The Prediction and Diagnosis of Bank Failures in Zambia

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. 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 paper provides a simple, non-econometric, yet practical policy instrument for regulators and supervisors in small developing countries. Concludes that overall, the CAMEL-S model is a more flexible approach to the effective diagnosis and prediction of bank failures in Zambia than any currently in use, or proposed recently.

• Model is able to monitor macroeconomic factors, industry specific factors and bank specific conditions;
• Other sources of information, such as the bank's strategic plans, and reliable press articles are formally acknowledged and integrated in the design and implementation of the CAMEL's early warning system;
• Early warning system provides for an automatic means of revising the benchmarks for performance.