5 January 2013

Zambia: Lending Rates Capping Timely

THE decision by the Bank of Zambia (BoZ) to cap lending interest rates is a positive shift which will curb exploitation and forestall distortions in the country's economic outlay.

It is a resolute decision which has come on the heels of several other major interventions aimed at realigning Zambia's economic and social landscape.

In the new measure, the maximum effective annual lending rate for non-bank financial institutions designated as microfinance service providers will not exceed 42 per cent while other non-bank financial institutions will have a ceiling of 30 per cent.

In November 2011, BoZ reduced statutory reserve ratios on both Kwacha and foreign currency from eight to five per cent, a move which led to the release of an additional K700 billion to commercial banks.

This money was set for lending to the private sector and pushed lending rates downwards.

Statutory reserves are liquid assets that firms must hold at the central Bank in order to remain solvent and attain partial protection against a substantial investment loss.

In the national Budget presented in 2011 soon after the Patriotic Front (PF) assumed power, corporate tax for commercial banks was reduced from 40 to 35 per cent to enable financial institutions to mobilise sufficient funds for lending. This pushed lending rates downwards.

All these interventions have had a positive effect on the economy.

The capping, therefore, is timely because non-bank financial institutions have had leverage in pegging lending rates which in most cases have been exorbitant.

This is aimed at making borrowing from non-bank financial institutions more affordable and equitable, especially to the vulnerable micro-borrowers.

Yes, as the Central Bank has noted, some non-bank financial institutions have continued to charge their customers high rates.

Some of them have been dangling a carrot to desperate customers such as pledging to process and issue 'soft' loans within 30 minutes.

All they ask for is a letter from employers, latest payslip, and a personal identification card.

Many a time, some Zambian workers fall prey to this seemingly attractive package in desperate situations.

The microfinance institutions have been making super profits from high lending interest rates.

Their contribution to the economy was in fact misery which affected ordinary customers, who laboured to pay back at exorbitant levels.

No reasonable business enterprise would ever attempt to borrow from microfinance institutions.

In fact, microfinance institutions should depart from providing personal consumer loans and concentrate their book loans to the private sector.

In particular, they should target the small and medium enterprises (SMEs) in order to contribute meaningfully to economic growth.

There are about 32 microfinance institutions licensed by the Central Bank out of which six are deposit-taking institutions.

We hope, therefore, that BoZ would be able to supervise and invoke its regulatory powers to deregister non-bank financial institutions that would be abrogating regulations.

The Government is in a hurry to ensure the economy is stable and free from financial haemorrhage associated with imbalances in the economic disposition.

We also caution Zambian workers who rush to borrow at every turn from microfinance institutions to desist from the practice; they should only do so when necessary.

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