Understanding How Banking in Zambia Is Impacted by the 6th Force in Michael Porter’s Model

In his famous 1979 article for the Harvard Business Review (HBR), Michael Porter introduced the world to what was known then as the Five Forces Framework. Later on, in 2008, prior to global financial crisis (as if it was a premonition of things to come), he extended the 5 forces framework to 6. This 6^th force that would impact on the other 5 forces came from outside a corporation, or as we have been calling it on our numerous blogs on TFHZPC the Macro environment (macroeconomic indicators/issues).

There are several actors in the macro environment that any firm, listed on LUSE or not, must be aware of in order to protect shareholder value. Sometimes, these forces may weigh so heavily that the very existence of a firm is put under threat.

We have deliberately included this blog as a kind of a pre-cursor to the double whammy of Banks we are about to assess. We gave you a blog on Zanaco, one of the other players in the banking industry and listed on LUSE. Echoes of some of these forces were cited in it.

All financial institutions are governed by the Central Bank of Zambia. Therefore, keeping an eye on their monitory briefings is high on the agenda of executives that running our local and international banks. Bear in mind, that these announcements, are critical to how banks create value for shareholders. Furthermore, they also impact on how banks deliver service to customers.

2015 was marked by numerous international 6^th forces such as the slowdown in the global economy and fall in commodity prices which impacted our exported minerals. Conversely, the central bank also added its own 6^th force in terms of new regulatory and statutory requirements that banks needed to meet. Of note,

·        Increase in Statutory Reserve Ratios from 14% to 18%

·        BOZ Policy Rate from 12.5% to 15.5% combined with waiver on upper limit restriction on margins (open season)

·        Overnight Lending Facility up to 25.5% with revised restrictions on frequency of access

The aforementioned changed the landscape of banking in Zambia. We will not offer an opinion on these measures. However, we will show you how Porters 6^th force can impact a banking business. You see it in the movement of the numbers in the annual report and the demeanor of the stewardship delivering the chairman or CEO’s statement. 

The 5 forces Porter mentioned in his HBR article include, when aligned to the banking industry include: Threat of new entrants in the banking industry, bargaining power of buyers, bargaining power of suppliers, threat of substitutes and rivalry among banks. Banks that seek to enter the Zambian banking market may answer the make or buy question by seeking an M&A (merger - acquisition) as opposed to launching a new bank. Increase in interest rates may give rise to substitutes such as micro financing companies that are not required to adhere to stringent regulation. Competition in service offerings may intensify between banks there by increasing cost of sales. These are among the few dynamics that may arise due to the 6th force. Therefore, the force itself dictates how banks compete in the banking as game arena. 

Stay tuned for the double whammy.