The Zambian government regulates the financial system for two main reasons: 1) to increase information available to investors to reduce adverse selection and moral hazard, and 2) to ensure the soundness of financial intermediaries and prevent financial panics. Some major regulations the government can implement include restrictions on entry to the financial sector, requiring disclosure of information, restricting the activities and assets of financial institutions, and providing deposit insurance. These regulations aim to protect the public and economy from financial panics by promoting transparency and stability in the financial system.

1. QUESTION: The financial system is among the most heavily regulated sectors of the Zambian
economy. Briefly explain why the government regulates the financial system. In this regards,
what are some of the major regulations that government can implement to protect the public and
the economy from financial panics?
INTRODUCTION
Financial system is the system that allows the transfer of money between savers, investors and
borrowers in an economy. A financial system can operate on a global, regional, national or firm
specific level. Gurusamy (2000:105) described financial system as a set of complex and closely
interconnected financial institutions, markets, instruments, services, practices, and transactions.
This presentation shall briefly explain why the Zambian government regulates the financial
system and also provide tools which the government can implement to protect the public and the
economy from financial panics.
REASONS THE GOVERNMENT REGULATES THE FINACIAL SYSTEM
There are basically two major reasons the Zambian government regulates the financial system
which are explained as follows:
i. To increase information available to investors
Government regulates the financial system in order to make information available to
investors for efficient operation of financial market. Asymmetric information in financial
markets means that investors may be subject to adverse selection and moral hazards that
may hinder the efficient operation of the financial market. Financial institutions with ill
or crooked intentions may be the most urges to sell securities to the unsuspecting
investors which may lead to adverse selection. Once an investor has bought a security
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2. there by lending money to a firm, the borrower, may have incentives to engage in risk
activities or to commit outright fraud.
Thus government regulation reduces adverse selection and moral hazard in financial
market and increase their efficiency by increasing the amount of information available to
the investors. For example Securities and Exchange Commissions requires corporations
issuing securities to declare certain information about their sells, their assets and earnings
to the public and restrict trading by largest stock holder.
ii. To ensure the soundness of financial intermediaries.
Asymmetric information can as well lead to wide spread collapse of financial
intermediaries known as financial panic. Providers of funds to financial intermediaries in
some cases may not be able to asses whether the institutions holding their funds are
sound or unsound. In such circumstances were they have doubts about the overall health
of the financial intermediaries, they may opt to pull out their funds from such financial
institutions. The possible outcome is the financial panic that produces large loses to the
public and causes serious damage to the economy. To protect the public and the economy
from financial panics the government ensures soundness of financial intermediaries by
providing an environment where information is made available throughout the financial
system.
MAJOR REGULATIONS THAT GOVERNMENT CAN IMPLEMENT TO PROTECT
THE PUBLIC AND THE ECONOMY FROM FINANCIAL PANICS
Financial Panics according to Gurusamy (2000:125) are events during which bank depositors
attempt to withdraw their deposits, equity holders sell stock, and market participants in general
seek to liquefy their assets. When providers of funds to financial intermediaries are unable to
asses whether the institutions holding their funds are sound, or if they have doubts about the
overall health of the financial intermediaries, they may pull out their funds from sound or
unsound financial institutions. This may led to financial crisis. Financial crisis is applied broadly
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3. to a variety of situations in which some financial institutions or assets suddenly lose a large part
of their value. Many financial crises are associated with banking panics, and many recessions
coincided with these panics. To protect the public and the economy from financial panics, the
government implements certain types of regulations which include the following:
i. Restrictions on entry.
Government banking and insurance commissions have created very tight regulations
governing institutions that are allowed to set up financial intermediaries. Individuals or
groups desiring to establish financial intermediaries such as banks or insurances must
obtain chanter from the government. Only upstanding candidates with impeccable
credentials and huge and sound capital are given a chanter.
ii. Disclose
The government financial authority ensures that all financial intermediaries maintain
stringent reporting procedures. Their books are subject to periodic inspections and must
make them open and certain information available to the public. Their book keeping must
follow certain strict principles.
iii. Restrictions on assets and activities
There are restrictions on what financial intermediaries are allowed to do and what assets
they can hold. One way of doing this is to restrict the financial intermediaries in engaging
in certain risk activities. Foristance the separation of commercial banking from the
security industry so that banks could not engage in risk ventures associated with industry.
Another way is to restrict financial intermediaries from holding risk assets or at least
from holding a greater quality of these risk asserts. Foristance commercial Banks and
other depository institutions are not permitted to hold common stock because stock prices
experiences a lot of price fluctuation. Insurance companies are allowed common stock
but their holdings cannot exceed a certain fraction of their total assets
iv. Deposit Insurance
The government can insure people’s deposits so that they do not suffer financial
intermediaries that hold these deposits to fail.
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4. CONCLUSION
Financial system as described above is a set of complex and closely interconnected financial
institutions, markets, instruments, services, practices, and transactions that allows the transfer of
money between savers, investors and borrowers within a given economy. The efficient operation
of the financial market in an economy depends on the information available to investors and the
soundness of financial intermediaries. Thus to protect the public and the economy from financial
panics the Zambian government ensures soundness of financial intermediaries by providing an
environment where information is made available throughout the financial system.
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5. REFERENCES
B. Mwiya (2010). Money and Banking, The copperbelt University. Kitwe Zambia
Gurusamy (2000). Financial Services and Systems. Princeton University Press, Princeton.
H.L. Ahuja (2008). Macroeconomics, Theory and Policy advanced analysis. S. Chand and
Company limited, New Delhi.
James C. Van Horne and John M. Wachowicz, JR (2005). Fundamental of Financial
Management. Rotolito Lombarda, Italy.
Stephen A. Ross, Randolph W. Westerfield and Bradford D. Jordan (2008). Corporate Finance
Fundamentals. McGraw-Hill International, New York.
www.wikipedia.com. role-monetary-policy
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6. REFERENCES
B. Mwiya (2010). Money and Banking, The copperbelt University. Kitwe Zambia
Gurusamy (2000). Financial Services and Systems. Princeton University Press, Princeton.
H.L. Ahuja (2008). Macroeconomics, Theory and Policy advanced analysis. S. Chand and
Company limited, New Delhi.
James C. Van Horne and John M. Wachowicz, JR (2005). Fundamental of Financial
Management. Rotolito Lombarda, Italy.
Stephen A. Ross, Randolph W. Westerfield and Bradford D. Jordan (2008). Corporate Finance
Fundamentals. McGraw-Hill International, New York.
www.wikipedia.com. role-monetary-policy
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