Why Banks ought to reduce lending rates drastically
……Zambian Banks’s margins highest in region, BOZ should consider capping
By Mwansa Prospery Chalwe
The Zambian economy will not recover quickly enough as long as Commercial banks continue charging unjustifiable and exorbitant lending rates. Zambia commercial Banks interest rates continue to be high despite improvements in other economic fundamentals. The finance Minister, Felix Mutati was recently quoted in the Zambia Daily mail of 18th February, 2017 that high interest rates are constraining private sector growth and the economy as a whole.
In the last twelve months or so, the major determinants of lending rates have all being going down but there has not been any significant change in the lending rates of the roughly eighteen Commercial banks in Zambia. Inflation rate has dropped from a high of 22.5% to 6.8%, the monetary policy rate has gone down from 15.5% to 14.0%, the Bank of Zambia Statutory reserve ratio has reduced from 18% to 15.5% and the government Treasury bill rates has reduced from a high of 27% to 21% in February,2017.
The Zambian private sector and households have borne the blunt of the high interest rates in the last couple of years resulting in massive repossessions of farms, vehicles, houses, reduction in disposable income of households with loans as loan and mortgage repayments have more than double. There have also been numerous closures of businesses resulting in loss of jobs. Private sector borrowing has declined tremendously in past few years due to high interest rates resulting in low economic activity. The so much talked about growth and diversification will remain a pipe dream in this economic environment of limited and expensive capital to expand or start up a business.
In order to put the argument that Zambian Commercial banks are overcharging its customers, risk considerations notwithstanding, we should consider two economies in the SADC regions – Botswana and South Africa- and ask questions as to why the interest rate margins are so high compared to these two countries. The margins for the purpose of this article are the difference between what the banks charges its customers and the four major determinants of lending rates: The risk free interest rates as represented by Government Treasury bills, Bank of Zambia Policy rate, the inflation rate and the term deposit rates paid to customers saving with banks.
The current average Commercial bank lending rate is about 44% but there are banks that have been charging as high as 48%. The current Government Treasury bill rate averages around 21% which means the premium on risk free rate is 23% which gives a margin of 109%. Zambian inflation has dropped from a high of 22.5% to 7% in January,2017 and this means that banks’ positive interest rates which is the difference between inflation and commercial bank lending rate is 33% which is 417% above inflation. The Bank of Zambia’s old policy rate was 15.5% (revised to 14% last week). The difference between the policy rate and what commercial banks are charging customers is 24.5% which is 158% above the old policy rate. Commercial Banks mobilize deposits from customers for onward lending and prime customers are currently being paid interest on their savings on average about 25% which gives the banks a margin of 76% above term deposit.
According to the latest information available, the average commercial Bank interest rates in South Africa is 10.5% and the inflation rate is 6.9% which gives a positive interest rate of 3.6% which is 52% above inflation compared to Zambian banks’ 417% above inflation. The South Africa Reserve Bank’s repo rate which is the equivalent our Bank of Zambia Policy rate is 7.0% which means commercial banks are charging 3.55% margin above the repo rate and compare this with our banks’ 24.5% above policy rate or 158% above the policy rate. The South African Government bond rates which we can compare with our Treasury bills though the latter is more short term than the former is 8.97%. Commercial banks are charging 1.53% above the risk free rate.
In Botswana, the average commercial Bank interest rates in is 7.5% , the inflation rate is 2.7% which gives a positive interest rate of 4.8% which is 177% above inflation compared to Zambian banks’ 417% above inflation. The Bank of Botswana prime rate which is the equivalent our Bank of Zambia Policy rate is 5.5% which means commercial banks are charging 2.0% margin above the prime rate and compare this with our banks’ 24.5% above policy rate or 158% above the policy rate. The Botswana Government bond rates which we can compare with our Treasury bills though the latter is more short term than the former is 8.0%. Commercial banks are charging 2.5% above the risk free rate.
In neighbouring Zimbabwe, where the economy is in tatters, the average lending rate has been averaging about 18%.The Zambia Daily Nation of February 23, 2017 quoting the Zimbabwe Daily News reported an outcry in Zimbabwe about the super profits made by banks whose profits had increased by 42% year on year t because of charging “unacceptable charges” and “extortionist fees”.
“The super profits announcement was immediately followed by an announcement by Reserve Bank of Zimbabwe (RBZ) governor John Mangudya in his 2017 monetary policy statement that he had capped interest rates at 12% per annum from 18% and further reduced bank charges,” The Daily Nation reported.
Although we are liberalized economy, there is need to ensure that oligopoly and monopolistic tendencies are kept in check for the sake of the economy as a whole. It is rather disappointing that even after the Bank Of Zambia’s goodwill gesture of removing the capping of interest rates a few years ago to ensure economic stability and bank profitability, Commercial banks have abused the gesture by charging “extortionist” interest rates, fees and other bank charges. Zambian banks are giving a role deal to its customers. How does one, for example, justify a charge of K110 per page for a duplicate bank statement by one of the South African Banks as this writer was charged by his bank recently? In the light of the fact they are only about eighteen commercial banks in Zambia and most of them foreign owned, allegations by some observers that there is some collusion in interest rate pricing by our banks may have some credence.
The recent example in South Africa where banks were found by the Competition Commission to be involved in price fixing and market allocation regarding the South African rand and the US dollar since April 2015 is a case in point. The commission found that banks had a gentleman’s agreement dating back to at least 2007 to collude on prices for bids, offers and bid-offer spreads for spot trades on rand-to-dollar exchanges. This is a major red flag for Zambian regulators like Bank of Zambia and the Competition Commission of Zambia.
It is imperative that the Bank of Zambia should revisit the re-introduction of capping interest rates because Zambian Banks like those in Zimbabwe have failed to self regulate. This is also a lesson to Zambian government that multinationals including mines cannot be trusted to act in the best interests of the host country or the World economy as the 2008 financial crisis proved. They serve the interests of managers and shareholders. There is need to for reasonable regulation and oversight.
The Author is a former financial Advisor to Botswana Confederation of Commerce, Industry and Manpower (BOCCIM) under the USAID FINANCED Botswana Private Sector Development Project (BPED)- a Tripartite Project between the Government of Botswana, USAID and the Private Sector.
The answer is simple. Legislate just like Uhuru Kenyatta did in Kenya. Banks are greedy always. In Zambia, NGOs need to lobby and cap commercial banks interest rates above Bank of Zambia Rate Benchmark. Here is a piece of the story: “President Uhuru Kenyatta has signed into law a Bill capping bank interest rates at 4 per cent above the Central Bank Benchmark Rate, currently at 10.5 per cent. The law will regulate applicable rates to bank loans and deposits thereby capping the interest that banks can charge on loans and deposits, President Kenyatta said in a statement.”
It’s because people accept it. Keep your money at home like Liato and they can charge interest to their Ntwenu!
The article is pretty good. However, just a few clarifications. Zambia also has Govt Bonds which are similarly long term as those in Botswana and South Africa. Not using yields on GRZ bonds for comparison gives slightly higher differences than Treasury Bills. Secondly, BoZ itself has set its own Policy Rate way too high compared to inflation rate. BOZ must show confidence in the economy by putting the policy rate as close as possible to inflation rate. Finally, the interest cap, if implemented, must be a formula linked to the inflation rate and the BoZ policy rate, instead of a hard cap. Anyway, the economic ills reflect the care that the party in govt has for the people.
The monetary and fiscal policies of Zambia have a lot of loop-holes why not revisit our policies and maybe try to adjust accordingly to fit into the region or Africa as a whole.
Another thing is that Zambia is too flexible to foreign investors, this triggers some huge wave of poverty in our Country as the citizens are found to be in a position of kissing the foreigners’ feet for mercy to atleast feed their Families. We all know each Country’s foreign policy should be inclusive and flexible but not to the detriment of your own people, it’s high time Zambia revised her policies to embrace national development.
Further, our Banks are not so given to helping the locals especially the emerging small businesses and medium business, this is so retrospectively degenerating if you considered the way our economy has been performing of late. Why should a Country immersed and endowed with such rich natural resources coupled with a dynamic and a blessed human resource, who compete favourably in the Continent and the World, be degraded and reduced to an impoverished and irredeemable (unless people change their mindsets) nation. It time Zambians “for once” considered our Children, what are we going to leave for our Children”Ichalo ne fikamba kuli kaputula – icasapula kwati Lishilu.
This has been the norm for years. I believe since Edward was at UNZA and before. There must be beneficiaries who want the status quo.
Well written, its one matter that needs proper discussion. BOZ are not serious and have caused this mess. Imagine all these foreign banks can not even charge those rates in their countries. lets talk Barclay, Standard Chartered, FNB or Stanbic. If they are a true partner to help improve the country’s economy why this greed? Where is the CSR. they come to Zambia to make Zambians more poorer. its a shame and Zambians should stand-up to this. 41% lending rates?? is this kaloba?? This is what forces people to steal..
Just open your own bank and charge us low..
Highest interest rates in the region and lowest number of homegrown companies expanding regionally.Kenya,South Africa and Zim beat us hands down even on our own soil.
The problem is that these foreign firms come with their own resources at zero tax. Something needs to be done urgently or else no Zambian emerging company will be able to compete with these foreign companies. What is the motivation for these high interest rates in Zambia? Can Ministry of Finance give us a feed back. It’s madness to borrow at 48%. How much profit and mark up is a borrowing company supposed to place on their supplies? The trickle effect is huge in an economy
When MMD mentality is in Govt then we are in problems, ever since MMD came on the scene in 1991 Zambia became the most expensive country in Southern Africa next to hopeless Angola. Why? Because of greed! The late Great MCS wanted to change this but sadly ill health affected his tenure. Mr President Sir, we need to reduce on the interest rates to make business grow. Mutati I sometimes wonder how he thinks? He was responsible for many failed deals under MMD why was he brought back in govt. Ok he was given a chance but otherwise he is not performing well. Just let him go.
Oh please MCS messed up the economy big time when he went on borrowing spree. I wonder, do you live in Zambia. In 2013 the policy rate was 9.5 and margin top up was 9%.
Legislate when a group of people cannot excercise descretion honestly the best is to force them to do so. If the Fed had acted fast on wallstreet the financial crisis wouldnt have occured. As usual they targeted the money lenders but not the commercial banks boz wake up!
In Zed BoZ is ineffective to a point of being toothless. GRZ is also corrupt to the bone. Legislation is the only language commercial banks will understand especially that most of the banks we have in Zed are foreign owned. The don’t care about ordinary Zambians. Which makes one wonder what is Minister of Finance doing? He is a Mampara number one.
To remove interest capping was not the best option. This meant that the banks were relieved of their responsibility to understand, manage and minimize risk associated with interest rates determination and it was thrown to customers who know very little about that. Why was this big responsibility removed from the financial expert and given to customers who don,t understand the financial risk. Bring back the interest caps and save the nationals from exploitation. There could have been some political motivation that these caps were removed at the time…..its one thing you should look Mr Mutati. So far all the indicators give much hope to economic improvements…private sector is still trapped and will not make meaning contribution to the economy as long as there are no interest caps. No…
The benchmark as mentioned in the article should be looked at in relation to our lending rates. They need to be lower, However in relation to the comparison with SA, that’s a much bigger economy and has been the hotspot hub for investment in SADC. Moreover they have liquidity on the JSE, the mining sector despite taking a 30% hit are still reporting better returns. Despite a growth rate expected at 1% in 2017, the sentiment is still bullish. Zambia’s GDP v Debt ratio does not make for good reading. The inflation rate is still in double digits closer to 18% as opposed to the 6.8% being reported for expediency. Our currency was 1 of 4 of the worst performing currencies in 2016. The ratings downgrade, is a signal to show that there is still a great deal of risk. In relation to Zimbabwe,…
This is absolutely ridiculous! Daylight robbery!! Stealing from the poor.It’s no wonder the poverty cycle is continuing. Can the Minister of finance please give a statement.These are serious issues that Zambian people did not realise for a long time.We elect leaders to safe guard our interests but for decades the elite have been taking advantage of the poor ordinary Zambian who does not understand that when he borrows money he has to pay back over 400%!!!
IN September 2014, i got a loan of K64 000 from Stanbic with a monthly deduction of K1900.00 but when i went to check the loan balance, i was shocked that its at K61 000.00 This is after servicing the loan for morethan 29 months. This is how bad our bank interest rates are. We need to stand up for this.
You should get an amortization schedule to see who is stealing from who.
Ati more money in your pockets kikiki pf are crooks and liars. Other countries people would have thrown out the government. Here we are too docile. Lungu deserves to be whipped like a kid
All you know is Politics! Very dull NEZ, cannot analyse issues atase malabishi yako iwe!
But you see there is this thing called a constitution so there is no way your words have or proposed plan has substance as usual!
Lending is high and having a basic is costly surely why should the bank charge you for putting money in their account and paying your salary in that account…you wonder why you have a billion dollars black market; why should they bank their money!!
*…Basic current account…
Like Don Corleone said in that classic novel by Mario Puzo, i.e. the Godfather, “four thieves in suits can steal 10 times as much as four men armed with machine guns!”
Legalized “kaloba” is just as bad as illegal kaloba, it is issues such as these that continue to act as a brake on the Zambian economy, lets sort them out NOW!…
All it takes is a one simple action to cap interest rates and the ripple effects on the economy are so huge. I am an average income earner enough to be able to get K400,000 bank loan but i cant. I would rather endure and save for two years to get that amount and shame these damn banks. Banks are certainly colluding and making super normal profits at the expense of ordinary Zambians. For me it’s two things 1) The BOZ is simply clueless, toothless and does not know exactly what needs to be done or 2) the BOZ knows the real state of the economic (not these managed inflation rates, economic growth) and so they can not do nothing knowing the true reflection of the ‘managed’ economy (which is the terrible economy) will show its true picture. There is no way in hell can we spur private sector…
You see this is a paradigm that requires serious action to change. The mindset of lavish expenditure by govt which was brought in by the evil MMD at the expense of the average Zambian must change, why can’t the govt simply cut on salaries by 50 percent for Ministers, Perm Secretaries etc? Remove luxury vehicles which gobble milllions of USD by the day, remove paid unnecessary travel abroad by top civil servants? The IMF know that doing this will actually help the economy but yet they keep silent, there is no way Mutati can actually be genuine to help the average Zambian. And United Dunderheads are just the same with their Kafupi chola boy Hungry Hyena (HH).
Hahaha very funny. Lungu is creating more ministries….
Mutati is the right minister for now could be best if he continues….but come on BOZ is under Finance minister….what is BOZ doing about it…what is killing Zambia is the weak regulatory system….this is where tuma lobby groups, LAZ should help seal such loop holes…. Competition Commission is equally weak maybe useless where are they
I was in South Africa where the banks are accused of exactly the same thing. What is the truth?
The price fixing is correct as per 17 Banks including Barclays, HSBC Standard Chartered, Nomura, Citi etc. Barclays was given immunity for their corporation, and Citi Bank have paid a settlement. As for the rest the competition commission is still trying to reach or resolve and that has hurt Banking stocks on the JSE.
I hate being Zambian, we talk too much for northing.
Ku Konda va free na daddy government. Start your own Credit Union, Building society, or sell stocks on the Alt-Market (LUSE) or LUSE, or even to private investors wanting to diversify their portfolios if you need to raise money.
And the local market is flooded and open to any tom and jack with money borrowed cheaply from abroad. India and China have banks in Zambia to specifically service their nationals at the expense of dopey zambians and their leaders. Very shameful
China Bank is also in England to do exactly that….
What do you expect? To arrive safely when the crew is drunk, with blurred vision? Do you also expect to be safe with your money when you are being led by thieves? Banks in this country are day light robbers, no wonder the people I know do not take their money there and more will stop doing so with the snooping dog called Chanda taking his rabbies there.
You Know this is very bad. I think the Bank of Zambia has to step in and regulate this because its hit me hard as well. The commercial banks are basically making money from nothing and these stats will result in a credit and liquidity freeze which is not good for any economy…If we are to stimulate growth in SME’s in this country we need some robust and hands on regulation of the commercial banks because 35% – 41% is too too much. The BOZ has reduced Policy and Overnight Lending rates from 14% to 15.5% and 600 basis points to 1000 basis points respectively in a bid to get commercial banks to reduce lending rates…But we need some hard approach to ensure that the commercial banks are taking this into consideration.
That minister of commerce Maggie should know better as she is from the banking sector but oh no she is like her Labour counterpart who is from the unions but can not change anything!!
after this article zambians will keep quite, thats what politicians know.
Very good article. The author should be given a job at bank of Zambia to advise those dull chaps there !
What happened to Kalyalya? He came on the scene with a lot of promise but he is slowly earning a very bad legacy. He may just go into that busket of the worst BOZ Governors we have ever had. Where has PROFESSIONALISM gone in this country?
The author has ignored the biggest factor in why Zambian interest rates are so high: risk. He mentioned it but he brushed it aside. Yes they are other factors, some have been mentioned in the article, including greedy. However the biggest factor is ‘risk’. Banks also have to borrow money outside the country to lend out, they borrow at exorbitant higher rates compared to other countries like S/Africa and Botswana. A number of reasons contribute to this, including poor rule of law, poor governance, unstable political system, corruption, bribery, poor economy, mismanagement of public resources, poor fiscal policy, etc. Banks have to pass on this risk to consumers who mostly don’t have stable permanent jobs, have bad credit rating or history, have no means of paying back, etc…
continue reading…
…have no means of paying back, etc. It’s more than just greedy and factors described in the article. Remember as a country we don’t export anything else other than copper; we are mainly a consumer country.
Speaking of rule of law, a country that just grabs legitimately acquired business because it can (ZAMTEL and Mahtani’s Finance Bank) is always considered a high risk.
However, yes I agree the interest rates are just too high for an average consumer but government fiscal policies have more to do with it as overall we are a high risk country. In other countries, consumers are the ones who demand change, aided by competition.
The article is very articulate and has opened the eyes of many Zambians. In order to get the Minister of Finance to act on this very important observation, Economics Association of Zambia, Manufacturing Association of Zambia and SME organisations must engage the Minister of Finance to implement regulations which will check the day light robbery of these Sharks called banks.
The Government should understand that banks will not grow this economy. It is the local individuals who can borrow and invest but their little incomes are chocked by these greedy foreigners who externalize their profits at the end of the day.
This is why I sometimes wonder why they always ask for Masters Degrees when jobs are on offer at the BOZ…vaupuba sivisebenza atase!
@ Peter Kaputa, you are right the guys in the Economics Dept at the BOZ are very dull. I am content with my kantemba…it’s okay!
This article is highly technical , i was looking for a headline like BOZ governor found NAKED IN KALINGALINGA WOO…THEIR COULD BE SO MANY COMMENTS IN JUST 10 MINUTES but hmm.. this Phd thesis please no comment
Zambians both SME and individuals don’t want to cut down on unwarranted costs. Cut down on unnecessary costs thereby increasing the capital base and consequently stop borrowing.Too much misplaced priorities in Zambia. Someone gets a huge loan just to buy an expensive SUV yet they don’t even own any real property. Redeem yourselves country men and women. Lest you die of hunger.
Inflation Rate is the the most important determinant of lending rates just like prices of goods & services of the four major determinants (The risk free interest rates as represented by Government Treasury bills, Bank of Zambia Policy rate, the inflation rate & the term deposit rates for depositors. Interest rates & other price & salary increases have to be within the Inflation Rate. Countries which have achieved this goal, are those with stronger consumer bodies, chambers of commerce & Competition Commissions because these do influence both Central Bank & Commercial Banks to charge affordable Policy Rate & Interest Rates, respectively. The Zambian situation is unchangeable because Consumer bodies, ZACCI, CCPC exists on paper only & deeply asleep.
Our country has got one of the highest defaulting rates, reflecting the lawlessness in every aspect of life. Without even considering the other factors banks look at, you have one good reason right there. Lenders worry about the ability to get back their money. We have seen instability in our political setup, lack of direction and politicians with hardly any conscience. Elections being held in an atmosphere of intimidation and disingenuity, capriciousness. Who knows what will happen next, when the judiciary provides no safeguards to protect the constitution? There is no assurance for anyone to risk their money for long. I am not surprised that we pay even higher for borrowed money than in Zimbabwe.
In Zambia everything is expensive not only borrowing from banks. Talk about FUEL, FOOD. TRANSPORTATION, HOTELS, HOUSES and RENTALS. How much do you need to grow maize on a 1 acre of land (labour, seed, fertilizer, tools) if you do not benefit from the fertilizer support program? How much do you need to import a second hand car costing $1000. You discuss these issues on this platform but what are your actions on the ground if you want change? Who once said YOU WILL DIE WITH YOUR DEGREES. What ever you do has consequences. Chiluba may be dead but his legacy lives on. As Zambians we are what we are because of what we are! We are not Tswanas or Shonas.
It is day light robbery. Please you guys working at Bank of Zambia bench mark with your colleagues in economies that have a heartbeat such as South Africa. In South Africa they have kept 3% difference between the re-purchase rate of the reserve Bank and prime lending. Which means that any one purchasing mortgage through the bank only pays a prime lending interest rate. For example, the Zambia repurchase rate announced by Bank of Zambia of 14% means that the prime borrowing rate from commercial banks would be 17%. But at the moment the banks seemingly charge what the want. We hear figures of 40% + this is outrageous. Someone needs to come up with a statutory instrument to protect the consumer from these loan sharks..
…The investors will come and invest and take their profits but what about the local people? just jobs? the local people need to have access to loans to invest in development projects and these will keep the profits in the country for development. With interest rates so high am afraid the local people will only borrow to become saves in their own back yard. We need balanced economic development.
Zambians buy safes and keep your money at home! period.
Why are you people blaming the banks?You should blame Lungu and his FP-fools who have caused the worst budget deficient in order to fund their unsustainable lifestyles. The banks are just reacting to the foo-ish policies from the clueless and cheating government. How can inflation be 6.4%a and the base rate be at 14%? This is the most foo-lishness i have ever seen.
Electricity where they claim we are the lowest we want to increase rates so why cant we do the same fro interest rates to be competitive in the region