Zambia: Developing and Strengthening Contingency Planning 

Zambia underwent an FSAP in 2008. Stress tests performed by the FSAP team confirmed that although the country’s banking sector could withstand considerable shocks, it was prudent to put in place a strategy to prevent macroeconomic fallout from the global crisis.

FIRST received a request from the Bank of Zambia (BoZ) to enhance its tools for managing financial distress and a potential systemic crisis, and approved the project worth $161,485 in August.

It was the project’s objective that, at its conclusion and through the ongoing efforts of the client, the BoZ should have a sound framework for preserving the stability of the financial system, to include:

  • An institutional framework for crisis preparedness
  • A contingency plan
  • Arrangements for the provision of emergency liquidity assistance
  • A well-designed bank-resolution process
  • A depositor protection facility
  • A tool to strengthen the surveillance of banks and project their balance sheets based on different scenarios

At the end of the project, substantial progress had been made in designing the institutional arrangements, but they were yet to be made operational. The emergency liquidity assistance policy was ready, subject to final management and board approval. A deposit protection bill had been drafted, circulated for comment, revised, and then submitted to the Ministry of Finance and National Planning. An agreement had been reached on the need to set up an internal BoZ group that would monitor risks and vulnerabilities in the financial system, draw attention to danger areas, and be responsible for coordinating action when needed. BoZ has already begun this process by drafting memorandums of understanding with home supervisory authorities of foreign banking groups represented in Zambia. An agreement has also been reached within the bank to establish a small financial stability unit.

In addition, a financial projection model was developed for two banks at the request of and in cooperation with the BoZ. The mission left the bank with a baseline projection for the target banks, a working copy of the model, and some elementary sensitivity analysis. It also helped familiarize the BoZ staff with the model.