As we reflect on performance of the year 2021 in the investment faculty, Africa’s second largest red metal producer Zambia has one outstanding investment option that surpassed traditional risk free assets, village banking. The investment options annual interest yield of above 120% qualifies it for most lucrative asset even when adjusted for inflation.
ZAMBIA’S SOCIALLY ACCEPTED BANKING MODEL
Village banking is Zambia’s socially accepted banking model, understood at the most elemental level which has transcended various classes. And what makes it so powerful is that was developed and propelled by the country’s most effective business unit – the woman! It has created money and wealth for the banking and mobile money systems without them even realizing it.
Village banking operates on a very basic premise that most financial players struggle with, trust. Joining a group is as easy as getting a referral which proxies official due diligence (typically a form of know your customer) on a counterparty and informally passes credit risk to the referee should the recommended party not oblige to settle dues. With a high settlement risk landscape informed by historical fraudulent incidents that have been perpetrated in some village banking groups, there is a strong shift towards providing collateral for credit extension above prescribed thresholds. Borrowing nonetheless is seamless ideally without collateral asks while interest is charged monthly. Most village banking groups have however turned to charging simple interest on a monthly saving basis as opposed to compound interest which was the case at inception. Compound interest methodology is more complex for an investment product managed on spreadsheets.
ACCESS TO CAPITAL HURDLES IN AFRICA CATAPULTS VILLAGE BANKING
Access to capital remains a key hurdle in Africa generally because banks still ask for physical or cash collateral as such many are incapacitated from borrowing. Village banking has solutioned for many personal and small business segments that seek liquidity to fund needs while not worrying about collateral requirements. Cycles are preferably short in duration ranging from 6 -12 months allowing maturity and payouts after which other which other cycles commence. Village banking players practice diversification by belonging to multiple groups that offer different benefits and investment payouts. At a time exchange rate risks were high some high profiled groups saved in foreign currency with fairly decent balances of a minimum of $5,000 to $10,000 as beginner investment lots.
Bank of Zambia Assistant Communications Director Besnart Mwanza
“The Bank of Zambia recognizes the relevant role that village banking or saving groups play in communities, including transitioning their members into other forms of financial services and driving the financial inclusion agenda,” Assistant Communications Director Besnart Mwanza (2020)
Despite central banks approval of the product in the quest to encourage savings and promote financial inclusion, village banking remains unregulated and as such deposits have grown significantly. Village banking has evolved from its traditional class of the lower tier ranging from marketeers to micro business owners in rural areas to inclusion of higher tier white collar classes that actively participate in savings and investments.
Gauged against fixed deposits, treasury bills, currency trading real estate and stocks, village banking was by far the best performing asset in Zambia in 2021.
The Kwacha Arbitrageur