies away from emerging markets as market participants aggressively “deleverage”

Slow global growth for medium term Recession in the short term

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Impact on Zambian economy

Zambia recent past

Solid macro-economic policiesDownwards trends of inflation and interest ratesStrong and stable Zambian KwachaStrong Gross International ReservesCopper prices at historic highsStrong GDP growth ratesImprovement in banking sector penetration and financial inclusion as a result of large investments in retail banking initiatives in urban and rural areas

Strong banking sector growth ( ≥ 30% p.a.)

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2009 and medium term outlook

Kwacha depreciationUpward trending inflation in the mid teenscopper prices to range steadily between USD 3,500 and USD 4,000 per ton

Withdrawal of capital projects in the mining sectorReduced production in mining and other mining activitiesGRZ borrowing to increase from 1.4% to 1.8% of GDPSlow down in the economy; 2009 GDP growth rate; 5% p.a.Withdrawal of foreign investors from T-bills/Bonds, equities, and repayment of Kwacha liquidity facilities provided by hedge funds or parent banks to local banks

Reduced market liquidity in Kwacha and foreign currencies, resulting in reduction in credit extension to the productive sector

Upwards pressure on local interest rates in Kwacha and USDLay offs in the mining sector; unemployment pressureRisk of deteriorating credit quality; further reduction in consumer credit extension

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Impact of the crisis on the banking industry and private sector

Possible impact of crisis on Zambian banks

New environment–Higher interest rates–Less liquidity in USD and Kwacha–Higher credit risks

May result in;–Tighter credit standards–Limited credit extension–Re-pricing to reflect higher risks–More rapid move toward foreclosure/receiverships–General cost containment measures

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Possible impact of crisis on Zambian private sector

Slower economic growth; slower salesPayment delays affecting working capitalHigher cost of imported materialsHigher inflation expectationsHigher cost of creditDifficulties in renewing credit facilities in some sectors

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Corporate response to the new environment

Private sector-time to tighten the belts

Work the balance sheet;–Manage capital–Manage liquidity; payables/receivables–Cost conscious–Cash is king

But stick to long term strategy and fundamentals–Create opportunities–Prepare for when slow down lifts–Stay customer focused, not inward focused–Continue investing; selectively–Boost staff productivity

More market share shifts and opportunities in turbulent times than in good times!

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Outlook

Not to be too negative; –Sub-Sahara Africa better off than G 20 –Decreasing share of developed economies in global economy

Some of the best companies come from the toughest operating environments; –BRIC’s, Mexico, Zimbabwe!–Agile in volatile environments

Emerging markets to grow faster than G 20–Becoming less export dependent–Growing local/regional markets–Multi-National Companies expect more than half of their future growth to come from emerging markets!

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Outlook (cont’d)

Key reason of failure of companies;–Not operating environment –But Lack of strategyLack of ability to execute

Getting things done in difficult times–Clear strategy–Right people–Focus on operational issues–Sustainable results

Back to basics–Real value–Real delivery

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Vision, Values and Mission

Vision To be the people’s bank, and to be the leading financial services firm in

Zambia, providing sustainable financial returns and benefits to all our stakeholders

Values

What drives us? Proactive, result oriented, and prideHow do we achieve our goals? Teamwork, accountability, and competence

What guides us? Integrity, respect, and professionalism

Mission To consistently exceed our stakeholders’ expectations in proactively designing, selling, delivering, and servicing competitively priced financial solutions for all key segments of the Zambian public, in rural and urban areas, through appropriate technology, and distribution channels, with

empowered and motivated staff

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Zanaco-What have we done?

Privatisation April 2007;Clear strategy;–Vision– Mission–Financial aspirations

Visible progress made;–2 new branches opened (Senanga and Chirundu)–Refurbishments;5 branches refurbished and 8 other branches given a facelift by year end 2008

–ProductsATM air time top upMobile bankingATMs; 35 to 100

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Zanaco-What have we done? (cont’d)

GPRS enabled POSSeba enhancedCorporate internet bankingVisa electronLima/Munda schemeEmerging farmers credit facility

–Relationship managers and Agric team–Branding

Financial progress;–Revenue 33% up–Cost/Income down from 79% to 70%–Gross LDR 47%–Deposits growth 30%

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Zanaco-What have we done? (cont’d)

Capital structure–Capital Adequacy Ratio from 11% to 18%–New foreign currency funding; USD 25 million

Ownership structure–IPO–ESOP–Citizen OwnedRabo 46%GRZ 25%Public 29% (Institutional Investors, ZNFU, Individuals, Employees)

CSRFinancial literacy programZanaco FC

Citizen owned; Still Zambian, Still your Bank! Bigger, Stronger, more Reliable

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Conclusion

Conclusion

If we satisfy our customers’ needs, business and financial results will follow, in good or in bad times!

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Addendum

Suggested key policy measures-Zambian economy

Ensure banks are encouraged to continue financing key sectors such as agriculture, SME’s (fiscal and monetary policy incentives)

Ensure continued convertibility of Kwacha, but curtail offshore dealings in Kwacha that would be speculative (consider discouraging short term transactions through stamp duties rather than outright prohibition)

Diversification of economy away from minerals to primary agriculture and agric-processing, and SME’s

Support primary agriculture;– Industry initiative to refurbish or build silos/warehouses (to avoid farmers flooding

market at harvest time)– Finalize warehouse receipt legislation– Professionalize/privatise extension services– Minimize distorting subsidies and spur of the moment import/export bans that decimate

farmers and that discourages banks from lending to the sector

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Suggested key policy measures-Banking sector

Maintain sufficient liquidity for the banking sector by ensuring ample liquidity mechanisms for banks (T-bills discount/Repo window) are in place; delay monetary initiatives that would reduce liquidity

Encourage competition in the financial services but; – Increase banks’ minimum capital requirements

Currently at K 12 billion, USD 2.5 million! To K 100-150 billion, USD 20/30 million

Ensure sufficient returns to the banks to continue funding capex and costs associated with financial inclusion initiatives for all Zambians

Review banking sector tax rate to normal tax rate of 35% to reduce costs (fiscal stimulus) BOZ to access foreign currency funding from the IMF/World Bank to provide Apex facilities to

banks for on lending to productive sector Encourage banks to lend to productive/agriculture processing sectors instead of consumptive

credit Reduce bank leverage/reduce loan to deposit ratios

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Suggested key policy measures-Banking sector (cont’d)

Ensure banks remain involved in Agriculture and SME’sLower statutory reserve requirements or provide incentives for banks with

demonstratable initiatives on financial inclusion or exposure to chosen sectorsFinalize CEEC funding structure for SME’sFinalize DBZ SME guarantee facility

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Key policy measures-Customers

Remove rigid labour legislation; it delays needed corporate or industry restructuring and increases risks of companies to close during difficulty times like these

Economic diversification stimulus package (Apex funds/monetary policy incentives/ DBZ SME guarantee fund) to reduce the cost of lending to the key productive sectors

Continued increase of financial inclusion initiatives in urban/rural areas

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