The Diagnosis and Prediction of Bank Failures in Zambia, 1990–98

Abstract

This article presents a non‐econometric, yet practical approach for regulators in developing countries. With limited financial resources to determine the ‘safety and soundness’ of a large number of financial institutuions, regulatory authorities are appreciative of any kind of mechanism that can identify banks that are in financial difficulties. The Zambian case is interesting, in that the bank failures of 1995 and 1997/8 brought into question the ability of the central bank to diagnose the financial condition of banks. This article evaluates the Bank of Zambia's experience over the period 1990 to March 1998 and makes recommendations on how to improve diagnosis and prediction of bank failures by incorporating non‐financial factors into the analysis of bank performance.