i) Over view of AFMI

African Financial Markets Initiative (AFMI) is funded by three bodies namely the African Development Bank (AfDB),
Canadian International Development Agency (CIDA) and Fund for African Private Sector Assistance (FAPA). AFMI was
launched in 2008 by the AfDB to consolidate the development of the local currency bond market on the African
continent. This initiative was propagated by the understanding of AfDB regarding the bond market and its critical role
in fostering economic development. Deep and liquid bond markets are essential for a country to enter a sustained
phase of development, driven by market-determined capital allocation. However, bond markets in Africa remain
largely underdeveloped, with corporate bond markets non-existent or in their infancy. AFMI aims at: acting as a
catalyst for the development and stability of financial markets as well as for regional financial integration; and
improving the availability and transparency of African fixed income data. To achieve these goals, AFMI has two
complementary pillars namely: the African Financial Markets Database (link is external) - a comprehensive database
that provides updated information on African local currency bond markets; and the African Domestic Bond Fund (link
is external) - an index tracker fund that will invest in local currency denominated sovereign bonds.

ii) Credit worth analysis methods

Credit analysis is the evaluation of a borrower’s loan application to determine if the entity generates enough cash
flows to settle its debt obligations. Bond issuers are parties that express interest to borrow. Prior to the bond
holder’s decision to lend, several considerations have to be taken into context about the bond issuer. While
conducting credit analysis for corporate borrowers, several qualitative and quantitative methods are employed. This
discussion points to two methods. The first is financial ratios specifically liquidity ratios. These ratios help the
bondholders assess the solvency of the bond issuer to meet the annuity coupon payments and the face value at the
redemption date. The second method is cash flow analysis. This is a method that assesses how a bond issuer
optimizes working capital. A cash flow analysis determines a company’s working capital—the amount of money
available to run business operations and complete transactions. That is calculated as current assets (cash or near-
cash assets, like notes receivable) minus current liabilities (liabilities due during the upcoming accounting period).
Analysis of working capital provides a snapshot of the liquidity of the business and this important for bond holders.

iii) Evaluations based on ratio analysis

In order to evaluate the credit worth of the banks below, liquidity ratios will be computed using the recent annual
financial statements for the year ended 2020.

Net profit Long term Equity Interest Gearing Interest

before Debt expense ratio coverage
interest and ratio
tax
ZANACO 85,252,000 11,181,058 1,066,097 143,193,000 0.912 0.595

First National Bank 17,509,000 1,314,674,000 100,038,00 3,118,000 0.929 5.625

0
Indo Zambia Bank 211,570 6,246,887 1,018,994 101,811 0.859 2.07
ABSA 182,506,000 15,277,173 1,329,206 116,578,000 0.919 1.566
Standard Chartered 14,765 M 485,225M 45,886 M 1,907 M 0.914 7.742
Bank
iv) Credit rating criteria

Obligations rated Aaa are judged to be of the highest quality, with minimal credit risk.
Obligations rated Aa are judged to be of high quality and are subject to very low credit risk.
Obligations rated A are considered upper-medium grade and are subject to low credit risk.
Obligations rated Baa are subject to moderate credit risk. They are considered medium grade and as such may
possess certain speculative characteristics.
Obligations rated Ba are judged to have speculative elements and are subject to substantial credit risk.
Obligations rated B are considered speculative and are subject to high credit risk.
Obligations rated Caa are judged to be of poor standing and are subject to very high credit risk.
Obligations rated Ca are highly speculative and are likely in, or very near, default, with some prospect of recovery of
principal and interest.
Obligations rated C are the lowest rated class and are typically in default, with little prospect for recovery of
principal or interest.

Rating Interest cover Grade Risk

Aaa Above 3 Investment Lowest risk
Aa 2.6 - 3 Investment Low risk
A 2.1 – 2.5 Investment Low risk
Baa 1.6 - 2 Investment Medium risk
Ba/B 1.1 – 1.5 Junk High risk
Caa/Ca/C 0.6 - 1 Junk Highest risk

D Less than 0.6 Junk Default

v) Evaluation of credit worthiness

Bank Interest cover Rating

ZANACO 0.6 D
First National Bank 5.6 Aaa
Indo Zambia Bank 2.1 A
ABSA 1.6 Baa
Standard Chartered Bank 7.7 Aaa
vi) Calculating credit spread

Treasury bond yield is at 8.5%

Bank Lending rates Treasury Credit Credit

bond spread spread
yield (bps)
ZANACO 27.14% 8.5% 18.64% 1,864 bps

First National Bank 27.79% 8.5% 19.29% 1,929 bps

Indo Zambia Bank 32% 8.5% 23.5% 2,350 bps

ABSA 26% 8.5% 17.5% 1,750 bps

Standard Chartered Bank 35% 8.5% 26.5% 2,650 bps