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WORKING PAPER SERIES Paper No 13 THE PREDICTION AND DIAGNOSIS OF BANK FAILURES IN ZAMBIA

The diagnosis and prediction of bank failures through the development of an effective early warning system is currently an important issue at the Bank of Zambia. The bank failures of the 1995 and 1997/98 brought into question the ability of the central bank to diagnose the financial condition of banks or act promptly in effecting remedial measures for failing institutions. This paper evaluates the method of financial analysis currently employed by the Bank of Zambia and considers the merits of a new method of analysis proposed to the Bank of Zambia by an external consultant. The paper makes recommendations on how to improve the diagnosis and prediction of bank failures by incorporating non-financial factors into the process of analysing bank performance. The objective of the paper is to provide a simple, non-econometric, yet practical policy instrument for regulators and supervisors in small developing countries.