Answer to Question #165345 in Finance for Bishem

Question

(a) Discuss in detail the roles played by financial institutions (FIs) in the economy with particular reference to Zambia citing particular examples of financial institutions that you are familiar with in Zambia.

(b)List and explain the major risks that financial institutions in general face? How do these risks manifest or affect the FIs?

Answer 1

a) Bank of Zambia endeavors to achieve a financial system that is resilient to shocks and is able to smoothly conduct its core tasks of:

1. Intermediation of financing;
2. Transmission of payments;
3. Pricing of instruments and;
4. Redistribution of risks appropriately.

b)Credit risk - Credit risk is the biggest risk for banks. It occurs when borrowers or counterparties fail to meet contractual obligations.

Operational risk - Operational risk is the risk of loss due to errors, interruptions, or damages caused by people, systems, or processes.

Market risk - Market risk mostly occurs from a bank’s activities in capital markets. It is due to the unpredictability of equity markets, commodity prices, interest rates, and credit spreads. 

Liquidity risk - liquidity risk refers to the ability of a bank to access cash to meet funding obligations. Obligations include allowing customers to take out their deposits.