DR LUBINDA HAABAZOKA REGULATORY FRAMEWORK OF FINANCIAL INSTITUTIONS: A ZAMBIAN PERSPECTIVE Download free eBooks at bookboon.com Regulatory Framework of Financial Institutions: A Zambian Perspective 1st edition © 2016 Dr Lubinda Haabazoka & bookboon.com ISBN 978-87-403-1431-1 Peer review by Dr P Kamanga, Lecturer and Head of Department – Business Administration and Marketing, Copperbelt University, Kitwe, Zambia Dr S Kapena, Senior Lecturer and Dean of the School of Business, Copperbelt University, Kitwe, Zambia Prof T.K Taylor, Professor and Dean of the School of Graduate Studies, Copperbelt University, Kitwe, Zambia Download free eBooks at bookboon.com REGULATORY FRAMEWORK OF FINANCIAL INSTITUTIONS: A ZAMBIAN PERSPECTIVE CONTENTS CONTENTS Preface Overview of the Financial System 1.1 Introduction 1.2 Structure of the Financial System 1.3 Financial System Boundaries 11 1.4 Revision Questions 13 Overview of Financial Institution Regulation 14 2.1 Introduction 14 2.2 The Priciples of Regulation 14 2.3 Regulatory Structure 16 2.4 Revision Questions 29 Central Bank Regulation 30 3.1 Introduction 30 3.2 Rationale ¢ Central Bank Regulation 31 3.2 Central Banking Around the World 33 www.sylvania.com We not reinvent the wheel we reinvent light Fascinating lighting offers an ininite spectrum of possibilities: Innovative technologies and new markets provide both opportunities and challenges An environment in which your expertise is in high demand Enjoy the supportive working atmosphere within our global group and beneit from international career paths Implement sustainable ideas in close cooperation with other specialists and contribute to inluencing our future Come and join us in reinventing light every day Light is OSRAM Download free eBooks at bookboon.com Click on the ad to read more REGULATORY FRAMEWORK OF FINANCIAL INSTITUTIONS: A ZAMBIAN PERSPECTIVE CONTENTS 3.3 Functions of Central Banks 36 3.5 The Bank ¢ Zambia Act 38 3.6 Revision Questions 41 Commercial Bank Regulation 42 4.1 Introduction 42 4.2 Overview of Commercial Banking 43 4.3 Objectives of Commercial Bank Regulation 46 4.4 Formation and Registration of Commercial Banks 47 4.5 Prudential Supervision of Commercial Banks 51 4.6 Taking Possession of Banks and Financial Institutions 56 4.7 Insolvency Dissolution and Liquidation of Banks And Financial Institutions 58 4.8 International Aspects of Commercial Bank Regulation 60 4.9 Revision Questions 68 Insurance Industry Regulation 69 5.1 Introduction 69 5.2 Overview of the Insurance Industry 69 5.3 The Legal Framework and Regulatory Body 70 5.4 Formation and Registration Insurers 73 5.5 Regulation of Management and Shareholding of Insurers 74 5.6 Transfer of Insurance Business 77 5.7 Winding Up of Insurers 82 5.8 Revision Questions 83 Pension Fund Regulation 84 6.1 Introduction 84 6.2 Role of Pension Funds in an Economy 85 6.3 Legal Framework for Pension Fund Regulation 86 6.4 Registration of Pension Funds 88 6.5 Prudential Regulation and Supervision of Pension Funds 91 6.6 The Role of the Pension And Insurance Authority in the Regulation of Pension Funds 94 6.7 Deregistration of Pension Funds 97 6.8 Revision Questions 98 Download free eBooks at bookboon.com REGULATORY FRAMEWORK OF FINANCIAL INSTITUTIONS: A ZAMBIAN PERSPECTIVE CONTENTS Regulation of Building Societies 99 7.1 Introduction 99 7.2 Overview of Building Societies 100 7.3 Formation and Registration of Building Societies 100 7.4 Regulation of Building Society Management 104 7.5 Roles of the Registrar and Minister of Finance in the Regulation of Building Societies 107 7.6 Winding-Up and Dissolution of Building Societies 111 7.8 Revision Questions 114 Capital Market Regulation 115 8.1 Introduction 115 8.2 Overview of Capital Markets 115 8.3 Objectives And Principles of Capital Market Regulation 121 8.4 Legal Framework for Securities Markets Regulation 125 8.5 Improper Trading Practices and the Compensation Fund 130 8.6 The Roles of Institutions Involved in Securities Market Regulation 133 8.7 Revision Questions 138 Money Laundering and Financial Crime Prevention 139 9.1 Introduction 139 9.2 Overview of Money Laundering and Financial Crime 139 9.3 Prohibition and Prevention of Money Laundering Legislation 140 9.4 Revision Questions 148 References 149 Download free eBooks at bookboon.com REGULATORY FRAMEWORK OF FINANCIAL INSTITUTIONS: A ZAMBIAN PERSPECTIVE PREFACE PREFACE Regulatory Framework for Financial Institutions – a Zambian Perspective introduces, illustrates, and discusses the many aspects of inancial institution regulation his book is unique in that it explains how all the diferent segments of inancial markets are regulated It irst introduces the inancial system and explains the various boundaries that exist within the inancial system his book is also rich on inancial institution regulation theory as it explains objectives, principles and tools for inancial institution regulation It also uses the Zambian legal framework to explain how various institutions like banks, insurance companies, security markets and pension funds are formed, regulated and dissolved he main purpose of this book is to explain the structure and purpose of the inancial system from a regulatory perspective, explain the theories and objectives of inancial institution regulation, examine the principles of inancial institution regulation, explain the structure of regulation of inancial markets in Zambia, give an understanding on the formation, operations and winding up of major types of inancial institutions and to examine the prevention of inancial crime and money laundering his book is intended for undergraduate and post graduate scholars taking courses such as Banking Law, Business Law, Regulatory Framework for inancial institution or any other related subjects It can also act as a guide for students taking courses such as “Insurance”, “Banking Operations” and “Money and Capital Markets” his book can also be of interest to investors wishing to set up inancial institutions in developing countries whose law is based on the British law It can also be used by researchers in the ield of inancial institution regulation Download free eBooks at bookboon.com REGULATORY FRAMEWORK OF FINANCIAL INSTITUTIONS: A ZAMBIAN PERSPECTIVE OVERVIEW OF THE FINANCIAL SYSTEM OVERVIEW OF THE FINANCIAL SYSTEM 1.1 INTRODUCTION his introductory chapter explores the roles and contributions that diferent types of inancial institutions make to the eiciency and efectiveness of an economy his Chapter discusses the following: • • • • • 1.2 Structure of the inancial system Financial Markets Financial Market promises Financial Market Participants inancial system boundaries STRUCTURE OF THE FINANCIAL SYSTEM Financial Systems he inancial system of a country can be deined as a collection of inancial institutions, regulatory framework and inancial market infrastructure that enables inancial resources to move from individuals and companies with surplus resources to those with deicit ones he overall contribution of the inancial system to the economy is that of channeling or converting savings into investments Financial systems consist of markets and participants: Markets A market in any economy provides for goods and services to be exchanged or traded Financial Markets can be deined as the economic relationship between buyers and sellers with regards to the buying and selling of inancial instruments In inancial markets, instruments that are traded can be characterized as promises because any inancial claim can be viewed as a promise to deliver speciied payments at speciied times, under speciied circumstances he promises traded in inancial markets can be classiied into generic types: a) b) c) d) Debt promises Equity promises Contingent promises Derivate promises Download free eBooks at bookboon.com REGULATORY FRAMEWORK OF FINANCIAL INSTITUTIONS: A ZAMBIAN PERSPECTIVE OVERVIEW OF THE FINANCIAL SYSTEM a) Debt promises – involve promises to pay ixed kwacha amounts at ixed dates in the future Debt promises include: deposits, government treasury bills, commercial paper, corporate bonds, mortgages, loans etc b) Equity promises – are claims over the residual earnings of a business Equity promises include common stock, partly paid shares and preference shares c) Contingent promises – are promises to make speciied payments under speciied circumstances Contingent promises include all forms of insurance, warranties and guarantees d) Derivative promises – are promises to enter into transactions involving physical commodities, debt or equity promises at a future point in time at prices determined at the time of entering the derivative contract, e.g options, futures, swap, forwards Participants Participants of both the local and international inancial markets include households, business entities, Central governments and their agents, international inancial organizations like the World Bank, International Monetary bank etc A broader perspective of inancial market participants would also include regulators such as the Bank of Zambia, Securities Exchange Commission, Insurance and Pensions Authority, Basel Committee on Bank Supervision etc For the purpose of this book, it will be helpful to classify institutions by the services they provide: i Deposit taking institutions ii Risk pooling institutions iii Contractual savings institutions iv Market makers v Specialized sectoral inancers vi Financial service providers i Deposit taking institutions are institutions that accept demand and ixed term deposits from households, business entities, governments etc hese include: Commercial banks, Building societies, credit union Commercial banks are the only deposit taking inancial institutions that can provide a group of services which include: • Taking or accepting deposits from legal entities and citizens; • Converting deposits into loans; • Debiting or crediting clients’ accounts on their instruction Download free eBooks at bookboon.com REGULATORY FRAMEWORK OF FINANCIAL INSTITUTIONS: A ZAMBIAN PERSPECTIVE OVERVIEW OF THE FINANCIAL SYSTEM ii Risk pooling institutions are institutions which specialize in providing contingent promises by underwriting economic risks associated with death, illness, damage to or loss of property, and other exposure to loss Insurance companies are an example of a risk pooling institution Insurance companies issue contingent liabilities against themselves in the form of insurance policies Insurance companies can be divided into life insurance and general insurance (non-life or property and casualty insurance) iii Contractual savings institutions are vehicles that provide contractual saving services in a iduciary rather than principal role Also known as collective investment vehicles, contractual savings institutions invest pooled resources of individuals and irms into a wide range of equity, debt and derivative promises here are two main types of collective investment vehicles: • Open – end mutual funds whose participation is open to anyone • Closed-end mutual funds which are not open to everyone Pension funds are simply mutual funds that satisfy legislated conditions for retirement savings Unlike deposit taking institutions, collective vehicles provide equity promises rather than debt promises iv Market makers are participants in inancial markets who make secondary markets in securities such as equities, government and corporate debt and derivatives by taking principal positions as buyers and sellers of existing securities Security dealers include: investment banks, stock brokers and other inancial institutions v Specialized sectoral inancers are inancial institutions that provide a limited range of inancial services to specialized target of promisors and promises For example, General inance companies raise funds via debt promises from the wholesale inance market and on-lend them to borrowers Real estate inance companies specialize in channeling funds to home ownership Leasing companies specialize in providing inance for equipment he distinguishing characteristic of leasing companies is that they retain ownership of the leased assets hey also beneit from the preferred tax treatment that is often conferred on the investment treatment In each of the cases, inancial institutions provide a highly specialized service that concentrates on informationary eiciency heir promises are generally of a debt nature, although equity components are not uncommon Download free eBooks at bookboon.com 10 ...DR LUBINDA HAABAZOKA REGULATORY FRAMEWORK OF FINANCIAL INSTITUTIONS: A ZAMBIAN PERSPECTIVE Download free eBooks at bookboon.com Regulatory Framework of Financial Institutions: A Zambian Perspective... more REGULATORY FRAMEWORK OF FINANCIAL INSTITUTIONS: A ZAMBIAN PERSPECTIVE OVERVIEW OF THE FINANCIAL SYSTEM All inancial institutions sell instruments that fall under any of the two categories of. .. Download free eBooks at bookboon.com REGULATORY FRAMEWORK OF FINANCIAL INSTITUTIONS: A ZAMBIAN PERSPECTIVE PREFACE PREFACE Regulatory Framework for Financial Institutions – a Zambian Perspective