By Kalima Nkonde
This article has been prompted by the two red flags raised by Bank of Zambia Governor, Dr. Denny Kalyalya. The Governor is concerned about commercial banks’ high interest rates despite Central bank intervention and the low level of reserves despite high copper prices. This article addresses the Governor’s first concern. The second concern may be addressed in future articles. As a nation, we need to debate these economic issues as solutions to the country’s problems lie within us and economic issues should concern all across the political divide.
The creation of jobs for its citizens should be one of the top most priorities for any responsible government. This is so because if the government was to laser focus on job creation alone as an objective, it will solve most economic problems as jobs leads to more economic activity(growth), more tax collection, poverty alleviation and other multiply effects. It is because of the importance of jobs for citizens that countries like the USA track jobs numbers on a monthly basis. For example, the USA created 303,000 jobs in February, 2018
Governor decries high interest rates
During the press conference when presenting the monetary policy statement on February 22, 2018, the Governor observed that Bank interest rates remained high and he did not seem to know the reason why commercial banks’ still kept their interest rates high.
“Our view is that they (lending rates) should be coming down because we have consistently reduced the policy rate, we have also consistently reduced the statutory reserve ratio”, he responded to the question why lending rates were high. He further advised the media to ask banks to explain reasons why rates were high despite the convention wisdom that they should be coming down and responding to BOZ measures like it happens in other countries.
It was evident from the Governor’s answer and his referring journalists to commercial banks that the Central Bank is frustrated with Commercial banks not reacting to the reductions in the key drivers of interest rates. The Governor was indirectly crying for help from individual patriots like this writer and other stakeholders including government.
The Governor is not the only one to complain about the high interest rates and commercial banks intransigency to reduce them substantially. In December, 2017, the former finance Minister, Felix Mutati complained about the same.
“We have made interventions to enable banks have sufficient credit lending space to the private sector but the response is very slow, the cost of money is still high and we urge banks to reduce them and profit margins will not be affected,” He said
The understanding by experts is that the major factors that led to the increase in interest rates and a reduction in lending by banks (credit crunch) in 2015/16 were the following risks: the liquidity risk as the Central bank mopped up cash, the interest risk as the Central bank increased the monetary policy rate.
The major drivers of lending rates in Zambia are inflation rates, monetary policy rates and statutory reserves. The inflation rate in Zambia for February, 2018 is 6.1%, the monetary policy rate is 9.75% and statutory reserves are 5%. However, the average bank lending rates, on the other hand, is about 25% which is a premium of 19% above inflation rate as positive interest rate for banks. There are few countries in the world where one would find such kind of bank profiteering. This is even more concerning due to the fact that the majority of banks in Zambia are foreign owned and the profits earned are externalized to foreign shareholders and do not stay in Zambia.
In its editorial of 15 December, 2017, the Zambia Daily Mail observed the following: “Government has expressed frustration at the reluctance by commercial banks to reduce interest rates despite the reduction of the national monetary policy and statutory reserve ratio by BOZ. Lending rates have continued to be scandalously high in Zambia. This is not putting the banks in positive light in the eyes of the public. Capitalist tendencies seem to be at the core of the obstinacy.”
What is so curious is that when inflation shot up to about 23% in 2015 and the Central Bank put in measures to mop up liquidity in the market to reduce inflation, banks were quick to raise their interest rates to as high as 48% which resulted in increased defaults and write offs losses, property repossessions and resulting in a credit crunch (banks reducing lending to businesses and households). The Central bank measures have achieved the desired results and inflation has been reduced to single digits with commercial banks keeping more of their cash ( have more liquidity) but they are not responding by reducing interest rates quickly and substantially. In light of interventions by the Central Bank, Bank interest rate should be in the region of 12%-15% and comparable to the region which is way above inflation and the policy rate.
Bank Charge skyrocketing
Apart from the high interest rates, there has been public outcry about the high fees being charged by Zambian banks. Analysts have argued that the current charges are discouraging Zambians from opening bank account thereby denying the banks the funds for onward lending for investment. It estimated that over 80 percent of Zambians do not have bank accounts. It could easily be inferred that current behavior of Banks of resorting to charging customers all sorts of bank charges including for depositing money is to partly cover for the short fall income from their core source of income which is interest. They want to earn money without assuming any credit risk when the managers’ job is the management of risk.
There are those that argue that although Zambia has 19 commercial banks, 80% are foreign owned and the top 6 control make up 70% of market share which in effect explains the monopoly tendencies we see as the few big banks control the market. The high bank charges are known to the Central Bank but as with interest rates, our Central Bank appears to be toothless to control these foreign banks. The big foreign Commercial Banks appear to call the shots in Zambia.
Delaying economic recovery and killing jobs
The effect of the high interest rates is that businesses are not able to borrow to expand their operations or finance working capital needs and create jobs. Households/consumers on the other hand are also unable to borrow so that they can create demand in the economy for goods and services with positive multiplier effects on economic activity.
There is overwhelming evidence at the Central bank and the Central Statistics that private sector lending has been declining drastically. The only entity the banks are lending to is government at risk free rate but it does not create jobs. This is contributing to the cash shortage in the economy in general and consequently leading to low economic activity and wide spread unemployment.
The reduction in the cost of borrowing is one the key drivers in the creation of private sector jobs in the shortest possible time as it touches all sectors of the economy including agriculture. It is in this respect that the Zambian Banking system can justifiably being accused of killing jobs as well as being greedy and not contributing to the growth of the economy but wanting to earn risk free income from government bonds and bank charges.
Market failure and Government intervention
The current situation that is obtaining in the Zambian financial market is a clear testimony of the failure of the market and therefore other measures such as the intervention in the market by Government ought to be explored for the sake of the country’s economy.
It is important to point out that Government intervention when markets fail are normal, and nobody should not cry wolf in the case of Zambia. For those with short memories, Banks’s corporate greed was responsible for the USA sub prime crisis, the consequential credit crunch, world recession and the 2008 financial crisis which threatened the World economy. President Barack Obama had to take brave and bold steps to intervene through various steps including more regulations for financial institutions.
In neighbouring Zimbabwe, on 23 February2017, the local paper reported an outcry about the super profits made by banks whose profits had increased by 42% year on year 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.
In view of the market failure alluded to above, there are various options that Zambians can explore to force banks to reduce interest rates and reduce their profit margins to help grow the economy and create jobs. The actions should include political pressure which is totally absent at the moment. This is an issue the Opposition can also use to gain political mileage if they calibrate the messaging in such way that it appeals to Zambians and show that the current administration has failed to rein in banks to reduce interest rates and create jobs.
On the other hand, it is recommended that the Government should explore strategies that can put maximum pressure on Banks to act through political statements at the highest level possible. The threat of legislation against irresponsible or cartel behaviors by the financial market players should also be looked at. The Government could also consider re-introducing a higher tax rate of about 40-45% for banks as was the case some years back.
Interest rate Cap
Another measure ,as last resort, although not advisable in a market economy, would be for the Bank of Zambia to 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 the 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 for monitoring their behavior and if necessary put in place reasonable regulations as a deterrent. These big institutions need constant oversight on various matters including compliance to agreements they signed when they made investment or when obtaining licences.
In order for Zambia to realize our full economic potential, it is time our leaders showed the same zeal and boldness to deal with foreign investors’ transgressions such as banks, Mines, Chinese contractors and others, the same way they demonstrated with matters that affect the ordinary Zambians such as removal of subsidies on electricity and fuel, reduction of subsidies on farmers’ inputs, removal of Venders from the streets to contain cholera and imposition various tariffs and levies.
There is no shadow of doubt that jobs can be created within twelve months if sufficient political will is demonstrated and practical intervention are made. Unfortunately, at the moment, there is no evidence from both the ruling Party and the Opposition to show that there are laser focused on this important issue of creating jobs for Zambians especially the youth. They are rather concerned with their own jobs thus all the talk is about the 2021 election which is three years away instead of the current problem of youth unemployment which is time bomb.
The writer is a Chartered Accountant by profession and a financial management expert. He is an independent and non partisan commentator/analyst. He has lived in the diaspora in England, South Africa and Botswana for over 25 years.