Bank of Zambia Circular 15/2002 on Support for Commercial Bank Lending to the Agriculture Sector

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BANK Of ZAMBIA
OFFICE OF THE DEPUTY GOVERNOR -OPERATIONS r . t"'; September 19,2002 CB Circular No.15/2002 To : ALL COMMERCIAL BANKS '... .,.- : " i SUPPORT FOR COMMERCIAL BANKS LENDING TO THE AGRICULTURE SECTOR r-' '. ; ill the 2002 Budget, the Honourable Minister of Finance and National Planning announced measures ! ., to support the growth of the agricultural sector. These included an announcement that the Bank of I ' Zambia (BoZ) would take measures to lower bank lending rates for the agricultural sector, in 1; particular, and the economy in general. ill this regard the BoZ is introducing the following voluntary i schemes for commercial banks that provide finance to the agricultural sector.

1. With effect from September 27, 2002 (i.e. based on the weekly return of September 25, 2002) the
   BoZ will exclude the new loans and advances as well as leases to the agricultural sector (whose definition is outlined in Annex 1) from the total deposit liabilities base used when calculating the required statutory reserves ratio on Kwacha deposit liabilities/or participating commercial banks. This will in effect lower the effective statutory reserve ratio, on Kwacha deposit liabilities faced by commercial banks lending to the agricultural sector. r:' By this measure the BoZ expects lending base rates on qualifying Kwacha loans and advances to l. decline by 15%. The resources released to commercial banks through this mechanism are to be r:: chann~led sol.ely to the a~cul~al ~ector. Any deviati~n of funds fr~m this p~o~e and non￾r: complIance WIth the underlYIng guIdelInes (see Annex 1) WIll attract penaltIes prescnbed m paragraph 11 of Annex I.
2. Further, in order to support commercial banks in addressing problem agricultural loans, the
   requiremento have interest rates on renegotiated loans match obtaining market rates is being waived for all qualifying agricultural loans as defIned in Annex I. Those commercial banks wishing to participate in these schemes should formally notify the Director , -Financial Markets in writing. rc::
   Annex I outlines the detailed implementation modalities. The reporting format for loans and advances
   to the agricultural sector is attached as Annex II and ill. For further clarifications, kindly contact Director-Financial Markets Department, telephone No. 225008 and facsimile 221189. f: ~enda DEPUTY GOVERNOR -OPERAnONS Bank Square, Cairo Road, PO Box 30080, Lusaka 10lOl,Zambia Te/:260-1-226844,Fax:260-1-237070,emai/:amwenda@boz.zm

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ANNEX I
IMPLEMENTATION MODALITIES FOR MEASURES TO SUPPORT LOWER LENDING RATES TO THE AGRICULTURE SECTOR I Introduction r.'.; 1. In the 2002 Budget, .the Honourable Minister of Finance and National Planning f: announced measUres to support the growth of the agricultural sector. These included an announcement that the Bank of Zambia (BoZ) would take measures to lower bank lending rates for the agricultural sector, in particular, and the economy in general. This note outlines detailed implementation modalities for the specific measures BoZ has introduced to support the agriculture sector. ~ /' L_. II. Support to the agriculture sector
2. The BoZ has introduced voluntary schemes to lower the effective statutory reserve
i , ratio for participating commercial banks making new loans, advances or leases to the agricultural sector under this schemel. Under this scheme new loans, advances or leases f.~ to the agriculture sector (defmed as loans, advances or leases made after the corning into : effect of this scheme) will be excluded from the total deposit liabilities base used to calculate the required statutory reserves that each commercial bank must maintain at BoZ.
3. In addition, in order to help banks better address the situation of problem agricultural
loans, the requirement to have interest rates on renegotiated loans match a new fully performing loan of similar merit will be waived for all agricultural loans as defined in
Annex I (see paragraph 4). In this way, banks have, at senior credit management's ~':: discretion, the option to charge lower interest rates on problems loans in existence on
~ coming into effect of this scheme and that may be renegotiated during the period that this scheme will be in effect (see paragraph 8). The monthly reporting requirements for all ~-.1 loans renegotiated and restored to accrual status under this scheme (i.e J-list) is provided .in Annex lI(a). m. Definition of Agriculture
4. For the purpose of this scheme, agriculture will be defmed as follows:
, ..All cropping; t a) Cereals (maize, wheat, paddy rice, sorghum, and millet), b) Root and tubers (groundnuts, soya-beans, mixed beans, sweet & irish potatoes, cassava); and , I Participating commercial banks are those that agree, through written notification to the Director￾f-" --Financial Market, to participate in this scheme and abide by the regulations outlined in Annex I.' l 2 !

. r'- c) Industrial/export crops (tobacco, sunflower, cotton, coffee, castor beans, cut flowers, vegetables, paprika) .Livestock (including dairy) and Poultry (including egg) production; .Fishing & fish fanning; F-,! i='~ .Agricultural equipment and infrastructure for cropping, livestock (including dairy), . ~ : fish and fish fanning:
a) Equipment (steel structures for tanks, boilers, engines, turbines, pumps, packaging ma~hinery, lift~g and lo~d~ng e~uipment, generators, compressor} tractor and traIlers, prefabncated bluldmgs) ~ " .b) Infrastructure (dip tanks, irrigation dams, dams for livestock water, greenhouses, fish ponds), and
IV. Implementation modalities
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~ : Eligible loans and advances
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5. Only new Kwacha loans and advances (i.e. given after CB Circular 15/2002 has come
into force) as well as leasing by commercial banks to agriculture (as we have defmed it above) are eligible.
6. Except as provided for under paragraph 10 of this scheme, non-performing loans and
advances, as defmed under the Banking and Financial Services (Classification and ,. Provisioning of Loans) Regulations, 1996 (Statutory Instrument No 142), are not eligible. -Loans and advances made through on,.lending facilities such as the Enterprise ;'; Development Fund (EDF) are also not eligible under this scheme. r' ~;! Tenure of scheme
7. This scheme will run for a minimum period of three years. BoZ will monitor and ~
assess the operations of the scheme on a continuous basis to ensure that the intended objective of providing real relief to the agricultural sector, through lower lending rates, is achieved. , Lending rates to agriculture] i-: . .8. BoZ expects that, at the minimum, commercial banks will pass on the reduction in the cost of maintaining statutory reserve at BoZ to all new borrowers in the agricultural -. 2 A limited definition is adopted here, principally to minimize the opportunities for abuse. Additional items may be added (or subtracted) by BoZ in consultation with the Banker Association of Zambia (BAZ) and the ,. Zambia National Farmers Union (ZNFU). 3 As defined in paragraph 2.
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i tj t , sector by reducing their lending base rates by 15%. In addition commitment fees and other charges must not exceed 4%. Operational Issues
9. Commercial banks will be required to maintain records of all loans disbursed under
r: this scheme and reports on such loans should be submitted in the prescribed fonnat !:.. attached as Annex II. Furthennore, participating commercial banks will have to provide t- additional information as outlined in Annex III, regarding new loans to the agricultural sector, in the Weekly Return of Selected Assets and Liabilities that commercial banks submit to BoZ every Friday.
10. Regulation 11(1)(a) of the Banking and Finanrial Services (Classification ~
..Provisioning of Loans) Regulations, 1996, shall not at the discretion of any bank's senior ;~. credit management apply to any agricultural loan or advance already made or in existence F.- at the coming into force of this scheme and subject to renegotiation under these Regulations, provided that:
l r-1 a) Bank senior credit management has given 14 days prior notification to the ~: BoZ;and i b) The bank continues to comply with all the BoZ prudential guidelines and regulations currently in force.
11. Current penalties for the issuance of incorrect returns or the late submission of
returns shall apply. Furthennore, if the information submitted on qualifying loans and advances is found to be incorrect, these loans and advances will be excluded from the ~ calculation of the required statutory reserves to be held at BoZ (see Annex III). Commercial banks will have to make good on their required statutory reserve ratio and , the current charges for non-compliance with statutory reserve ratio will apply for the f: period over which incorrect data was submitted. It should be emphasized that the I infonnation supplied through these returns will be subject to on-site verification. The BoZ may charge additional penalties to those specified here. / $ :
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ANNEX Ilia
::: COMMERCIAL BANKS' WEEKLY RETURN OF SELECTED ASSETS t: AND LIABILITIES Position Reporting as Bank on Wednesday Total
1. Core Liquid assets
r:; (a) Zambia Notes and Coins r:-~ (b) Current account Balances at BOZ (c) Treasury Bill Holdings (d) Term Deposits
2. Statutory account Balances at BOZ
.3. Liabilities to the Public (a+b)
~;.. (a) Kwacha Deposit Liabilities to the Public (b) Bills Payable t (c) Foreign Currency Deposit Liabilities to the Public($'OOO) i
4. New Lending to Agriculture 1/
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f~ 5. Deposit Liability to the Public less New Agric Lending (3-4) i
6. Government Deposits
7. Loans and Advances outstanding
(Of which loans in million of US $)
8. Core Liquid Assets Ratio
1. 9. Minimum required liquid assets(35% of 3a+3b)
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10. Excess/shortall in liquid assets
fi;, 11. Statutory Reserve Ratio
12. Minimum Statutory Reserves (15% of 5)
13. Excess/shortall in statutory reserves
14 Minimum F .C. Statutory Reserves (15% of 3c) in US$.
l. 14a. Statutory Reserves in US dollars
14b.Statutory Reserves to be reserved in Kwacha t;:
16. Foreign Currency Statutory Reserve Balance in K.
17. Minimum F.C. Statutory Reserves (15% of 14b) in K. (at BOZ mid rate)
18. Excess/shortall in F .C.Statuto Reserves (16-17)
t--. Notes:
;l 1/ Breakdown of agriculture loans to be given in Annex Illb --:.' \ I

ANNEX Illb
f; COMMERCIAL BANKS' WEEKLY BREAKDOWN OF AGRICULTURAL LOANS Reporting Position Account as No. Bank on Wednesday Client Name Date of Disbursement Amount r", t '0 .: ,..P￾i:::.! ;'" . f .: :
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