Analysis of Rural Finance Policy and Strategy Implementation
Dear Friends & Colleagues
Approximately 50% of adults in rural areas are unbanked or have no access to financial services. Access to financial services has been a challenge due to various reasons, which among others include low population density in rural areas and extremely poor infrastructure, compounded by low productivity, making it difficult and expensive to provide such services. The importance of increasing access to financial services cannot be overemphasized because of the key role it plays in reducing poverty, increasing employment and attracting development. This can consequently help to bridge the rural-urban economic divide with 77% of poor people in rural areas compared to only 23% in urban areas.
This paper is aimed at analyzing the Rural Finance Policy and Strategy of 2012, a key policy document aimed at promoting access to financial services in rural areas and thereby reducing vulnerability and promoting prosperity of the rural population. The paper also analyzed other policy statements on rural finance. Implementation gaps were identified and recommendations were proposed thereafter. The paper relied on desk reviews and key informant interviews with stakeholders involved in rural financing.
At a macro level, the Rural Finance Policy and Strategy of 2012, has been criticized. The emphasis should be given to provision of support through subsidies/incentives to financial providers offering services in rural areas where it may be difficult to operate and make profit. Since the policy was launched very little has been done regarding the review of the financial landscape in Zambia particularly the development of a functional incentive system for existing financial players.
At meso level, it has been realized that the provision of supply and demand side market information about rural financial services, which is key in decision making for financial players is not coordinated or nonexistent. For examples, farmers who demand financial services in rural areas have in some studies indicated that the provision of such services is absent.
The Rural Finance Unit at the Ministry of Finance has not been so effective in leading the role of financial inclusion. Particularly due to constraints ranging from fiscal to staffing. Though notable successes have been registered in the overall financial inclusion status for the country, the Government needs to upscale efforts to provide rural financial services by focusing on support towards good product design, development and delivery that meet the needs of the large rural market segment.
To upscale rural finance, Government needs to deal with the prohibitively high costs of offering conventional, branch-based services in remote rural areas by promoting creative thinking and innovation in both financial products and delivery of those products. Capacity building also needs to be done among banks and other financial service providers on how to use non-traditional forms of security/collateral and to develop a functional agricultural insurance scheme. Government can also utilize mobile phone payment solutions for farmers’ deposits of the mandatory K400 under the Farmer Input Support Programme (FISP). This will help to enhance financial inclusion of rural farmers who do not have access to conventional branch based financial services.
Some of the interventions/strategies stated in the Rural Finance Policy document and implemented by the Government so far, include the following, among others:
- Enacted the Credit Reporting Act in 2018 to provide for the establishment of a Credit Registry and the overall governance and management of credit reporting agencies including the protection of data subjects as well as information sharing and reporting, to enable assessment of credit worthiness of data subjects.
- Supported efforts to enable inter-operability of the national payment switch to reduce the cost of financial services and modernize payment systems. The inter-operability of payments systems was effected in 2019 and it is hoped that this will effectively facilitate better access to the unbanked in rural areas.
- Revision of the National Payment Systems Directives on Electronic Money Issuance. In 2018 the Bank of Zambia revised the National Payment Systems Directives on Electronic Money Issuance that were initially issued in 2015. The key changes to the directives include the following:
- Permitting customers to hold multiple wallets.
- Permitting both commercial banks and approved non-bank financial institutions to host Holding Accounts for electronic money.
- Inclusion of specific guidance on the use of interest earned on the Holding Accounts.
- Provisions for consumer protection and the need for e-money institutions to have procedures for dealing with customer complaints.
Consequently, the volume and value of transactions processed on mobile money platforms in 2018 rose by 76.0% compared to 2017.
- Supported the implementation of micro-insurance products in the agriculture sector. The Zambian Government had awarded Mayfair Insurance Company a contract to offer weather-based index insurance to all farmers who benefited from Government input subsidies.
- In September 2018, Government established the Rural Finance Unit to coordinate rural finance, under the Department of Investment and Debt Management at the Ministry of Finance (MoF)
- In 2016, Government enacted the Movable Property Security Interest Act (MPSI) to Support efforts to fully establish unified collateral registry regulations (as started under Financial Sector Development Plan II), including the use of movable property (especially in non-banks). The Act is aimed at making the business environment attractive for lenders to accept movable property as collateral. The MPSI Act seeks to make movable property a reliable form of collateral, thereby diversifying the nature of mobile assets used as collateral resulting in enhanced borrowing
- The Bank of Zambia has also been at the fore of promoting the Financial Literacy Week aimed at empowering people with knowledge on available financial products and services as well as creating momentum on both the supply and demand side information for the development of consumer centric financial products and services.
In order to upscale financial inclusion in rural areas specifically and the entire country generally, the following issues need to be addressed:
- The Central bank of Zambia needs to urgently develop Agency Banking regulations to guide and accelerate agency banking in underserved rural areas and consequently increase the agency banking’s share of transaction volume by financial agents.
- The Development Bank of Zambia needs to play an active role as an apex financial institution providing finances to micro-financial institutions for onward lending to rural areas as espoused in the Rural Finance Policy and Strategy and Rural Finance Expansion Programme (RUFEP) programme design.
- Government and Zambia Agriculture Commodity Exchange ZAMACE need to put in place measures that will guarantee smallholder farmers’ active participation in the agriculture commodity exchange as opposed to the current scenario where majority of farmers having access to the agriculture commodity exchange are well established farmers.
- The Pensions and Insurance Authority (PIA) needs to upscale its efforts in ensuring that the necessary microinsurance guidelines/principles are promptly put in place to promote growth of insurance uptake in rural areas and the country at large. Additionally, legislation needs to be amended to accommodate licensing of micro-insurers and facilitate the opening up of the distribution space.
- Following the enactment of Movable Property Security Interest (MPSI) Act in 2016, Patents and Companies Registration Agency (PACRA) and other stakeholders need to increase sensitization in rural communities on the options available to smallholder farmers through MPSI Act regarding use of a movables sets as collateral to access finance.
- The Zambia Statistics Agency needs to include “financial inclusion variables” in its routine national surveys to be able to measure financial inclusion statistics as opposed to the country relying on private sector sanctioned surveys to measure financial inclusion.
- Ministry of Agriculture needs to decisively deal with complaints specifically relating to inconsistencies in Weather Insurance Index payouts where some farmers receive payouts while others do not but residing in the same geographical area affected by the drought. Enhanced confidence in Weather Insurance will enhance uptake of other micro-insurance products for the farmers.
- Some of the key activities during the Financial Literacy Week need to be extended for the rest of the year and priority should be given to rural areas with lower levels of financial inclusion.
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Mrs. Bernadette Deka Zulu – PMRC Executive Director