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The Bank of Zambia (BoZ) has maintained the Countercyclical Capital Buffer (CCyB) at 0.00 percent despite an increase in near-term financial stability risks, largely driven by the anticipated effects of El Niño-induced drought and floods in some areas.
The Financial Stability Committee (FSC) assessed near-term risks to financial stability to have increased since its April 2026 meeting, citing exposure to adverse weather conditions and their potential to amplify systemic risks amid existing threats.
In its Financial Stability Statement issued pursuant to Section 34(1) of the Bank of Zambia Act, 2022, following its October 2026 meeting, the Committee said other threats included prolonged and worsening geopolitical tensions, which have contributed to higher energy and fertiliser prices, tighter global financial conditions and persistent cybersecurity risks.
The Committee noted that growth and fiscal risks had increased despite adequate external buffers and low inflation.
“Economic growth prospects have been overshadowed by the anticipated drought, while subdued financial intermediation and weak private sector credit growth also continues to constrain the effective contribution of the financial sector to economic activity,” it said.
Although the sovereign-bank nexus had moderated, the Committee said the fiscal sector remained vulnerable to climate-related spending pressures, exchange rate volatility and refinancing risks.
On the other hand, the Committee said stress in financial markets had eased, with yields on Government securities falling, liquidity improving and exchange rate volatility of the Kwacha against major currencies declining.
It said commercial banks had maintained resilience, supported by strong capital, liquidity and profitability.
In addition, non-bank financial institutions had remained broadly sound, with a notable reduction in non-performing loans associated with public workers, which had been observed previously.
The Committee said insurance companies, pension funds and collective investment schemes (CIS) had also remained broadly resilient.
It added that payment and settlement systems continued to support financial stability.
However, the Committee warned that vulnerabilities persisted, including concentrated loans and deposits, a rising share of foreign-currency-denominated credit and weak financial intermediation, as reflected in the persistently negative credit-to-GDP gap.
“Vulnerabilities persisted from concentrated loans and deposits, a rising share of foreign-currency-denominated credit and weak financial intermediation, as reflected in the persistently negative credit-to-GDP gap,” it stated.
The Committee further identified increased non-resident holdings of Government securities relative to international reserves as an emerging vulnerability, while the equity market remained structurally illiquid and the corporate bond market shallow.
It also noted that microfinance institutions faced increased exposure to common shocks and liquidity pressures arising from concentrated lending to public service workers.
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“Insurance companies, pension funds and CIS have continued to face market, liquidity and climate-related risks, including weak insurance underwriting performance and vulnerability to the imminent drought, pension funds and CIS’ exposure to offshore markets and Government securities and CIS’ elevated concentration in illiquid assets,” it said.
The Committee further warned that persistent fraud and cyber threats, coupled with reliance on shared technologies and service providers, could accelerate the transmission of operational shocks across the financial system.
It said stress test results showed that a severe El Niño-induced drought could weaken economic activity, raise inflation and tighten financing conditions.
This could result in slower deposit and credit growth, an increase in non-performing loans and a weakening of profitability and capital buffers.
However, the Committee said that even under stressed conditions, banking sector capitalisation would remain well above the 10 percent prudential requirement.
Although near-term risks had increased, the Committee said system-wide vulnerabilities remained manageable, with banks continuing to hold adequate capital and liquidity buffers.
In view of these developments, the Committee resolved to maintain the Countercyclical Capital Buffer at 0.00 percent, adding that it would continue monitoring developments and adjust the macroprudential policy stance if risks to financial stability intensified.
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