Despite a rosey and thorny interest rate theme for Africa’s second largest copper producer investment returns for various asset classes have varied depending on duration. In economic turbulence as one that Zambia faces, risk appetite skews towards shorter duration assets compared to longer dated fixed income assets.
In an interest bearish environment, a new asset class in an unregulated market has blossomed with earning returns in excess of 50-75% over a one year period surpassing treasury bills, stocks and fixed deposits. One year treasury assets earned 27.5%, while investing in the best performing stock Africa Explosives Ltd PLC earned investors 14% despite the LuSE All Share Index (ALSI) sliding 14.5% in 2019 and the best fixed deposit deals paid investors 28-29% maximum.
Village banking was the winner: Village banking earned groups lucrative returns in excess of 55% with some individuals in groups posting supernormal returns of up to 75% with zero tax. Village banking has infiltrated the suburbs with many in white collar employment participating in the investment savings options with a silent lending leg. Globally the investment option has thrived unregulated and is the best conduit to channel mattress cash back into the financial system in the quest to promote financial inclusion. Historically it was targeted towards improving the lives of village settings through savings from small business holdings and allowing for liquidity to boost smaller entrepreneurial settings. The investment option has however been replicated by cash surplus units motivated by higher earnings capacity in an unregulated market in an era where cost of conventional banking are not only exorbitant but returns on investment are marginally low to make savings business sense by commercial banks.
Top banks have read the curve early to tap into the deposits nonetheless to benefit from liquidity in liability booking campaigns that then house the savings group account. Key banks such as Zanaco bank PLC, Barclays and Stanbic Banks have not been left behind offering village banking offering going by different nomenclature.
Stakes still high: Despite the lucrative returns, village banking has its own unique risks such as counterparty credit risks should savings group members default and money laundering risks should savings group members use the investment option to launder cash. Savings groups are many with non standard but similar constitutions whose lending rates vary. As with the Capital Asset Pricing Model (CAPM), risk premiums remain high for higher exposures taken. The central bank has allowed for unregulated markets to allow for tapping of the dark side of the economy not captured by the financial system to channel mattress liquidity to flow back to the system in the quest to boost financial inclusion.
The Kwacha Arbitrageur