Will Banks as Market Makers Help or Disadvantage Retail Investors?

On 31 March 2026, the Bank of Zambia issued a Public Notice announcing important adjustments in the Government Securities Market. From April 2026, Zambia’s bond market began moving more deliberately toward benchmark bonds, larger auction sizes, fewer bond auction dates and liability management operations. These changes were not random. They were already anticipated in the Capital Markets Master Plan 2022.

For many retail investors, the April 2026 changes raised immediate practical questions. Why has the 7-year bond become more important? Why has the 15-year bond been elevated? Why has the auction frequency changed? Why is the market being reorganised around fewer, larger benchmark bonds?

The answer is that Zambia is trying to move from a fragmented, buy-and-hold bond market toward a deeper, more liquid and more transparent capital market. In the Capital Markets Master Plan 2022, one of the key government bond market reforms is the creation of benchmark bonds. Another major expected reform is to create a framework for appointing banks as primary dealers.

That second reform is where the discussion becomes very important for ordinary investors. If selected banks become official primary dealers or market makers, will that help retail investors by improving liquidity and pricing? Or will it disadvantage them by placing banks between ordinary citizens and government bond auctions?

The April 2026 changes announced by the Bank of Zambia should be understood as part of a bigger reform journey. The public notice brought attention to changes that many investors could immediately see: new benchmark bond designations, revised auction frequency, increased bond auction sizes and the introduction of liability management operations.

But beneath those visible changes is a deeper market-building objective. Zambia wants government bonds to become more tradable, more transparent and more useful as a pricing benchmark for the wider economy.

These reforms are important because a bond market cannot develop properly if every bond line is small, scattered and thinly traded. Liquidity needs concentration. That is why benchmark bonds matter.

But benchmark bonds alone are not enough. A benchmark bond must also trade. Investors must be able to buy and sell it after issuance. Prices must be visible. Institutions must be willing to quote both buying and selling prices. This is where market makers come in.

A market maker is a financial institution that stands ready to buy and sell securities in the market. In the case of government bonds, this usually means a bank that is willing to quote a buying price and a selling price for bonds on a regular basis.

In simple terms, a market maker helps ensure that a bond is not just something you buy at auction and hold until maturity. It becomes an asset you can trade if you need to enter or exit the market.

That is the positive side. But it is not the whole story. The role of market makers can strengthen a market, but it can also shift power toward banks. That is why retail investors must understand both the advantages and the risks.

A primary dealer system is a more formal market-making arrangement. Under such a system, selected banks are appointed to play a central role in government securities. They may be given direct access to auctions and, in return, are expected to support the market by buying securities, distributing them to investors and quoting prices in the secondary market.

In practical terms, this means banks become the main bridge between government securities issuance and the wider investor base.

Instead of government bonds flowing from auction to every type of investor in a broad direct manner, selected banks become central intermediaries. They buy, hold, distribute and trade the securities.

The greatest advantage of market makers is liquidity. Liquidity simply means how easily you can buy or sell an investment without a major price disadvantage.

For a retail investor, this matters because life does not always follow the maturity date of a bond. You may buy a 7-year or 10-year bond with the intention of holding it, but later you may need cash for school fees, business capital, medical expenses or another investment opportunity.

In a weak secondary market, you may struggle to sell that bond quickly at a fair price. In a stronger market-making system, there should be institutions ready to quote a price.

This does not mean you will always sell at the price you want. Bond prices move with yields. But at least the market becomes more active and more visible.

Price discovery is one of the most important functions of a market. It means the market is constantly revealing what an asset is worth.

When bonds rarely trade, investors do not have a clear sense of fair value. They may know the coupon rate. They may know the yield accepted at the last auction. But they may not know what the bond is worth today.

Market makers improve this by quoting buy and sell prices. Over time, these quotes help investors understand how the market values different maturities.

This is especially important for benchmark bonds. A benchmark bond is supposed to become a reference point. But it can only become a useful reference point if it trades actively enough for its price and yield to be meaningful.

The government bond yield curve shows the interest rates at which government borrows across different maturities. For example, the yield curve helps compare the pricing of short-term, medium-term and long-term government debt.

A reliable yield curve is essential because it becomes the foundation for pricing other financial instruments. Corporate bonds, infrastructure bonds, private debt and other long-term instruments all depend on a credible government bond benchmark.

If Zambia wants a stronger capital market, it cannot rely only on government bond auctions. It needs a secondary market that continuously confirms and updates pricing. Market makers can help achieve that.

Large investors care deeply about liquidity. A pension fund, insurance company or foreign investor does not only ask, “Can I buy this bond?” They also ask, “Can I sell it when I need to?”

If a market has no reliable exit route, investors demand higher yields to compensate for that risk. But if the market is liquid and transparent, investors may accept lower yields because the market is easier to trade.

This is why Zambia’s benchmark bond reform, secondary market development and primary dealer proposal are connected. They are all part of the same logic: create fewer, deeper, more tradable bonds and support them with institutions that can make a market.

The biggest risk for retail investors is pricing power. When banks sit between investors and the market, they may control the price at which retail investors buy and sell.

A bank that makes a market earns money through the spread. The spread is the difference between the price at which the bank is willing to buy a bond and the price at which it is willing to sell the same bond.

This is normal. Market makers must be compensated for holding inventory and taking risk. But if the spreads are too wide, retail investors can be disadvantaged.

For example, a small investor may not know whether the price quoted by a bank is fair. A large institution can negotiate. A retail investor may simply accept the price offered.

One of the strengths of Zambia’s government securities market has been that ordinary individuals can participate. Many investors have built confidence because they know they can apply for Treasury bills and bonds directly through authorised channels.

If the market moves too quickly toward a bank-led model, retail investors may feel that government bonds are becoming an institutional product.

This psychological issue matters. Financial markets grow not only because systems improve, but because people trust them. Retail investors need to feel included, respected and informed.

If banks become the main route into bonds, the system must be designed carefully so that the ordinary investor does not feel locked out.

Banks naturally prioritise clients who bring larger volumes. A pension fund investing millions of kwacha will often receive faster attention, better pricing and more detailed market guidance than an individual investing K5,000 or K20,000.

This is not unique to Zambia. It is how financial markets tend to operate. But if Zambia wants inclusive capital markets, retail investors must not be treated as an afterthought.

A proper market-making system should therefore include retail investor protections, public price transparency, accessible information and clear rules around fees and spreads.

A primary dealer system works best when there is meaningful competition among dealers. If only a small number of banks dominate, spreads can remain wide and service quality can vary.

For market makers to benefit retail investors, there must be enough competition to force fair pricing. Investors should also be able to compare quotes across dealers where possible.

Without transparency and competition, a market-making system can deepen the market for institutions while leaving smaller investors with weaker outcomes.

The honest answer is: both outcomes are possible.

Market makers can help retail investors if the system creates real liquidity, transparent pricing, easier exits before maturity and better access to benchmark bonds.

But market makers can disadvantage retail investors if banks dominate pricing, spreads are unclear, retail investors lose direct auction visibility, and large institutions receive better treatment.

The reform itself is not automatically good or bad. What matters is implementation.

For Zambia, the best path may be a hybrid model. Banks can become market makers, but retail investors should not disappear from the market.

A hybrid model would allow banks to strengthen liquidity while keeping retail participation visible and protected.

• Market makers should quote prices transparently.
• Retail investors should continue to receive clear information.
• Fees and spreads should be easy to understand.
• Benchmark bond prices should be publicly visible.
• Investor education should accompany every major reform.

This is especially important because Zambia is still building a savings and investment culture. Many people are only beginning to understand bonds, shares and unit trusts. If reform becomes too technical or too bank-centred, ordinary people may step back just when they should be learning to participate more confidently.

Retail investors should not panic. These reforms do not mean your existing bonds are unsafe. Government bonds already issued continue according to their original coupon, maturity date and payment terms.

But investors should become more informed. The bond market is becoming more sophisticated, and investors must move with it.

1. Understand benchmark bonds. Know why the 7-year, 10-year and 15-year matter in the new structure.
2. Watch auction calendars carefully. Fewer bond auctions mean you must plan your cash earlier.
3. Learn secondary market pricing. Do not only focus on coupon rates; understand yield and price.
4. Compare access channels. If banks become more central, compare service, pricing and information quality.
5. Follow policy announcements. The liability management details and future primary dealer framework will be especially important.

The question is not simply whether banks should become market makers. In a more developed bond market, market makers are necessary. They support liquidity, trading, price discovery and confidence.

The real question is whether Zambia can introduce market makers while keeping retail investors included, informed and fairly treated.

If banks as primary dealers are introduced with transparency, competition and strong investor education, retail investors can benefit. They may gain better liquidity, clearer prices and a stronger market.

But if the system becomes opaque, bank-dominated and difficult for ordinary people to understand, retail investors may feel disadvantaged.

Zambia’s capital market future should not be built for institutions alone. It should be built for pension funds, banks, companies, foreign investors and ordinary citizens who are learning to invest with confidence.