Evaluation of the Benefits of using Rebased Kwacha in the Banking Sector

TABLE OF CONTENTS

DEDICATION

ACKNOWLEDGEMENT

Abstract

1.0 Introduction
1.1 Background of the Study
1.2 Statement of the Problem
1.3 Research Questions
1.4 Research Objectives
1.5 Scope of the Study
1.6 Significance and justification of the study
1.7 Outline of entire thesis

2.0 Introduction
2.1 Overview of Rebasing (Redenomination)
2.2 Definition of Redenomination
2.3 General reasons for rebasing
2.4 Bank of Zambia(BOZ)’s stated benefits of Rebasing of Kwacha
2.5 Conditions for a Sustainable Rebasing Exercise
2.6 Brief History of Currency Reforms in Zambia
2.7 Brief History of The Banking Sector in Zambia
2.7.1 Nationalization of Foreign Financial Institutions
2.7.2 Bank of Zambia’s Control of Lending Rates
2.7.3 Incorporation of Foreign Banks to Zambian Financial Market
2.7.4 Current Ownership Structure of Banks in Zambia
2.8 Currency rebasing experiences in some selected countries
2.8.1 Germany
2.8.2 Turkey
2.8.3 Ghana
2.8.4 Zimbabwe
2.8.5 Venezuela
2.8.6 Netherlands
2.8.7 Ukraine
2.8.8 Russia
2.8.9 Argentina
2.8.10 Nicaragua
2.8.11 Taiwan
2.8.12 Romania
2.8.13 Vietnam
2.8.14 Indonesia
2.8.15 Europe Monetary Union
2.8.16 Israel
2.9 Explanation of the Main Bank Variables under Consideration
2.9.1 Transaction Cost
2.9.2 Efficient Payment Systems
2.9.3 Automated Teller Machine (ATM)
2.9.4 Reliability and Convenience of Banking Services
2.9.5 Accounting Records
2.10 Review of Similar Studies
2.11 Chapter Summary

3.0 Introduction
3.1 Theoretical Framework
3.1.1 Quantity Theory of Money (Q.T.M)
3.1.2 Money Illusion Theory
3.2 Conceptual Framework: Outline and Explanation
3.3 Chapter Summary

4.0 Introduction
4.1 Research Design
4.2 Population
4.3 Sampling Frame
4.4 Data Collection Method
4.4.1 Primary Data
4.4.2 Secondary Data
4.5 Data Analysis Method
4.6 Problems Encountered During Data Collection
4.7 Chapter Summary

5.0 Introduction
5.1 Data Presentation
5.2 Level of Response
5.3 Descriptive Analysis: Response rate
5.3.1 Simplification of accounting Records
5.3.2 Transaction costs
5.3.3 ATM operations Descriptive Analysis
5.3.4 Payment System Descriptive analysis
5.3.5 Reliability and Convenience Descriptive analysis
5.4 Quantitative Analysis
5.5 Quantitative Tests and Results
5.5.1 Hypothesis One:
5.5.2 Hypothesis 2:
5.5.3 Hypothesis
5.5.4 Hypothesis
5.5.5 Hypothesis 5:
5.6 Qualitative Results
5.7 Discussion of The Results
5.8 Chapter Summary

6.0 Introduction
6.1 Conclusion
6.2 Recommendations to Bank of Zambia and for Further Research
6.3 Final Remarks
6.5 Chapter Summary

REFERENCES

ANNEXURE A

ANNEXURE B

DEDICATION

This thesis is firstly dedicated to my late beloved sisters Annunciata E. Soko and Rose Soko who would have been very excited to see their brother graduate. I also dedicate it to my beloved Wife, Sara Kunda Soko, Parents Mr. and Mrs. Soko and the entire Soko family for their collaborative support throughout this rough moment. This MBA surely belongs to all of us.

ACKNOWLEDGEMENT

I would like to sincerely pay tribute to my supervisor Dr. Lubinda Haabazoka for his invaluable advice, support and guidance throughout the research.

To Dr. Chanda Sichinsambwe whose additional and valuable statistical guidance eased the pressure of this research.

To the management of all commercial banks in Zambia both at their Headquarters and of some branches, I render my gratitude for understanding me during data collection.

To my father Mr. Soko Edmond and mother Mrs. J.B Soko for the utmost encouragement rendered to me throughout this research.

To Mr. Kezala Kelly Mwale, Kitwe District Education Board Secretary and Mr. Daka Ismail, Copperbelt Senior Planning Officer, I pay tribute to you for the encouraging words ushered to me during this study.

I will not forget my very good friends Mbale Evaristo, Patrick Saidi Phiri, E. Mtonga and Patson Hanjele, for all the encouragement throughout this research work.

As to my beloved wife, Sara Kunda for unselfish sacrifice: she allowed me to reduce family attention for the sake of this study. I am highly indebted and grateful.

Finally, above everything else, I wholeheartedly thank my Creator, Jehovah God and His Son Jesus Christ, for the gift of good life and protection throughout my life.

Abstract

Following the Bank of Zambia’s decision to rebase the Kwacha in 2012, this study was conducted to evaluate the benefits of using the rebased Kwacha in the banking sector. The study was guided by the following research objectives: To establish whether the use of rebased kwacha has simplified the accounting records in Commercial Banks, to find out whether rebasing of kwacha has reduced the transaction costs in the banking sector, to investigate whether the rebased kwacha has improved the operations of the automated teller machine (ATM) of the banks, to analyze as to whether the use of rebased kwacha has brought efficiency in the payment systems in banks and to investigate if the use of rebased kwacha made banking services more convinient and reliable.

The researcher used both primary and secondary data. The primary data was collected from commercial bank staff of which 18 of 19 banks in Zambia participated by the use of self-administered questionnaires and semi-structured interviews. Secondary data was obtained from published materials, which included journals, textbooks magazines, internal reports and newspapers. The quantitative data was analyzed using Statistical Packages for Social Sciences (SPSS) and results presented.

Qualitative data was analyzed using the interview responses from the bank officials.

Therefore, generally, with the combination of both quantitative and qualitative analyses, the research study broken into several hypotheses produced the following results:

- The use of rebased kwacha has simplified the accounting records in the banking sector in Zambia.
- The use of rebased kwacha has failed to reduce the transaction costs in the banking sector.
- The use of rebased kwacha has failed to improved ATM operations in the banking sector.
- The use of rebased kwacha has successfully resulted in Payment System Efficiency in the Banking sector.
- The rebasing process has successfully made banking services be more Reliable and Convenient.

The researcher made the following recommendations for further research:

- The impact of the rebasing process on Foreign Direct Investment and investor confidence.
- Critical examination of how rebasing has impacted on the performance of kwacha on the foreign exchange market.
- Impact of rebasing of kwacha to the Zambian marketeers:Case study Chisokone Market in Kitwe or City Market in Lusaka or any large market place in Zambia.

CHAPTER ONE RESEARCH BACKGROUND

1.0 Introduction

The importance of monetary stability is derived from the significant independent influence of monetary change on the subsequent course of economic activity. If any nation’s currency did not matter at all or were of only minor importance in affecting the flow of expenditure, income, and price, monetary stability would be of little relevance. However, a stable monetary environment is crucial to achieve economic stability encompassing both stable prices and real growth immune to wide swings. The essential element required to generate a stable monetary environment is systematic policy, so as to minimize monetary shocks to the expectations of economic agents.

Therefore, the performance of any nations currency in the foreign exchange market and other domestic markets, is a very critical component to achieving monetary stability and country’s economic welbeing. Stable and moderately predictable currency whose movements range are marginal, don’t only portray the health of that economy, but is in itself an investment as it has the capacity to trigger economic activities hence results into much needed economic growth.

On the contrast, a deteriorating and fast weakening currency on the foreign exchange market is mostly an indication of serious economic reversals which can result into disinvestment thereby raising inflation and further worsening that local currency.It is from this background that monetary economists such as central bankers need to all the time pay enough attention to monitor and check the behaviour of the currency not only within the domestic economy but also on the foreign exchange market. During the monetary policy execution, the Central bank must be very proactive on the type of instrument and economic tactics to apply in order to stabilise the economy and the currency to make it more and more competitive. Some of the tools used could be the operations at open market, others by controlling the money supply through the bank fractional reserve ratios. Sometimes the Central Bank can institute a particular currency reform, such as Rebasing or redenomination of the currency, just to stabilise the monetary system. It is a known fact that many countries have over the years performed redenomination exercise in their economic history for many reasons; but mainly it is to try to achieve the much-needed monetary/economic stability by having a credible local currency. Some countries with recent redenomination are: Turkey (2005), Romania (2005), Azerbaijan (2006), Ghana (2007), Venezuela (2008), Mozambique (2008), Zimbabwe (2006, 2008 and 2009), among others. These redenomination generally involve reducing the value of the currency by a factor of ten (Mosley, 2005) mostly to control inflation and sometime for change in currency as a prerequisite for joining a union (for example countries joining the European Union are required to change their currency to Euro). The aim of redenomination could be for economic and political, as in the case of Afghanistan in 2002 that was aimed at helping the country better come out of economic decline after years of civil conflicts (Woodruff, 1999; Mosley, 2005). A more recent example of a country, which has rebased or redenominated is Zambia in 2012 by knocking off the last three zeroes from kwacha. This was done due to several reasons that will be outlined in this research. Therefore, this research is aimed at evaluating the benefits that accrued to the Zambian commercial banks because of using rebased kwacha.

1.1 Background of the Study

The name of currency, “Kwacha” is derived from the Chewa word for "dawn", alluding to the Zambian nationalist slogan of a "new dawn of freedom". The name ngwee translates as "brightness" in the Chewa language (Linzmayer, 2012). Since independence in 1964, Zambian Kwacha has undergone different shapes and forms. Few years after independence, the Currency Act of 1967 was enacted to indigenize the monetary system. Therefore, on 16 January 1968, the pound was replaced by the kwacha with the new official rate equal to one half the old unit, or US$1. The 5-pound note became 10 kwacha, the 1-pound note 2 kwacha, the 10-shilling note 1 kwacha, and a new 50-ngwee note was introduced to correspond to the old 5 shillings. At the same time, the currency was decimalized. It will be interesting to note that this was the first redenomination of Zambian currency.

Five-kwacha notes were introduced in 1973, the same year that the last 50-ngwee notes were issued 50-kwacha notes were introduced in 1986, with the 1-kwacha note being replaced by a coin in 1988. 100 and 500 kwacha notes were introduced in 1991, followed by 1000, 5000 and 10,000 kwacha in 1992, when the 5 and 10-kwacha notes were replaced by coins and the 2 kwacha discontinued. In 2003, 20,000 and 50,000-kwacha notes were introduced (Ibid).

Before 1991, all Zambian banknotes featured a portrait of President Kenneth Kaunda on the obverse. After 1992, all notes have instead featured a fish eagle on the obverse; all the reverses featured the Chain breaker statue. This currency reform depicted the second form of redenomination. In 2003, Zambia became the first African country to issue polymer banknotes.

In the late eighties and early nineties, Zambia experienced a severe economic crisis emanating from poor governance, high expenditure and oil crisis. As a result, the currency suffered from high inflation most of 80s the 90s. During this period of high inflation rates, commercial banks were facing high cash based transaction cost because relatively large quantities of notes were needed for transactions. There was also high risk involved in cash based transaction to the banks and their clients. Bank customers were becoming more uncomfortable carrying huge quantities of cash to and from the banks. Customers also had to spend more time at the banking halls to get served. These and other factors reduced the interest and confidence of the general public in the banking sector. The banks were increasingly finding it difficult in maintaining bookeeping and statistical records and ensuring compatibility with data processing softwares. The high cash balances resulted in a strain on the payment systems especially the ATMs as they had to churn out huge quantities of notes on a daily basis to satisfy clients demand for cash.

Therefore, after the Patriotic Front government took over power from the Movement for Muilt-party Democracy (MMD) in 2011, it decided to institute another currency reform in order to deal with this currency imbalance and send a signal that the once high inflation in the Zambian economy is something of the past. The Bank of Zambia (BOZ), the Zambia’s Central Bank facilitated this exercise, which is called rebasing. Currency rebasing or redenomination, according to Bank of Zambia (2012), involves the dividing of a currency unit by a defined denominator and adapting that rebased currency to every amount expressed in both notes and coins.

On 22 August 2012, the Bank of Zambia issued a press release stating that the changeover date for the rebased currency had been set as 1 January 2013. (The new ISO code was ZMW. On January 1, 2013 the new Zambian Kwacha was introduced at a rate of 1000 old kwacha = one new kwacha.

For this reason, this study is meant to evaluate the benefits of using rebased kwacha in the banking sector. The paper will try to investigate whether some the benefits have been accrued to the banks in the pro-rebasing era, and these are: simplification of the accounting records, efficiency in the payment systems, improvement in the ATM operation, and reduction in transaction costs to the Banks.

It must be known that throughout this research, the word Rebasing will be used interchangeably with redenomination.

1.2 Statement of the Problem

In the early 1980’s the Zambia economy faced a severe economic crisis, stemming from poor governance, overspending and other external factors like oil crisis including the slumping of Zambia’s major exporter, Copper at the London Metal Exchange Market. As a result, the Zambia Kwacha suffered from very high inflation throughout the 1990’s and parts of 2000’s, which rose up to 108% in 1987-88.

During this period of hyperinflation rates, the prices of both goods and services short up making the currency lose its value very fast so much that people had to start carrying a lot of cash to buy a small commodity. Therefore, the credibility of the kwacha was lost. The combination of the loss in the credibility and the loss of its value, the kwacha experienced an accelerated depreciation against major currencies. Despite the interference on the foreign exchange market by Bank of Zambia, the kwacha never recovered. It is at this point that some few remaining investors and other business people disposed off the kwacha to keep their cash in a more stable currencies like US dollar. The continued loss of value and further depreciation of the kwacha made commercial banks face very high cash balances. Therefore the cash based transaction costs increased because relatively large quantities of notes were needed for transactions. There was also high risk involved in cash based transaction to the banks and their clients. Bank customers were becoming more uncomfortable carrying huge quantities of cash to and from the banks. These customers also had to spend more time at the banking halls to get served. These and other factors reduced the interest and confidence of the general public in the financial sector affecting banking businesses.

On the other hand, there was increasing difficulty in maintaining bookeeping and statistical records and ensuring compatibility with data processing softwares. These large cash balances reduced the processing of the same cash,hence making all the bank services become very unreliable. Further, the increasing high cash balances also resulted in a strain on the payment systems like the ATMs especially just after 2000 when ATMs were first introduced in Zambia, as they had to churn out huge quantities of notes on a daily basis to satisfy clients demand for cash, hence reduced the efficiency in the payment systems.

In an effort to reverse the economic distortions, the Zambian Government through the Bank of Zambia, instituted this currency reform called Rebasing but commonly known as redenomination of the currency. On 22 August 2012, the Bank issued a press release stating that the changeover date for the rebased currency had been set as 1 January 2013. (The new ISO code was ZMW). On January 1, 2013, the new Zambian Kwacha was introduced at a rate of 1000 old kwacha to 1 new kwacha.

The Bank of Zambia (2012) argued that it was justified to rebase the Kwacha since rebasing or redenomination of the Kwacha is aimed at addressing the costs associated with the accumulated depreciation of the Kwacha since 1991, which they contended had undermined the basic function of the Kwacha and furthermore created transaction difficulties. It is argued that since inflation has been broken and Zambia now qualified, as a moderately stable economy with high public confidence in the economy, rebasing of the Kwacha is ripe.

The Post Newspaper quoted Alexander Chikwanda, the Minister of Finance highlighting the benefits of rebasing. He explained,

"It will simplify book keeping, accounting records and facilitate easier business transactions. It will further reduce the costs often incurred by businesses when customising standard packages, adding that the decision to rebase was premised on government's conviction to restore the intrinsic value of kwacha as a medium of exchange by bring normalcy to the numeration of the local currency.”

Further benefits amplified by Bank of Zambia (2012) were facilitating easier business transactions because it leads to the use of smaller units of money. It simplifies accounting and the ease of expressing monetary values, thereby minimizing errors associated with the inputting of financial data and time spent to review such data. It achieves a more efficient use of calculation and accounting record systems.

Thus, rebasing simplifies bookkeeping and reduces the drudgery in transactions, record keeping and banking transactions.

However, this introduction of the New Zambian Kwacha was met with scepticism and outright opposition in certain quarters of the Zambian populace. Some media houses echoed unspoken fears that the redenomination would trigger inflation. The Post newspaper cited a prominent Zambian Economist, Dr.Haabazoka .L. who highlighted this, "Maybe in the short-run, it might cause a bit of inflation as people are going to adjust prices upwards. So, you expect prices to shoot up because people will have a feeling that they have lost some savings…people might want to increase prices so that they feel comfortable because you receive your salary in millions and all of a sudden it's reduced. Therefore, everyone would want to increase the price on their rent, on the commodity to reach that million.

Whether or not rebasing of kwacha has simplified the accounting records in banks, reduced the transaction costs in the banks, improved the operations of the ATM or brought efficiency in the payment systems, is something that must be left to this investigative research.

Therefore, the researcher has found it critical to carry out an early independent evaluation of some of the benefits of using rebased kwacha in Banks. It will concentrate on the evaluation of the benefits to ascertain the extent to which these expected benefits of the rebasing exercise have been realized in the banking sector. In other words, the paper will investigate how rebased kwacha has benefitted the Banking sector in the following ways: Simplification of the Accounting Record, efficiency in the payment systems, impact on the ATM operation, and impact on transaction costs to the Banks. It has to be noted that the research will only concentrate on finding out as to whether the BOZ highly ‘preached’ benefits of rebasing in the banking sector have been achieved.

1.3 Research Questions

The research is aimed at answering the following questions:

i. Has the use of rebased Kwacha, Simplified the accounting records in banks?
ii. Has the use of rebased kwacha reduced the transaction costs in the banks?
iii. Has the rebasing of kwacha improved the operations of the ATM?
iv. Has the use of rebased kwacha brought efficiency in the payment systems in banks?
v. Has the use of rebased kwacha made banking services more convenient and reliable?

1.4 Research Objectives

The general objective of this study is to evaluate the benefits of using the rebased kwacha in the banking sector.

The following are specific objectives identified to the main objective.

i. To establish whether the use of rebased kwacha has simplified the accounting records in Banks
ii. To find out if at all rebasing of kwacha has reduced the transaction costs in the banking sector
iii. To investigate whether the rebased kwacha has improved the operations of the automated teller machine (ATM) of the commercial banks
iv. To analyze as to whether the use of rebased kwacha has brought efficiency in the payment systems in banks.
v. To investigate if at all the use of rebased kwacha has made banking services more convenient and reliable

1.5 Scope of the Study

This study will concentrate on evaluating the benefits of using the rebased kwacha in banking sector in Zambia. The study will cover all the 19 commercial banks in this country using both headquarters and branches. The research will cover a period from 1st January 2013 to February 2014. However, for comparison, the researcher will be required to refer to the period before rebasing.

1.6 Significance and justification of the study

Since the Bank of Zambia strongly argued that the New Zambian Kwacha will be beneficial to the operations of the commercial banks, this study evaluates the prospects of the introduction of this New Zambian Kwacha to the banking sector.

Even though some people including Bank of Zambia personnel may argue that this research is premature, as rebasing has just been instituted, it must be understood that all the variables that are being tested take place in the banks almost every hour. For instance ATM operations occur every day as customers use these machines every day and recordings of all transactions through accounting records are an everyday activity in all banks including bank of Zambia. Therefore, all these variables have passed through ample time to be investigated, as they are used frequently hence, an appropriate change (if any) could have occurred. In fact, the rebased kwacha is in circulation and is always moving in and out of the banks since January 2013, meaning that some if not all desired change has already taken place, hence worthy to be investigated scientifically. This early evaluation of the behaviour of rebased kwacha in banks can help bank of Zambia to identify variables, which are not responding well to the rebasing exercise and take appropriate action.

This research would really help the BOZ to take certain measures before implementing a particular monetary policy most especially if the research results show that rebasing has actually impacted negatively on the economy. The researcher believes that the research work might be cardinal to many researchers and policy makers who might be interested in further research in rebasing category. The researcher has the hope that it can contribute knowledge and also serve as a literature review for further study and complement other research work made on similar field or topic.

1.7 Outline of entire thesis

Conclusions and Recommendations.

The reasearch paper is organized into six chapters. The first chapter covers, the background to the study, statement of the problem, research questions, research aims and objectives, scope of the study, significant of the study, and organization of the study.

Chapter 2 introduces literature review which will further discuss the redenomination and provide a definition and explanation of the key variables to facilitate the study. The chapter will also provide the brief overview of the financial sector of Zambia.

The third chapter will bring out the theoretical and conceptual framework which will be derived from the the hypotheses to be tested.

Chapter 4 will address the research methods that will be employed for the study and the reasons for their choice. It will include Research design, population, sampling design and sample size, data collection techniques, data analysis, hypothesis and study variables.

Chapter 5 presents the data presentation, analysis and discussion of results Chapter 6 Conclusions and recommendation

CHAPTER TWO

LITERATURE REVIEW

2.0 Introduction

In this chapter, the research will deal with Literature review by showing the overview of rebasing (redenomination) which will comprise definition and the rationale for rebasing. Further, apart from showing the experiences of rebasing around the world, it will include outlining the brief history of currency reforms and Banking System in Zambia.The chapter will end with review of similar studies and chapter summary.

2.1 Overview of Rebasing (Redenomination)

Currency rebasing has been applied on 60 occasions during the 1960-2003 period (Layna 2006). These redenominations were performed differently. Some countries managed to eliminate one zero from the currency and this occured about fourteen times. Others performed by removing six zeros (which happened nine times). The median redenomination, in which Zambia is categorised was by removing three zeros from the existing currency, that is, dividing the currency by 1000. Nineteen of the countries have used redenomination on one occasion, while ten countries did it twice. Brazil, Yugoslavia and Argentina have recorded as the highest users of rebasing process, and these are six times, five times and four times respectively.

2.2 Definition of Redenomination

Currency rebasing or redenomination, according to Bank of Zambia(2012), involves the dividing of a currency unit by a defined denominator and adapting that rebased currency to every amount expressed in both notes and coins. Ahmed Bello. D (2011) defined currency redenomination as the process where a new unit currency replaced the old unit with certain ratio that is achieved by removing zeroes from a currency. It is the looping off some zeroes from a given currency. For the Zambian currency, rebasing was instituted by removing the last three zeroes or dividing by one thousand (1,000). Thus the old currency is not revalued so that the external purchasing power of the old and the new currency remains the same.

On the other hand, rebasing may operate in reverse. Mas (1995), argued that redenomination also extends to adding of zeros to the currency as recorded in the immediate post-independence period of most nations, in few cases. Among countries that added digits to their currencies, includes South Africa (1961), Sierra Leone (1964), Ghana (1965), Australia (1966), The Bahamas (1966), New Zealand (1967), Fiji (1969), the Gambia (1971), Malawi (1971), and Nigeria (1973).

2.3 General reasons for rebasing

Currency rebasing can be traced as far back as gold standard era. In the 19th century when the gold and silver were still used as money, governments facing shortages of these precious metals adjusted the value of their gold and silver coins accordingly. Such a process was called recoinage (Layna 2006 ). This meant that rebasing process was born out of the shortages of gold and/or silver, which merchants and other players experienced in the early years of monetary systems.

According to Mosley (2006), the reasons why some countries decide to redenominate their currency is a combination of economic and political factors such as inflation, government concerns about credibility and the effect of currency on national identity. Mosley futher stated that the redenomination is also related to other political variables such as government time horizons, the governing party’s ideology, the fractionalization of government and legislature and the degree of social heterogeneity.

Currency rebasing is a means by which credibility of a currency would be restored, as was the case in Turkey, leading to reduction in the nominal value of its Lira by six zeros (Mosley, 2005); or when countries are experiencing hyperinflationary pressures which have the effect of making their local currencies unattractive, as was the case before redenomination in Brazil, Argentina and Peru (Martinez, 2007). This is most especially, where domestic currencies have lost significant value locally and internationally, to regain public confidence in the domestic economy and the economic policies implemented therein. Angola re-denominated her currency in 1995 when inflation rate was 2672 per cent, while Brazil re-denominated its currency in 1994 when inflation rate was 2076 percent. Many nations with high levels of inflation also have relatively lower valued local currencies,making large denominated currencies necessary for basic transactions in the economy’(Layner, 2006).

Currency redenomination may be a means by which governments attempt to reassert monetary sovereignty. This is usualy a strong objective for redenomination if their citizens lose confidence in their national currency and begin to use foreign currencies with more stability and prestige. In this case the government loses its monetary sovereignty to the international capital markets and foreign central banks. Thus the central banks no longer control the money supply rendering it unable to ’provide lender of last resort functions’(Cohen, 2004).

Governments attempt to reassert monetary sovereignty and counter citizens' loss of confidence in the national currency (Cohen, 2004), as was the case recently in Zimbabwe and Ghana, where three and four zeros were removed from the old Zimbabwean dollar and cedi, respectively. This is because a loss of confidence by citizens of a country in their national currency may necessitate the use of foreign currencies, particularly those adjudged to have higher prestige. If citizens are confident that the new local currency will hold its value, they may be willing to shift from using foreign currencies, such as Euros and dollars, to using the new domestic currency. While the act of dividing a currency’s value by a particular factor is somewhat symbolic, it can also help to convince citizens of a currency’s worth. As a result, redenomination often occurs after economic crises, as governments attempt to convince citizens and markets that hyperinflation is a thing of the past. In some cases, the timing is correct, in that redenomination caps off high levels of inflation. This in the case of Israel where after rebasing process in 1985 annual inflation rate in 1990 crashed from 386.4 per cent to 17.6 per cent in 2004 and by 2005, the inflation was 2.39 per cent (IMF, 2005).

2.4 Bank of Zambia(BOZ)’s stated benefits of Rebasing of Kwacha

The BOZ press realease,as viewed from BOZ technical guidline of 2012, on the benefits of rebasing of kwacha were as follows:

- simplification of accounting records and the ease of expressing monetary values.
- re-introduction of the culture of using coins which will reduce pressure on bank notes
- significant reduction in transaction costs
- reduction in the cost of carrying large volumes of bank notes as it’s associated risks.
- efficiency in payment systems such as the use of ATMs
- facilitating the introduction of the use of vendor machines and car parking meters

2.5 Conditions for a Sustainable Rebasing Exercise

Significant efficiency gains of rebasing are experienced when the process is done in the context of strong economic fundamentals and macroeconomic stability, such as low inflation levels and stable currency. Layna (2006), explained that most countries resort to redenomination after they have addressed the monetary policy problems that have generated the large local currency to dollar (or other prestigious currency) ratios. Besides, BoZ spokesperson added, “During the recent years, inflation has declined to single digit levels such that in December 2011 it stood at 7.2 per cent. This low level of inflation coupled with favourable macroeconomic conditions provides for an opportune time to rebase the Zambian currency."(K .Mayonde, 2012 Post Newspaper article).

Further, reports show that the last rebasing exercise in 2007 of the Ghanaian currency, Cedi was carried out when macroeconomic stability began to take root with falling inflation and interest rates increasing at a decreasing rate (Bank of Ghana, 2007).

2.6 Brief History of Currency Reforms in Zambia

Since independence in 1964, the Zambian government has taken several currency reforms. It must be known that the 2012 currency reform was not the first of its kind in Zambia.

In order to indigenise the monetary system, the Currency Act of 1967 was enacted. On 16 January 1968, the pound was replaced by the kwacha with the new official rate equal to one half the old unit, or US$1.The 5-pound note became 10 kwacha, the 1-pound note 2 kwacha, the 10-shilling note 1 kwacha, and a new 50-ngwee note was introduced to correspond to the old 5 shillings. Following the de facto devaluation of the U.S. Dollar on 1971, the Kwacha, through its link to the Pound Sterling fixed at K1.7094= £1.00, began to appreciate vis-a-vis the American unit, beginning August 23rd of the same year. On December 3rd, Zambia broke her currency's ties to the British unit and attached the Kwacha to the U.S. Dollar, thereby reestablishing the Official Rate of US$ 1.40, a de facto devaluation. It will be interesting to note that this was the first currency reform of Zambian Currency market.

Before 1991, all Zambian banknotes featured a portrait of President Kenneth Kaunda on the obverse. After 1992, all notes have instead featured a fish eagle on the obverse and all the reverses featured the Chain breaker statue. This currency reform depicted the second form of currency reform. In 2003, Zambia became the first African country to issue polymer banknotes.

Again, after the Patriotic Front government took over power in 2011, it instituted another currency reform in order to deal with this currency imbalance and send a signal that the once high inflation in the Zambian economy is something of the past. The Bank of Zambia (BOZ), the Zambia’s central Bank facilitated this exercise, which is called rebasing. On 22 August 2012, the Bank of Zambia issued a press release stating that the changeover date for the rebased currency had been set as 1 January 2013.

The new ISO code was ZMW. On January 1, 2013 the new Zambian Kwacha was introduced at a rate of 1000 old kwacha = one new kwacha. This is the third reform in currency market performed by the Zambian government.

2.7 Brief History of The Banking Sector in Zambia

The brief History of Banking sector in Zambia is partly extracted from Martin Brownbridge’s article , Financial Policies and Banking system in Zambia published in 1996 .

For over 20 years until the early 1990’s Zambia pursued predominantly command economic policies that entailed extensive government ownership and administrative controls over markets, including financial and banking markets. The Post-independence financial policies consisted of three main strands: nationalization of foreign financial institutions, establishment of government owned banks and development finance institutions, and administrative controls over interest rates.

2.7.1 Nationalization of Foreign Financial Institutions

The Banking system in the mid 1960s was dominated by foreign commercial banks mainly serving the credit needs of foreign and expatriate businesses while excluding any locals. To curb that, in 1969 government established Zambia National Bank (ZANACO) whose main major aims included the provision of credit to Zambians and the extension of bank branches into the rural areas. Later, the government realised that ZANACO would be unable to expand rapidly enough to meet the expectations placed on it, and in 1971 announced plans to nationalize all the foreign financial institutions, including commercial banks (Harvey, 1991:262).The objective of nationalization was to control the major components of the economy and to prevent capital flight. Most of the non-bank financial institutions were nationalized and amalgamated to form financial parastatals such as the State Insurance Corporation and Zambia National Building Society. However, with one exception (the Nederland Bank) the banks were not nationalized because the foreign banks threatened to withdraw their expatriate management and the Zambian government was not confident that it could manage the banks without them (Harvey, 1993:7). Several other banks financial institutions were set up by the government to serve various purposes. The Indo-Zambia Bank was established in 1984 as a joint venture between the government and three state owned Indian banks, and in 1987 the Zambia Export and Import Bank was founded to supply trade finance. Development finance institutions were set up to provide concessional and/or long term finance to priority sectors with funds mobilized from the government or external sources. These included the Zambia Agricultural Development Bank and Agricultural Finance Company, which were amalgamated to form the Lima Bank in 1987, and the Development Bank of Zambia (DBZ). In order to encourage banking in rural areas, the BOZ imposed a requirement on the commercial banks that, after their first four branches had been set up, they should set up a rural branch for each new urban branch established.

2.7.2 Bank of Zambia’s Control of Lending Rates

Beginning in the mid 1960s, the deposit and lending rates of the commercial banks were controlled by the BOZ, which maintained a policy of low interest rates in order to minimise borrowing costs. Until 1984 commercial bank deposit rates were held within a range of 3.5 per cent and 8.5 per cent and lending rates between 7 per cent and 13 percent (Musokotwane:33 and 55). Nominal rates were generally held below the rate of inflation, which averaged 10 per cent during the 1970s and 20 per cent during 1980-84.

There was an increase in both inflation and nominal interest rates from the mid 1980s onwards. The implementation of a stabilization programme led to a small rise in administered interest rates in 1984 and the decontrol of interest rates and introduction of a Treasury bill auction in September of the following year. Lending rates rose sharply thereafter to around 30 per cent in 1986 - although because this was accompanied by an acceleration of inflation real interest rates remained negative. Interest rate controls were reimposed in May 1987 following the breakdown of an IMF supported adjustment programme, and held below 20 per cent for the remainder of the decade. The government adopted a new IMF supported adjustment programme in 1989 under which interest rates were again raised, although they remained far below prevailing inflation rates, which had by this time reached levels in excess of 100 per cent per annum. During the 1990s interest rates were again raised and then liberalized (Mulaisho, 1994).

2.7.3 Incorporation of Foreign Banks to Zambian Financial Market

During the colonial period three major foreign banks, Barclays, Standard and ANZ Grindlays, established operations in Zambia, and dominated the banking system at independence. The government had planned in 1971 to nationalize the foreign banks by purchasing 51 percent share holdings, but this plan was not implemented. The foreign banks were required to be incorporated in Zambia, and thus formed boards of directors, which included Zambians, but senior management remained in expatriate hands. Barclays and Standard have retained substantial shares of the banking market (approximately 20 per cent and 16 per cent respectively of total bank deposits in 1991) but their market share has been reduced by the growth of ZANACO, Meridien and other local banks. Both have nation-wide retail branch networks, although Standard, in line with its global policy, is now retrenching in Zambia to concentrate on corporate and trade finance, and announced the sale of some of its branches to Finance Bank (a bank owned by local private sector investors, in 1995.Grindlays was purchased by Stanbic in 1992: it has a much lower market share and focuses on the corporate sector. During the early 1980s two more foreign banks established subsidiaries in Zambia: Citibank, which has concentrated on corporate finance and Bank of Credit and Commerce International (BCCI). The latter - known as Bank of Credit and Commerce Zambia (BCCZ) - expanded rapidly by offering innovative services and attracting business from parastatals to capture 7.5 per cent of total bank deposits by 1989. It was purchased by Union Bank (another local private sector bank) in 1991 after its parent company was closed down. The BOZ accommodated its liquidity needs for several months, but in early 1991, Capital Bank suffered another liquidity crisis when some of its parastatal deposits were withdrawn and government allegations that it had lent money to its own directors, who were leading opposition politicians, contributed to a run on the bank. It received further liquidity support from the BOZ but was closed down in May 1991 after a BOZ inspection, instigated, according to Capital Bank, by the government to discredit the opposition. That some of its creditors were not fully reimbursed when a settlement of the bank’s debts was eventually reached indicates that it was insolvent. After the 1991 elections, Capital Bank was recapitalised, with additional shareholders and new management brought in, and it reopened in 1992 as New Capital Bank. It has since implemented a debt recovery strategy and managed its assets very conservatively. Meridien BIAO Zambia (MBZ) - the Zambian subsidiary of Meridien BIAO - was closed in April 1995 following the closure of Meridien subsidiaries in Swaziland and Kenya. The reasons for MBZ’s collapse have not yet been made public, but it seems likely that they were connected with problems afflicting the parent company, Meridien BIAO, which was clearly undercapitalised, faced an acute liquidity shortage and had probably expanded far too rapidly. It was reported that funds had been transferred from the subsidiaries in Africa to Meridien BIAO’s own parent company (Meridien International Bank Ltd.) in the Bahamas. Other financial irregularities, including insider lending and doctoring of financial data, were discovered by a BOZ inspection of MBZ in February 1995 (Bull and Simpson 1995:17). Two more local banks, African Commercial Bank (ACB) and Commerce Bank were closed in late 1995. The former was reported to be suffering from acute liquidity problems while the latter had failed to comply with a request from the BOZ to replace its Chairman, who was also a director of the ACB (African Business 1995: 25-26).

After financial liberalisation in the 90’s,the Government embarked on the Financial Sector Development Programme, a comprehensive strategy aimed at building and strengthening financial sector infrastructure to enable it support economic diversification and sustainable growth (GRZ, 2004). The implementation of the FSDP has helped address key bottlenecks in the financial system, including improving the governance of the banking sector, after crisis of the mid-1990s.It was meant to increase the number of banks in the economy of this country.

As a result of this financial measures and economic liberalisation, by 2006 there were 13 commercial banks. Out of these, seven were subsidiaries of foreign banks; one joint venture with majority foreign ownership, four domestic private banks and a public sector bank. ZANACO a public sector and the second largest bank by asset size, was privatised in 2007 although by regulatory definition, it is still majority owned by Zambians with 54.41% domestic interest. This case provides a unique feature of ownership, encompassing foreign financial equity stake, domestic private sector participation and public sector interest. Nonetheless, management rights reside with Rabobank, the single largest foreign shareholder. From 2008, 6 more subsidiaries of foreign banks have been registered, bringing the total number of banks with foreign ownership to 14 and 19 banks for the whole industry. The number of domestic private banks has remained unchanged

The increase in the number of banks has been accompanied by growth in nominal assets, accounting for more than 90% of total financial industry assets, which is ten times higher than other market participants. At the end of 2011, the banks’ nominal asset size stood at K27.8 trillion (30% of GDP) which was about three times higher than the K10.7 trillion held in 2006 (27.7% of GDP). Traditional intermediation activities (loans and advances) account for the largest share of banks’ assets.

Between 2006 and 2011, the share of loans in total assets increased to 43% from 36%, reflecting increased lending to the private sector on consolidation of macroeconomic gains. Over the same period, the share of liquid assets (cash and Treasury securities) fell to 35% from 42%, mainly due to divesture from Government securities as yield rates became less attractive. Historically, the low level of financial intermediation has been attributed to banks’ purchase of Treasury securities, which offer risk-adjusted positive premiums relative to the more risky bank loans. The banks’ share of foreign assets has also declined in recent years, averaging about 16% between 2006 and 2011 against 28% from 1998 to 2002.

However, the Zambian banking system continues to exhibit a high level of concentration with few large banks dominating the financial landscape.

2.7.4 Current Ownership Structure of Banks in Zambia

(Source: Bank of Zambia Website-2013 Update)

Name of Bank Type of Ownership

Abbildung in dieser Leseprobe nicht enthalten

Currently, Commercial banks in Zambia have continued to show resilience, largely due to the strong capital position. A majority of banks hold capital balances above the regulatory threshold, depicting the strength and stability of the Zambian banking sector. To boost the banks’ capital position and strengthen their resilience, the authorities raised regulatory capital further and introduced a tiered structure in April 2012 (GRZ, 2012). The minimum capital requirement for local banks was raised to K104 million (US$20 million) while the requirement for foreign banks was pegged at K520 million (US$100 million). Prior to this revision, the minimum regulatory capital was uniform across all banks at K12 million (about US$2 million). The authorities argue that the new capital requirement is expected to boost banks’ lending to the private sector.

2.8 Currency rebasing experiences in some selected countries

Different countries have had different experiences in the redenomination of their currencies. Globally, a lot of countries have redenominated their currencies in different ways, but few of them will be outlined.

2.8.1 Germany

Rebasing of currencies by elimination of zeroes first occurred in Germany after World War II. The country was experiencing persistent hyperinflation in the economic pressure which saw her currency becoming worthless. It could not be used to purchase any commodity; as such some citizens resorted into barter system. Therefore, Central Bank of Germany was forced to remove zeros from the Deutschmark (DM). But despite rebasing of DM, the currency never recovered, in fact it became worse.

2.8.2 Turkey

In January 2005, Turkey rebased its currency, the lira, with the new Turkish Lira with a conversion rate of one million of old lira to one new lira. According to New York representative of Central Bank of Turkish Republic Özçay (2006), deleting zeros from the Turkish Lira eliminated the technical as well as operational problems that rise from the use of figures with multiple zeros. Therefore, monetary expressions have been simplified hence it becomes easier to take records and make transactions. In sum, the changeover to New Turkish Lira was necessary both for the prospective positive effects on the currency’s reputation and for technical reasons. The Central Bank Governor argued that eliminating six zeros from the Turkish Lira contributed not only the prestige of the currency in Turkish Citizens’ eyes but also on the international level as well. By doing this operation, the trust of people in the currency had been renewed; and this trust created substantial investment that is increased in financial instruments and issued in New Turkish Lira.

2.8.3 Ghana

The Ghanaian cedi was initially introduced in 1965 to replace the British Pound and was then pegged at 2.4 cedis to one pound. This first cedi was replaced in 1967 with a second cedi, which was worth 1.2 of the old cedi that allowed for decimal conversion with the pound at the rate of one pound equal to 2 new cedis. The value of the second cedi introduced in 1967 continued to degenerate amid high rate of inflation in the domestic economy, especially when measured gains major international currencies; to the extent that the exchange rate was between 9,050 and 9,600 cedis to one US dollar between 2006 and July 2007(Onochie 2007). Ghana’s currency (Cedi) was devalued several times consequent upon the implementation of International Monetary Fund Structural Adjustment Programs initiative in 2001 because of debt-relief collaboration between the IMF and the World Bank (Bargawi, 2004). The currency redenomination exercise in Ghana as part of the country's monetary policy, wiped four zeroes off the national currency in 2007. The old currency (Cedi) had been rendered almost worthless by years of inflation that hit double digits a year for almost three decades (Mansah,2007). Bawumia, (2010) reported that the combined monetary and fiscal policies have led to reduction in inflation rates.

2.8.4 Zimbabwe

The Zimbabwean Dollar became completely worthless as a result of serious economic reversals. Therefore, the Central Bank of Zimbabwe (2006) had to recall currency notes in exchange for new notes with three zeros slashed from the dollar. In 2008, ten zeros were removed (The Z$10 billion was redenominated to be Z$1). The third redenomination dropped 12 more zeros from the currency in 2009 (Hanke, 2008). The Zimbabwean experience produces hyperinflation rate of about 12,875% per year. To resciscitate the economy, the "dollarization" process, in which US Dollar and South African Rand, was legalized in late January 2009, although the Zimbabwe paper money remnant circulated alongside foreign currencies with very little value (Ibid). The resulting lack of confidence in the currency is in the same league as several countries including Panama, Ecuador, and El Salvador, which currently use the United States dollar as their official currency.

2.8.5 Venezuela

In Venezuela, the policy of currency redenomination and restructuring was adopted to facilitate the reduction in the quantities of money, simplify the arithmetic calculations of amounts expressed in national currency, and facilitate the transactions made with coins and bills to achieve a more efficient use of calculation and accounting record systems. These policies left behind severe consequences of inflation on the currency. Inflation rates accelerated and the local currency depreciated.

2.8.6 Netherlands

Netherlands’ currency management crisis was partly responsible for what is known in economic literature as 'Dutch Disease'. Corden (1984) blames the sluggish performance of the Dutch economy in the 1970’s on the rise of the importance of the public sector, which followed the gas discovery, resulting in a crowding out of investment by the private sector. The government was forced to print large bills in response to the needs of the public exchanges when inflation crossed the border 100 per cent. The short-term monetary supply contraction was achieved by removing four zeros from its banknotes (Mehdi, & Reza, 2012). The prudent monetary and fiscal policies deployed by the government accounted for the macroeconomic stability of the nation thereafter.

2.8.7 Ukraine

Ukraine also faced similar problem during her economic transition. Landy (1997) submitted that in the early days of the transition, the centrally planned economy was bedeviled by an authoritarian and paternalistic political superstructures. The Communist governments acted with impunity in every sphere. In the financial sphere, the communist government could confiscate household and enterprise deposits with banks and other financial institutions with impunity. In an attempt to fight inflation, government embarked on confiscatory currency redenomination, and limits were put on amount and timing of the money exchange. The consequence of this was a decline in financial intermediation, which later manifested in the country's unstable macroeconomic environment.

2.8.8 Russia

Russia’s policy of monetary restructuring and redenomination in 1998 gave her citizens just a few days to trade in their Soviet-era Roubles. The resulting panic led to further damage in the peoples' confidence in the Rouble. Compounded partly by the government’s inability to service its huge debt obligations, it had to devalue its currency six months later with inflation rate growing up to 85.7 per cent in 1999 from 14.6 per cent the previous year (Ioana, 2005).

2.8.9 Argentina

Argentina in 2002 also adopted currency restructuring policy and redenomination by giving the depositors the option to withdraw their deposits from banks in US Dollar. The consequence of this policy allowed widespread circulation of US dollar in the Argentine economy, which then facilitated the flight of US dollars to foreign countries. Comparing Mexico’s policy of devaluation to that of Argentina’s without debt redenomination between 1994 and 1995. Calomiris (2007) found that devaluation benefited tradable firms, while the dollar debt redenomination in Argentina benefited high-dollar debtors. The findings also show that the investment behavior in Argentina contrasts with the experience of Mexican firms in the aftermath of Mexico’s large devaluation, in which non-tradable producers with high dollar debt displayed significant relative reductions in investment.

2.8.10 Nicaragua

Nicaragua, as reported by Mosley (2005), suffered hyperinflation of 4,770 per cent in 1989 which escalated to 7,485 per cent in 1990 despite the redenomination of its currency in 1988 as a result of civil war in the country. The macroeconomic indicators were poor.

2.8.11 Taiwan

As for Taiwan, Li (2005) conducted an investigation on Taiwan’s role in the currency conversion during the post-war of 1946 to 1950 and the results show that the policy produced severe hyperinflation that the government nearly exhausted the country's reserves to cover much of its deficit. The inflation arose from suppressed pent-up demand, due to rationing and price control during the war. In addition, Shangai’s retail price index moved from 130 to 1819 between 1945 and 1948 respectively. In the end, government had to introduce the Gold standard in order to engender public confidence in the currency, which had plummeted, resulting in social unrest.

2.8.12 Romania

Romania had earlier redenominated in 2003 when the Leu exchanged for 33,200 to dollar. The country had to again revalue its legal tender, the Leu on July 1, 2005 to a new Romanian Leu, the RON. The fixed conversion rate between the old Leu was 10,000 to RON 1, while one new RON is divided into 100 subunits named bani. The country allowed July 1, 2005 June 30, 2006 for double posting of prices, both in old and new Leu. The redenomination of the Leu was designed to simplify domestic monetary transfers and calculations, and was seen to be a necessary transition phase in preparation for Romanian’s integration into the European Union as well as the country’s eventual adoption of the euro as its domestic currency (Leroy and Mindru, 2005).

2.8.13 Vietnam

In 1985, Vietnam adopted the monetary policy of currency restructuring called, the General Adjustment of Price on Wage and Money. The policy adversely affected monetary system, such that it brought about paucity of cash and funds for ordinary operation of public firms. The policy could not curtail the runaway inflation between 1986 and 1987 (Layner, 2006). However, by late 1980, the government had complimented the stabilization programme with a combination of various supply-side policies to offset the adverse effects of the use of these instruments. In addition, the government also engaged in prudent fiscal and monetary policies to ease the pressure occasioned by the policy.

2.8.14 Indonesia

The Indonesia’s experience of currency restructuring in 2010 produced positive impact on the monetary sector and the domestic currency. Noland’s (2010) paper on Indonesia’s experience shows that the policy was confiscatory in content and was made to punish those who were opposed to communist regime. The confiscation of “excess” cash was meant to reduce the money supply in order to control inflation; to focus on groups engaged in market activities that generate cash earnings, and also require cash balances. The mechanism was instituted to redistribute assets in the society so as to favour asset allocations to groups who were closely connected to the party and punish enemies of the ruling party. To correct the monetary disequilibrium arising from the policy, the programme was abandoned in 2005 and reverted to more direct monetary controls in an effort to revive the socialist sector by limiting the sphere of private activity, and control inflation (Haggard & Noland, 2009; Park, 2009).

2.8.15 Europe Monetary Union

The Europe Monetary Union (EMU) redenomination policy was to provide a platform upon which the participating countries convert their currencies into new values in order to be in exchange parity with other currencies (Somoye, 2003). Angeloni, Aucremanne, & Ciccarelli (2006) investigated the impact at whether EMU has altered the behavior of price setters and/or the dynamics of inflation. The study finds no evidence of such change in inflation rate in 1999, when the euro was introduced as an electronic unit of account. Although the average magnitude of price changes fell when the paper currency came into play, both variables 'quickly settled back to the earlier patterns' and there was no evidence of a permanent decline in the persistence of inflation after the mid-1990s. The policy provides stable macroeconomic indicators. However, presently redenomination in the European Community seemed to be attracting blame for the severe debt and economic crisis which has hit badly all countries that rebased their currencies to Euro.

2.8.16 Israel

Israel is a good example of the countries that backed up the rebased of her currency in 1985 by removing three zeros with a stringent economic stabilization program. The currency reform was made in just a short while after the stabilization programme was launched and the programme yielded positive results. According to IMF Israel’s Annual inflation rate in 1990 crash from 386.4 per cent to 17.6 per cent in 2004 and by 2005, the inflation was 2.39 per cent (IMF, 2005).

2.9 Explanation of the Main Bank Variables under Consideration

The key concepts and variables of bank whose impact by the rebasing is the subject of this reasearch would be defined and explained to facilitate the study. The following are explanations of the key variables from a banking point of view.

2.9.1 Transaction Cost

Transaction costs include any direct costs, as well as any concomitant inefficiency in production or misallocation that resulted from them.The cost structure of businesses is made up of overhead costs and variable cost. The overheads costs or sunk cost are those that do not vary with the output level or service and the variable cost on the other hand are those that varies with the output level of the firm.In the financial sector, examples of fixed cost to banks include the huge cost of IT insfractructure and their installation, vehicles, computers, premises, vaults, safes, teller cages and desks. The variable cost on the other hand include stationary, telephone and utility bills.The cost of the redenomination to the central bank is ’few real cost beyond the short run expense of printing new notes and advertising the change to citizens and financial markets’ (Layna, 2006).This short run nature of the rebasing cost to the central bank seems to be the same to the commercial banks. systems. Some of the areas where cost is expected to reduce include transaction cost. The expected efficiency gains and cost savings of the redenomination to banks may outweigh the initial costs making banks operationally more profitable over time. This is one of the hypothesis that this research work will investigate.

2.9.2 Efficient Payment Systems

A payment system is a set of instruments, procedures and rules for the transfer of funds among participants (credit or financial institutions) in the system, relying on an agreement between the participants in the system and the system operator. The funds transfer is performed via an agreed upon technical infrastructure (CPSS report, January 2001). The payment system is an operational network that links bank accounts and provides the functionality for monetary exchange using bank deposits (Biago B. and Massimo C.2001). It is the infrastructure established in effect the transfer of monetary value between parties discharging mutual obligations.

Therefore, the efficient payment system is a system that settles payments quickly, safely and at reasonable cost. This definition applies to both interbank and retail payment systems. These three elements receive different emphasis depending on the type of payment involved. In connection with interbank systems, we place considerable emphasis on safety, because delays or failure of a payment settlement may lead to a liquidity shortage or loss in some banks.

Retail payments consist of many transactions of limited size and retail settlement amounts are normally modest. Normally, problems in the retail payment system will not pose a threat to financial stability. Therefore, more emphasis can be placed on executing retail payments quickly and at reasonable cost. The efficient national payment system reduces the cost of exchanging goods and services, and is indispensable to the functioning of the interbank, money, and capital markets. A weak payment system may severely drag on the stability and developmental capacity of a national economy; its failures can result in inefficient use of financial resources, inequitable risk sharing among agents, actual losses for participants, and loss of confidence in the financial system and in the very use of money.

In view of the above, this study will investigate as to whether rebasing of kwacha has improved the efficiency in the payment systems of these banks. Have banks in Zambia become more efficient in payment systems since rebasing process of the kwacha?

2.9.3 Automated Teller Machine (ATM)

An automated teller machine (ATM), also known as an automated banking machine (ABM) (Canadian English), cash machine, cash point, cashline or hole in the wall (British, South African, Sri Lankan, and Hiberno-English), is an electronic telecommunication device that enables the clients of a financial institution to perform financial transactions without the need for a cashier, human clerk or bank teller.

On most modern ATMs, the customer is identified by inserting a plastic ATM card with a magnetic stripe or a plastic smart card with a chip that contains a unique card number and some security information such as an expiration date. Authentication is provided by the customer entering a personal identification number (PIN).

Using an ATM, customers can access their bank accounts in order to make cash withdrawals, debit card cash advances, and check their account balances as well as purchase pre-paid mobile phone credit. If the currency being withdrawn from the ATM is different from that which the bank account is denominated in (e.g.; Withdrawing Japanese Yen from a bank account containing US Dollars), the money will be converted at an official wholesale rate. Nevertheless, this will only occur if the card being used is internationally calibrated and recognized like VISA ATM cards. Thus, ATMs often provide one of the best possible official exchange rates for foreign travellers, and are widely used for this purpose.

In Zambia ATMs arrived on the scene in 2000 and was first installed by the ZANACO (advisor.com). ATMs in Zambia allow for withdrawal of cash, checking of account balance and and some can be used to purchase mobile prepaid units. This means that the redenomination may affect the operations of ATMs when it comes to cash dispencing. Before the redenomination, when the old Kwacha was the legal tender, ATMs in Zambia dispense cash in denominations of K5,000, K10,000, K20,000, K50,000.However,Bank of Zambia argued that the rebasing process allowed it to introduce the high Kwacha note of K100 which has reduced the amount of notes to be issued per withdrawal.For example if a client before the redenomination is withdrawing K500,000 worth of the old kwacha in an ATM that is dispencing only K10,000 denominomination, then the machine will dispense fifty pieces of the 10,000 old kwacha denomination. This could only be done with two transactions since the machine can dispense only a maximum of 40 pieces of notes per transaction. However, after the redenomination, a clients can withdraw the same worth of cash (ie K50) by withdrawing 5 pieces of bank notes from an ATM dispensing only K10 denomination. This can be done in just one single transaction. In the first instance the machine chuns out fifty pieces of notes but with the redenomination it is only five pieces. Thus the ATM does less work, uses less power and may results in fewer breakdowns.

How the redenomination of kwacha has impacted on the reliability of ATMs overall performance will be analysed by this study.

2.9.4 Reliability and Convenience of Banking Services

Convenience is anything or situation that saves resources (such as time or energy) or frustration. Service convenience is one of the important promises financial institutions make to their customers. Customers would like to transact business with banks which makes their services more convenient through the use of technology or the accessibility of their branch and ATM locations for example. Could have redenomination made it more convenient for clients to do cash deposits and withdrawals, funds transfers among other transactions? These questions will be investigated by this research paper.

2.9.5 Accounting Records

Accounting records are all sources of information and evidence that are used in preparing, verifying and or auditing financial statements. Accounting records also includes documentation to prove ownership of assets creation of liabilities and evidence of monetary and non-monetary transactions. All of the documentation and books involved in the preparation of financial statements or records relevant to audits and financial reviews. Accounting records include records of assets and liabilities, monetary transactions, ledgers, journals, and any supporting documents such as checks and invoices. Accounting records can take on many forms and include; Ledgers, Journals, Bank statements, Contracts and agreements, Verification statements, Transportation receipts, Invoices, Vouchers, etc. Accounting records can be in physical or electronic formats.

Therefore, the hypothesis on this Bank of claim that rebasing of kwacha will simplify the accounting records will be tested as to what extent have the above-mentioned accounting records been simplified because of rebasing of kwacha.

2.10 Review of Similar Studies

(A) The Redenomination of the Ghanaian Currency: The Cedi (2007); A Study of its Impact on the Business of the Financial Institutions in Ghana

The Master of Business Administration student of Blenkinge Institute of Technology (BTH), Rueben Aziz, carried out a research on rebasing of Cedi entitled, The Redenomination of the Ghanaian Currency, the Cedi (2007); A study of its impact on the business of the Financial Institutions in Ghana . In this thesis, Rueben Aziz (2009) explored the impact on some variables affecting commercial banking businesses. These are cost, operational risk, deposit mobilization, ATM operations, and reliability and convenience of banking services. According to the researcher, Rueben Aziz (2009), the study showed the following results: 1) The redenomination had not affected costs in banks, 2) The redenomination has generally reduced operational loss risks, 3) The redenomination has generally improved deposit mobilization, 4) The redenomination has improved the reliability and profitability of ATMs, 5) The redenomination has improved the reliability and convenience of banking services.

B) Evaluation of the challenges and benefits of the New Ghana Cedi to Urban Market Women in the Accra Metropolitan Area.

Besides, in June 2011, a Ghanaian student at Kwame Nkrumah University of Science and Technology, Baba Sayuti, conducted another similar study entitled, “Evaluation of the challenges and benefits of the new Ghana cedi to urban market women in the Accra Metropolitan area. His research findings revealed that the major benefits of the new Ghana cedi to market women was the security as a result of the portability of the new currency compared to the old cedi. The major challenges identified in the study were difficulty identifying counterfeit notes, difficulty changing the Ghc50 note when customers bought from the market women and the difficulty in using the New Gh1 pesewa coin as many customers refused to accept it as change from the market women (Baba, 2011).

(C) Impact of Redenomination on Economic Indicators

Finally, Two Indonesian university lecturers, Prof. Dr. Euphrasia Susy Suhendra and Sri Wayhu Handayani of Gunadarma University, carried out a rebasing related research with a topic “Impacts of Redenomination on Economics Indicators”. The purpose of their study was to examine the impacts of redenomination on inflation, currency exchange, economic growth and export value on 27 different countries. They wanted to know which factors influence the government most to redenominated the currencies. After examining those factors by regression analysis, the two Lecturers concluded that the driving factors of redenomination are as follows: (1) simultaneously, exchange rate, inflation, and form of government, influence driving factors of redenomination. (2) Partially, inflation is the most dominant driving factor towards the redenomination. While the exchange rate as well as form of government are the driving factors that do not influence significantly towards redenomination. But the predictor of a country in doing redenomination is inflation in the year prior to redenomination period

2.11 Chapter Summary

In the previous chapter, the research dealt with the overview of rebasing (redenomination) which brought the definition and the rationale for rebasing. Further, apart from showing the experiences of rebasing around the world, it included the outlining of the Zambian Banking System from 1964 to date. The chapter ended with review of similar studies and chapter summary.

CHAPTER 3

THEORETICAL AND CONCEPTUAL FRAMEWORK

3.0 Introduction

This part of the study will deal with the concepts of conceptual and theoretical framework. This shows the system of concepts, assumptions, expectations, beliefs, and theories that supports and informs your research (Miles & Huberman, 1994; Robson, 2002). Conceptual framework depicts a visual or written product, one that “explains, either graphically or in narrative form, the main things to be studied, the key factors, concepts, or variables and the presumed relationships among them. In this section, conceptual framework will show a representation of the main components of the study and their interrelationships or linkages.

3.1 Theoretical Framework

Hussey and Hussey (1997: 123) define theoretical framework as a collection of theories and models from the literature, which underpins a positivistic research study. In addition, Black (1993: 25) states that theories are explanations of how things function or why events occur.

3.1.1 Quantity Theory of Money (Q.T.M)

The Quantity Theory of Money is one of the best-known theories of monetary economics. It says that the rate of inflation is approximately equal to the rate of growth of money in excess of the growth rate of real output. In this study, we explore whether the Quantity Theory of Money holds in the Post Rebasing era of the Zambian economy and in three standard monetary model economies, both in the short run and in the long run.

Whether the Quantity Theory of Money holds in the long-run is harder to establish, because we must make operative the meaning of long run”. However, the words “at once” are key in Hume’s Quotation when central banks conduct monetary policy such as rebasing of kwacha; changes in the quantity of money are not introduced evenly and “at once”. Instead, money is injected into one part of the economy typically the banking system, and it spreads out gradually from there. A consequence of this relatively slow spreading out of money is that the Quantity Theory of Money fails to hold in the short-run, while the spreading out is taking place.

In the standard neoclassical models, the QTM holds every period when rebasing occurs, there is likelihood that the ‘new’ cash injected in the economy and the ‘old’ cash still hanging in the system will raise the money supply while the velocity of money and real G.D.P remain constant. Therefore, in a short run the price levels rise marginally, but the ‘old’ currency is mopped out of the economy the ‘short term’ demand eases as the money supply decreased hence lowering the price level.

Now that the Bank of Zambia in its monetary policy has managed to wipe out the ‘old notes’ and remained with ‘new kwacha’ only, how does the quantity theory of money explain the changes that would occur in the banking sector? Since in the standard neoclassical models, the Q.T.M holds in both the short and long run, how will the new kwacha supply in Zambia’s Banking sector affect the banks and their business? Will the Bank’s operations change in a short run because of new kwacha? Thus, the research will apply this theory to investigate the extent to which the knocking off the three Zeroes from a kwacha will bring desirable changes on certain variables in the banking sector. Within this shortest possible time (in short run) of rebasing in Zambia, the research will use QTM to investigate whether the benefits of rebasing like improvement in the ATM operations, reduction in the transaction costs, simplification of the payment systems and efficiency of payment systems have really come to fruition in the commercial banks who are major key partners with the Bank of Zambia in monetary policy as result of new money supply comprising new notes and upgraded note.

QTM becomes a very suitable theory to be used for this research as it analyses the effects of increasing the supply of cash in the system by the bank directly and otherwise. Besides the theory also analyses the impact of introducing more and new money in the economy both in a short and long run. Will the introduction of this new money supply through rebasing bring any changes in the banking sector?

3.1.2 Money Illusion Theory

The phenomenon of money illusion arises whenever people misestimate the real value of their nominal wealth. Fisher (1928:4) defines this illusion as "the failure to perceive that the dollar, or any other unit of money, expands or shrinks in value”. Therefore, money illusion refers to individual or aggregate economic behaviour that consists in failing to distinguish transactions in terms of either nominal or real monetary values. Meanwhile, Safir et al. (1997) simply defined it as the tendency to think in terms of nominal rather than real monetary value.

During rebasing of a currency, consumers re-evaluate their money management strategies in order to adapt to a newly introduced currency especially when the old and new currencies are used simultaneously, pending a phase-out of the old currency at a later date. For example, Marques and Dehaene (2004) posited that 2 major processes can occur when a country is adapting to a new currency: rescaling (transforming all prices in the old currency to values in the new currency at the same time) or re-learning (memorize the new prices of consumer goods one by one). The first process would predict an easy adjustment to a new currency, whereas the second process lends itself to a slower, more cumbersome process. The Money Illusion theory highlights the perception of prices in a smaller denomination new currency lower than when expressed in the former national currency if it had a higher nominal value (Gamble, Garling, Charlton & Ranyard, 2002). This suggests that individuals adjusting to a new currency with a smaller nominal value will initially, at least, have trouble in understanding the true value of goods and services. Kane and Klevorick (1967) argued that the essence of money illusion laid in such misperceptions of the price level (P, weighted average of individual commodities' prices), the rate of exchange between nominal assets (W) and commodities.

The challenging influence of money illusion or its other derivation has been sourcing for multi- perspective studies, especially due to the little explanation of the money illusion, such as studies proposed to account for the typical reactions by consumers to currency redenomination including perceived increases in the prices of goods and services (Brachinger, 2006;Hobijn Ravenna & Tambalotti, 2006; Ranyard, 2007), errors in the monitoring of personal expenditures (Ranyard, 2007; Routh& Burgoyne, 1989, 1990), disturbance in consumer evaluation of transaction (Soman et al., 2002) and some increases in the giving of money at church (Cannon & Cipriani, 2006). In their examination of the phenomenon of money illusion, Jonas, Greitemeyer, Frey & Schulz-Hardt (2002) found that the nominal value of currency biases its subjective value in a number of ways. People perceived currency with lower nominal value than the familiar currency to be of lesser value, thus leading to an increase in consumer prices so as to be compatible with the nominal value of prices in the familiar currency.

In prior studies, the numerosity heuristic (see, for example, Pelham, Sumarta & Myaskovsky, 1994; Showers 1992; Pelham &Swann, 1989; Wilder 1978, 1977)—the tendency among animals and humans to over infer quantity from numerosity—tends to be activated when people’s cognitive resources are taxed or they are unable to make use of higher order cues for inferring quantity. Under such circumstances, people rely disproportionately on numbers as cues for inferring quantity.

The work of Pelham et al. (1994) reports that if inferring quantity from numerosity is less cognitively demanding than the engagement of more systematic reasoning, then it is possible that numerosity is a “default” strategy people rely on in making spontaneous judgments in their daily lives. Soman et al. (2002) clearly explains how a change in the numerosity of the scale can and does result in changes in spending behaviour and total spending. This change in numerosity of the scale can occur during different periods of the economy especially when the currency is being changed.

Therefore, it is important that any party, such as the government (political economy decision maker) and businesses to take note of the direct and indirect aggregated economic effects of money illusion in the process of rebasing the currency. For example, Dusansky and Kalman (1974) observed that in addition to changes in purchasing behaviour, disturbances in commodity prices can influence consumer utility.

3.2 Conceptual Framework: Outline and Explanation

Figure 3.1, the Zambia government through the Bank of Zambia, instituted currency reform called Rebasing but commonly known as redenomination of the currency.In justifying the exercise, Bank of Zambia (2012) argued that it was worthwhile to rebase the Kwacha since rebasing or redenomination of the Kwacha is aimed at addressing the costs associated with the accumulated depreciation of the Kwacha since 1991, which they contend, had undermined the basic function of the Kwacha and furthermore created transaction difficulties. It is argued that since inflation has been broken and Zambia now qualified, as a moderately stable economy with high public confidence in the economy, rebasing of the Kwacha is ripe.

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Bank of Zambia (2012) argued that rebasing the Zambia Kwacha would result in a number of benefits including: Facilitating easier business transactions because it leads to the use of smaller units of money. It simplifies accounting and the ease of expressing monetary values, thereby minimizing errors associated with the inputting of financial data and time spent to review such data. It achieves a more efficient use of calculation and accounting record systems. Thus, rebasing simplifies bookkeeping and reduces the drudgery in transactions, record keeping and banking transactions.

To evaluate the benefits of using rebased kwacha in the banking sector, the researcher is interested in finding out the following hypothesis as follows:

Hypothesis 1:

The use of rebased Kwacha has simplified the accounting Records in the Banking Sector .

Hypothesis 2:

The use of Rebased Kwacha has reduced the transaction costs in the banks

Hypothesis 3:

The use of Rebased Kwacha has improved the ATM operation

Hypothesis 4:

The use of rebased Kwacha has brought efficiency in the Payment Systems in the Banks.

Hypothesis 5:

The use of rebased Kwacha has resulted in Reliability and Convenience in the banking services.

3.3 Chapter Summary

The chapter dealt with the concepts of conceptual and theoretical framework. It has shown that these two can be wholesomely defined as the system of concepts, assumptions, expectations, beliefs, and theories that supports and informs your research. Whereas conceptual framework represents a visual or written product, one that “explains, either graphically or in narrative form, the main things to be studied, the key factors, concepts, or variables and the presumed relationships among them, theoretical framework outlines some theories or models that are linked and can explain the given research topic. Therefore, quantity theory of money and money illusion theory are the two theories that have been used to explain the topic under consideration.

CHAPTER FOUR

RESEARCH METHODOLOGY

4.0 Introduction

This chapter deals in detail with the various tools and techniques that were employed in this study, the target population, sample size and sampling techniques as well as the various and appropriate sources of data and how the data were collected. There are many different types of research methods and the choice for any particular study must depend on the objective of the research (Burns and Bush, 2000).

4.1 Research Design

This research has been designed to find out if at all, some of the benefits by the Bank of Zambia in the pre-redenomination era in 2012 of using rebased kwacha in the Banking Sector have been realized. This research was done in two parts. The first part comprised collecting and analyzing data obtained from various databases and this was done by a quantitative research design. The second part, which employed qualitative research design, involved expert interviews to validate the results.

4.2 Population

Population refers not only to people, but also to firms, products and so on (Kitchenham and Pfleeger, 2002). It is the set of elements or people to which findings are to be generalized. In evaluating the benefits of using rebased Kwacha in the banking sector, the focus was given to all the 19 commercial Banks in Zambia.

4.3 Sampling Frame

The population of 19 banks is too low to carry out any sampling process. Therefore, no sampling frame will be set for this study, as sample size will be equal to population.

4.4 Data Collection Method

The choice of data collection method will depend on an overall judgement of which type of data is needed for a particular research method’(Ghaurid and Gronhang, 2005). Generally, data will be sourced from both Primary or Secondary concaves.

4.4.1 Primary Data

According to Malhotra and Birks (2007:94), primary data is “data originated by the researcher for the specific purpose of addressing the research problem”. In this study, primary data included Semi-structured interviews and questionnaire to answer the research questions. Primary data can also be categorized as quantitative and qualitative.

(a) Qualitative Data

Qualitative data “refers to all non-numerical data or data that have not been quantified and can be a product of all research strategies” and usually associated with exploratory research (Saunders et al., 2009, p. 480). The common form of qualitative data methods are interviews, focus group discussion and usually employed to help the researcher gain insight into the subject area (Saunders et al., 2009). To achieve the objectives of this study, semi-structured interview was conducted as a qualitative data gathering method.

(b) Quantitative Data

Quantitative research involves the use of structured questions where response options are predetermined (Burns and Bush, 2000). Therefore, quantitative data are research data that can be expressed in numerical form and quantified to answer research questions. This type of data needs to be analysed and interpreted to make meaning (Saunders et al., 2009). Statistical Software such as SPSS for both final analysis to generate quantitative tools like graphs, tables etc.

The researcher used questionnaires as the quantitative method of collecting primary data in this research. Several questions were developed according to each variable under consideration, (See Annexure A for detail of the questionnaire). All the 19 questionnaires were administered to all the 19 commercial banks in Zambia.

It must be made clear that the uniform 7-variable Likert scale system was used in the questionnaire

4.4.2 Secondary Data

Blumberg et al., (2008) defined secondary data as information or data already collected by other researchers or institutions, usually for different purposes. Secondary data from sources like academic articles, newspapers and textbooks, used in this research includes currency rebasing and revaluation in different countries.

4.5 Data Analysis Method

According to Churchill (1979), both qualitative and quantitative data are usually required in complete evaluation since they are complementary to each other than mutually exclusive. For this research, data collected were analyzed and presented by the use of statistical models such as tables. The data was entered in the Statistical Package for Social Sciences (SPSS) database and descriptive statistics was used to determine the means for each hypothesis. However, since population mean is equal to sample mean, the hypotheses could not be tested, but a decision rule was made using the Likert scale and set it against the calculated overall mean for each variable.

4.6 Problems Encountered During Data Collection

a) Some of the bank officials were questionnaire averse for the reasons unknown. In most cases, they had to be persuaded and convinced to elicit their utmost co-operation, and hence it is expected that the quality of some responses may have been compromised

b) There are certain banks, which did not have any ATM until recently. Others to date do not have any ATMs; hence, there was less information on the variable relating to ATM operations.

4.7 Chapter Summary

The previous chapter dealt in detail with the various tools and techniques that were employed in this study, the target population, sample size and sampling techniques as well as the various and appropriate sources of data and how the data were collected. The research used both primary and secondary data that has further been categorized as qualitative and quantitative. The researcher concluded with methods employed in data analysis and the problems encountered during data collection process in the field.

CHAPTER FIVE

DATA PRESENTATION AND ANALYSIS

5.0 Introduction

The chapter presents the findings of the study from the analysis of the data that was collected. The data was collected from all the 19 commercial banks. The data collection included self-administered questionnaires and semi-structured interviews.

The researcher’s main objective is to evaluate the benefits of using the rebased kwacha in the banking sector.

The research is aimed at answering the following questions:

a) Has the use of rebased Kwacha, simplified the accounting records in banks?
b) Has the use of rebased kwacha reduced the transaction costs in the banks?
c) Has the rebasing of kwacha improved the operations of the ATM?
d) Has the use of rebased kwacha brought efficiency in the payment systems in banks?
e) Has the use of rebased kwacha made banking services more convinient and reliable?

5.1 Data Presentation

The table below shows the outline of the respondents who were involved during the research study . The researcher administered the questionnaires to all the 19 banks in Zambia. Since the questionnaires comprised two parts, each part was actually answered by one or more senior Bank officials with some rebasing experiences. However, the respondents were free to consult each other, but only within the bank.

It should be noted that in some cases, the same officials were used to answer both sections.

Table 5.1 Data Presentation Table

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5.2 Level of Response

From table 5.1 above, Nineteen (19) commercial banks participated in the research. Eighteen (18) managed to respond representing about 95% response rate. However, of the eighteen, four banks skipped the questions on “ATM operations” as they did not have any. Therefore, the analysis of variable on ATM operations shows only 14 banks with Bank 7,8,13 and 18 removed. Bank 19, which is IndoZambia Bank Ltd, was non-responsive.

5.3 Descriptive Analysis: Response rate

The researcher tabulated the rate of response of the respondents (banks) by each question under the variable being investigated. The rate shows the extent to which the respondents agreed or disagreed with a particular question.

5.3.1 Simplification of accounting Records

The researcher rounded up five questions and three sub-questions, which assisted in bringing out how rebased kwacha affected the bank’s accounting records.

Table 5.2: Accounting Records Response Rate Table

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Source: Author 2014

In this variable analysis, the data in table 5.2 was summarised in the figure 5.1 below. It portrays the percentage of the choices made by all the respondents in the variable of accounting record simplification. It shows that 34% agreed and 28% agreed somewhat with the claim. Generally, more than half (50%) accepted that rebased kwacha had simplified the accounting records. From the glance, it is clear that there was a very little percentage for all the responses that fell below neutral level of four.

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Source: Author 2014

5.3.2 Transaction costs

Similarly, Table 5.3 below shows that the researcher generated 10 main questions and 5 sub- questions which would assist in vividly generate tangible responses to come up with strong conclusion about the extent to which rebasing process has benefited the bank in as far as transaction costs are concerned.

The data in Table 5.3 has been summarised in the figure 5.2. It shows the percentage of the choices made by all the respondents in the variable. It shows that that the largest rate of response is skewed towards the disagreement side. However, the percentage proportions seem to be balanced between the level of agreement and disagreement, and hence the researcher could not accept the claim that transaction costs reduced because of rebasing process.

Table 5.3 Transaction Costs Response rate Table

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The data in Table 5.4 has been summarised in the figure 5.3 below. It shows the percentage of the choices made by the all the respondents in the variable. It shows that that the large rate of response is skewed towards the disagreement side. The figure clearly shows that collectively 62% are rejecting the claim that rebasing process had improved ATM operations while only about 30% accept. This shows that it is not possible to accept the question, which the researcher raised.

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5.3.4 Payment System Descriptive analysis

The researcher generated the table 5.5 that shows the proportion of the respondents that agreed or disagreed with the given question. This was achieved by raising 3 questions and 6 sub-questions in order to investigate whether the use of rebased kwacha has actually resulted in to payment systems efficiency.

Table 5.5: Payment Systems Response Rate Table

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Source: Author 2014

The data in Table 5.5 has been summarised in figure 5.4 below. It shows the percentage of the choices made by the all the respondents in the variable. It shows that that the large rate of response is skewed towards the agreement side. The figure clearly shows that collectively 50% are accepting the claim that rebasing process had brought efficiency in payment systems while only about 30% rejected. This shows that it is possible to accept the question that the researcher raised.

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Source: Author, 2014

5.3.5 Reliability and Convenience Descriptive analysis

In order to come up with a strong conclusion about the impact of rebasing of kwacha on the reliability and convenience on banking services, the researcher managed to come up with four questions under this variable. Respondents were asked to show the extent in which they agree or disagree with the particular question. Therefore, this is shown by the response rate tabulated as percentages in Table 5.6.

Further, using the data in Table 5.6 the researcher summarised it and presented in the figure 5.5 below. It shows the percentage of the choices made by the all the respondents in the variable. The response rate is skewed towards the agreement side with a collective 50% accepting the claim that rebasing process had made banking services more reliable and convenient while only about 30% rejected. This shows that it is possible to accept the question, which the researcher raised.

Table 5.6: Reliability and Convenience of Banking Services Response Rate

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Decision Rule:

In reference to the Likert Scale, the research analysis applied the following research decision-making process.

When ; µ ≤ 5: Reject the hypothesis

When : µ > 5: Accept the Hypothesis.

The researcher used point 5 on the Likert scale instead of point 4 for reference, because it is only above 5 that a responder is completely confident about the answer. Anything between 4 and 5 carries a weak and insufficient agreement to be used for conclusion. This research is meant to produce strong and not doubtful conclusions, which might be used for economic adjustments by any policy makers.

5.5 Quantitative Tests and Results

Using the SPSS package, the researcher descriptively carried out the data analysis for each hypothesis in order to come up with conclusions. Each hypothesis shows the main table with average responses and the summary table with overall sample mean.

5.5.1 Hypothesis One:

The use of rebased Kwacha has simplified the accounting Records in the Banking Sector .

Decision Rule

If µ ≤ 5: Reject the hypothesis ; Accounting records not Simplified

If µ > 5: Accept the Hypothesis: Accounting Records simplified

Abbildung in dieser Leseprobe nicht enthalten

Table 5.3 which is summarized in the summary table 5.2.1 shows mean, µ=5.466

Since the µ > 5: Accept the Hypothesis

Conclusion

Accepting the hypothesis means that the researcher confirms that the use of rebased kwacha has simplified the accounting records.

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5.5.2 Hypothesis 2:

The use of Rebased Kwacha has reduced the transaction costs in the banks

Decision Rule

If µ ≤ 5: Reject the hypothesis: Rebased Kwacha not reduced transaction Costs

If µ > 5: Accept the Hypothesis. Rebased Kwacha has reduced transaction Costs

Table 5.9 .1 Transaction Costs Summary Table

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Results interpretation

The summary table shows that the calculated population mean, µ = 4.0567

Since the µ < 5, we reject the hypothesis

By rejecting the hypothesis,the researcher concludes that the use of rebased kwacha has actually failed to reduce the transaction costs in the banks

5.5.3 Hypothesis

The Use of Rebased Kwacha has Improved the ATM Operations.

Decision Rule

If µ ≤ 5: Reject the Hypothesis: ATM Operations have not improved

If µ > 5: Accept the Hypothesis. ATM Operations Improved

Abbildung in dieser Leseprobe nicht enthalten

The calculated population mean, µ =3.1607

Since µ > 5 , we reject the hypothesis.

5.5.4 Hypothesis 4

The use of rebased Kwacha has brought efficiency in the Payment Systems in the Banks

Decision Rule

If µ ≤ 5: Reject the hypothesis: No Efficiency in Payment systems

If µ > 5 : Accept the Hypothesis: Efficiency in Payment Systems

Abbildung in dieser Leseprobe nicht enthalten

The calculated population mean µ = 5.0728,

Since µ > 5, we accept the hypothesis.

By accepting, the hypothesis simply means that the use of rebased kwacha has resulted into Payment System efficiency in the banking sector

5.5.5 Hypothesis 5:

The use of rebased Kwacha has resulted in Reliabilty and Convenience in the banking services

Decision Rule

If µ ≤ 5: Reject the hypothesis:

If µ > 5: Accept the hypothesis

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The calculated population mean, µ = 5.111 as shown above.

Since µ > 5, we accept the hypothesis

This shows that the due to the use of rebased kwacha, banking services have become more reliable and convenient.

5.6 Qualitative Results

Semistructred interviews were set for some senior bank officials who actively participated in the rebasing process in each bank. Several questions were prepared according to the five variables under investigation.

Hypothesis 1:

The rebasing of kwacha has simplified of the accounting records in Banks.

On this hypothesis, some senior bank officials were asked these questions:

How has rebasing process changed the accounting records in your bank?

Generally, 17 out of 18 commercial banks explained that the fewer figures on the system have simplied the data base.They also explained that the reduced figures have improved the comfort of computing large records and hence improved on the accuracy.

However, two banks explained that there wasn’t any difference at all as they were already working with fewer figures even before rebasing as the accounting records had already accounted for the last three zeroes (‘000).

Hypothesis 2:

The use of rebased kwacha has improved the payment systems in banks.

Do you think the payment systems have improved in your bank since kwacha was rebased? How ?

Most of the banks explained that there wasn’t much notable change only that it has simplified the drudgery in transactions and calculations. Generally, the notable responses were that atleast there has been improvement on accuracy and turnaround time even though at very minimal level.

Hypothesis 3:

The use of rebased kwacha has improved the ATM operations.

Most of the banks did not agree with the hypothesis.The responses mostly given were:

The pressure on the ATM has not reduced at all , most especially paydays, meaning that the costs of maintaining these machines will not change.This general response showed that rebasing process has not improved the operations of the ATM.

Hypothesis 4:

The use of rebased kwacha has reduced the transaction costs of the banks

The main responses were mixed as follows: Many banks disagreed with questions implying that transaction costs have actually reduced. They pointed out that introduction of coins in the system means increased handling costs due to counting and storage of coins. Others added that coin scales for weighing these same coins had to be procured. However, few of them are optimistic that the transactions costs will reduce overtime.

Hypothesis 5

The use of rebased kwacha has made banking services more efficient and reliable.

Most of the banks agreed with the hypothesis by stating that the K100 introduced has reduced the cash balances hence making most cash-based transactions more efficient. Even some machines like IBMs are becoming more reliable due to the reduced balances. They generally accepted the fact that many customers have become more comfortable carrying huge amounts of cash to and fro the bank hall as the bulkiness of cash has reduced due to introduction of K100 note.

However, some banks generally disagreed with the hypothesis as they felt that the efficiency and reliability banking services has not changed at. This is especially the banks that have very few customers.

5.7 Discussion of The Results

The research study with topic, an evaluation of benefits of using rebased kwacha in the banking sector and broken into several hypothesis will be discussed by answering the research questions asked:

Has the use of rebased of kwacha simplified the accounting records in Banks ?
Using both quantitative results and from semi structured interviews, it has come out that the use of rebased kwacha has successfully simplified the accounting records in the banking sector in Zambia. It has been shown that the banking sector has experienced a notable change in the accounting records. The accounting records which includes records of assets and liabilities, monetary transactions, ledgers, journals, and any supporting documents such as checks and invoices have now become much simpler to use than before rebasing process. This means that the processing time of certain transactions has really reduced.

Has the use of rebased of kwacha reduced the transaction costs in the banking sector ?

Even though some banks qualitatively explained that transactions costs have reduced, the results from most banks and those collected from quantitative analysis, show that the use of rebased kwacha has failed to reduce the transaction costs in the banking sector. This means that the much-expected reduction in the costs of banking services because of rebasing has not been realised. It came out clear that the initial transaction costs have not been covered, hence non-reduction. However, many are optimistic that in a long run, transaction costs may reduce.

Has the use of rebased kwacha improved the operations of the Automated Teller Machine?

The research has shown that the use of rebased kwacha has failed to improved ATM operations in the banking sector.The pressure on the ATM especially during paydays has not been eased. Long queues, breakdowns and sometimes non-dispensing of cash have continued even in the post-redenomination era. These ABMs have continued being unreliable most especially in banks with a large customer base.

Has the use of rebased kwacha brought efficiency in the Payment Systems in the Banks ?

The results obtained from the qualitative analysis and calculations have shown that the use of rebased kwacha has resulted in Payment System Efficiency in the Banking sector. The efficient payment system is a system that settles payments quickly, safely and at reasonable cost. This means that unlike ATMs, several bank machinery used to dispense cash and other products like mobile transfer have become more efficient in settling payments and transactions. The simplified accounting records have even made it very possible for banks to be become more efficient in doing their transactions like interbank cash transfer within and abroad.

Has the use of rebased kwacha has made banking services more reliable and convenient?

From both methods used, results have shown that the rebasing process has successfully made banking services be more reliable and convenient.The improvement of the efficiency in the payment systems has also made most of the banking services more reliable and convinient.The simplified data and electronic packages as a result of accounting record simplification, has made reduced the pressure of transacting.

5.8 Chapter Summary

The chapter outlined how the data was presented and analysed. The researcher applied both qualitative and quantitative analyse to investigate all the five hypothesis. The chapter showed all the results for the tests and the discussion of the obtained results.

CHAPTER SIX

CONCLUSION AND RECOMMENDATION

6.0 Introduction

This chapter focuses on conclusions drawn from the findings and offer recommendations of this research work. Both qualitative and quantitative data was collected and analyzed in relation to the objectives and questions. The conclusions will be presented in accordance with the hypothesis, stating whether it was achieved or not.

6.1 Conclusion

The stability of any monetary system is very critical to every nations economy. To uphold this stability, monetary economists such as central bankers need to all the time pay enough attention to monitor and check the behaviour of the currency not only within the domestic economy but also on the foreign exchange market. During the monetary policy execution, the central bank must be very proactive on the type of instrument and economical tactics to apply in order to stabilise the economy and the currency to make it more and more competitive. Some of the tools used could be the operations at open market, others by controlling the money supply through the bank fractional reserve ratios. Sometimes some countries have used rebasing of a currency to try to stabilise the monetary system in the country.

Therefore, this research has focussed on investigating the behaviour of certain variables after the Zambian kwacha was actually rebased. Five variables were analysed and in a nutshell the research produced these results. (Also refer to table 6.1 for the summary)

This study has shown that the use rebased of kwacha has successfully simplified the accounting records in the banking sector in Zambia.This means the records where most of the transactions are recorded in the commercial banks have been simplified so much that users find it easier and less complicated to feed thier systems with minimun errors.

In the next variable under consideration, it has come out very clear that rebased kwacha has failed to reduce the transaction costs in the banking sector. Even though the tests have shown the failure to reduce transaction costs, it should be stated that it is weak failure, meaning that in near future when further researches are carried out, rebased kwacha would have reduced the transactions

The investigation on the impact of the rebased kwacha on ATM operations has shown that the use of rebased kwacha has failed to improved ATM operations in the banking sector. This signifies that the Bank of Zambia’s objective to rebase the kwacha so that the operations of the ATM improve has completely failed to be realised.

On the other hand, when the other variable was tested, results have shown that the use of rebased kwacha has resulted in to Payment System Efficiency in the Banking sector.

Finally, from both methods obtained, results have shown that the rebasing process has successfully made banking services be more Reliable and Convenient.

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6.2 Recommendations to Bank of Zambia and for Further Research

I wish to recommend the following to the Bank of Zambia and for further research:

- During data collection, many banks complained about poor quality notes printed after the rebasing period. These notes easily fade and get spoiled most especially K2, K5 and K10, hence there is need to produce polymer notes that may last longer. In fact, the continued deterioration of the kwacha notes will exert serious pressure on the treasury, as the costs of reprinting will rise.
- Further researchers can look at the impact of the rebasing process on Foreign Direct Investment and investor confidence.
- Critical examination of how rebasing has impacted on the performance of kwacha on the foreign exchange market.
- Impact of rebasing of kwacha to the Zambia marketeers:Case study Chisokone Market in Kitwe or City Market in Lusaka or any large market place in Zambia.

6.3 Final Remarks

Rebasing process has been instituted and all the old notes have been fully mopped out from the financial system.This means that the much Prophesized and unprophesized” effects of rebasing process are clearly taking place in all the sectors. Bank of Zambia should not just sit and wait for a long time before it can move in to assess the economic’damage’ or ’buliding’rebasing process has impacted on the Zambian economic system.The Bank’s promptiness in carrying out not only surveys but also critical economic research to assess the impact of rebasing on the the economy, will assist in finding out whether or not the recent economic shocks like depreciation of kwacha, rise in the inflation levels and general rise in the standard of living are directly or indirectly linked to the rebsing process.

It will further assist the bankers in crtitically analysing any economic policies instituted before being implemented and not laying pieces of critical policies hastily.

In fact the early serious evaluation of such policies will make Bank of Zambia find out whether the rebasing process was a worthwhile undertaking or it was a purely superficial policy which has not added any value to performance of the Zambian economy. Maybe we can also conclude with the two Indonesian university lecturers, Prof. Dr. Euphrasia Susy Suhendra and Sri Wayhu Handayani of Gunadarma University who discovered that rebasing process is more likey to be done in a country where ”a new government has just been ushered into office.”

6.5 Chapter Summary

The concluding chapter summarised the results for this research study. It has shown that rebasing process has: Simplified the accounting records in the banks, failed to reduce the transaction costs in the commercial banks, failed to improve the operations of the ATM, brought efficiency in the payment systems and made banking services more reliable and convenient.

The chapter finally brought out recommendations for the Bank of Zambia and further research

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ANNEXURE A

QUESTIONNAIRE

PART ONE (1): MULTIPLE CHOICE QUESTIONS

1. SIMPLIFICATION OF ACCOUNTING RECORDS

A) The redenomination exercise has simplified your accounting records

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B) How has the use of rebased kwacha simplified your accounting records?

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ii. Easier record keeping

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iii. Easier computations

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C) Rebasing has reduced or eliminated Problems associated with accounting and data processing software

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D) The use of rebased Kwacha has reduced errors associated with inputting of financial data

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E) Rebasing has reduced or eliminated difficulties associated with maintaining bookkeeping and statistical records

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F) Rebasing process has reduced Time spent in reviewing financial data of this bank

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2.0 EFFICIENCY IN THE PAYMENT SYSTEMS OF BANKS

A) The payments system of this bank has improved as a result of using rebased kwacha

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B) How has the use of rebased Kwacha benefited the bank in the area of payments system?

i. Reduced turnaround time

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ii. Reduced hall traffic

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iii. Increased accuracy

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iv. Reduced clearing time

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v. Increased ATM usage

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vi. Conviniency and security

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C) The reintroduction of coins during the rebasing period has improved the efficiency in the payment systems of this bank.

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3.0 IMPACT ON ATM OPERATIONS – ( IF YOUR BANK DOESN’T HAVE AN ATM,GO TO ITEM 4.0 )

A) The use of rebased kwacha has improved the operations of your ATMs.

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B) In this short period of using rebased kwacha, the cost of maintaining the ATM machine has reduced significantly…

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C) The redenomination has reduced pressure on ATMs (such as reduced customer queues) resulting in fewer breakdowns

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D) From my observation the redenomination has reduced queus in front of the ATMs during salary payment weeks.

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4.0) IMPACT ON TRANSACTION COSTS TO THE BANKS

A) The rebasing exercise has led to the reduction in the transaction costs

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B) The rebasing exercise has led to the reduction in the transaction time

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C) The bulkiness of the coins with its additional handling cost has significantly reduced the efficiency gains of the redenomination

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D) The redenomination has reduced the breakdown in equipment such as note counting machines, counterfeit detectors, bullion vans etc hence reducing extra reparation costs of these machines.

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E) The rebasing exercise has reduced the cost of servicing or maintainance of certain equipment such as note counting machines, counterfeit detectors etc which has resulted in cost savings

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F) Taking other factors into account, the use of rebased kwacha in this bank has reduced the need to employ more staff to handle certain transactions

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G) The rebasing of kwacha has reduced the need for more note counting machines, counterfeit detectors, bullion vans, teller cages etc

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H) In my opinion the overhead costs such as the cost of recaliberation of equipment, software, IT etc is less compared to the expected benefits that will accrue over time

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I) According to this bank, how has the rebasing exercise led to the reduction in the cash handling cost and hence transaction costs :

i. Reduced labour costs

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ii. Reduced logistical cost

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iii. Reduced cost on bullion transportation

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iv. Reduced unchecked bulk cash

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v. Reduced turnaround time

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J) For this bank, the initial cost of the rebasing exercise is less compared to the expected benefits that will accrue overtime.

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5.0 RELIABILITY AND CONVENIENCE OF BANKING SERVICES

A) The redenomination has reduced the time it takes to serve a client per average cash based transaction

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B) The redenomination in general has improved convenience of banking services

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C) From my observation customers are more confortable carrying certain amount of cash to and from the banking hall as a result of the redenomination compared to pre redenomination time

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D) From my observation significant numbers of formerly un-banked have opened accounts due to, for example convenience of banking since the redenomination

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- END OF PART 0NE(1)

PART TWO(2): SEMISTRUCTURED INTERVIEWS

In which areas do you think the redenomination has reduced transaction cost?

__________________________________________________________________________________________________________________________________________________________________________________________________________

In which areas do you think the redenomination has increased transaction cost?

__________________________________________________________________________________________________________________________________________________________________________________________________________

On the net, do you think the redenomination has increased or reduced costs? Why?

__________________________________________________________________________________________________________________________________________________________________________________________________________

Do you think the accounting records in your bank have been affected by rebasing of kwacha?How?

__________________________________________________________________________________________________________________________________________________________________________________________________________

In which aspects has the redenomination simplified the accounting records in your bank?

__________________________________________________________________________________________________________________________________________________________________________________________________________

Do you think the payment systems have improved in your bank since kwacha was rebased?How?

__________________________________________________________________________________________________________________________________________________________________________________________________________

Are there any notable changes(good or bad) as result of the reintroduction of coins in this bank? State challenges as a result of coin reintroduction if any:

__________________________________________________________________________________________________________________________________________________________________________________________________________

Do you think the rebasing has improved the efficiency of ATM transactions? How and in which areas?

__________________________________________________________________________________________________________________________________________________________________________________________________________

Do you think the rebasing has reduced maintenance cost of the ATM machine? How?

__________________________________________________________________________________________________________________________________________________________________________________________________________

From your observation, do you think customers find ATM transactions more convenient and reliable with the redenomination/rebasing of kwacha?How?

__________________________________________________________________________________________________________________________________________________________________________________________________________

Generally,is your bank more comfortable than before as a result of using rebased kwacha?

__________________________________________________________________________________________________________________________________________________________________________________________________________

ANNEXURE B

DESCRIPTIVE ANALYTICAL RESULTS

ACCOUNTING RECORD SIMPLIFICATION TABLE Descriptive Statistics

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RELIABILITY AND CONVENIENCE TABLE Descriptive Statistics

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TRANSACTION COSTS TABLE Descriptive Statistics

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PAYMENT SYSTEM EFFICIENCY TABLE Descriptive Statistics

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Descriptive Statistics

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