Explaining bank regulatory failure in Zambia

This paper discusses regulatory failure within the context of the 1995 and 1997-98 bank failures in Zambia. It starts by acknowledging the difficulties that exist in establishing credible techniques for measuring the quality of on-going bank regulation and supervision performance and criterion for distinguishing between regulatory failure and regulatory success. It then proceeds to detail the choice of instruments the Bank of Zambia employed in responding to increasing financial distress amongst local banks. Using 'excessive regulatory forbearance' as an indicator of 'regulatory failure', the paper examines why regulatory forbearance occurred; why the Bank of Zambia failed to enforce the required corrective action in a timely and consistent manner, even at the risk of encouraging and permitting fraudulent and wrongful trading. Through in-depth interviews and documentary analysis, the paper concludes that delays in regulatory decision-making were not always the result of direct political interference, but rather bureaucratically institutionalised regulatory forbearance. Copyright © 2002 John Wiley & Sons, Ltd.