BANK of Zambia Governor, Caleb Fundanga, has warned insurance companies in Zambia to be cautious when underwriting bank loans in view of the anticipated high default rates during the current global economic melt-down.
He said for the first time, Zambia had witnessed personal loans growing to higher levels than previously thought.
Dr Fundanga said if one looks at sectoral distribution of credit, agriculture which for many years was always number one, had been pushed to second place, thereby ringing some warning bells.
“One thing I have always been told is that most of the personal loans are insured so that in the event that the borrower loses a job or dies,
the insurance company makes good and clears the debt,” he said.
Dr Fundanga said the warning bells were because in the mining sector some people were being retrenched and most of these personal loans were salary-based, and many retrenched miners borrowed some money.
He called for caution in the insurance industry during this period of retrenchments and job losses across the country.
Dr Fundanga said with most commercial banks, personal loans were covered by insurance companies and the current job losses due to the financial crisis, especially in the mines, could lead to borrowers defaulting on their loans from lending institutions.
“The only problem is that in the real world when the default rates become very high, even insurance cover may not be adequate,” he said.
Dr Fundanga was speaking in an interview at the Africa-International Monetary Fund (IMF) high-level conference, which has attracted over 300 participants, including African central bank governors and finance ministers.
He warned that the industry should not forget that even insurance companies collapse when the demands on them are too high.
Dr Fundanga cited the United States of America’s insurance firm – AIG – the largest insurance group in the world, which is facing financial problems even after getting billions of dollars from the government’s stimulus package.
Meanwhile, Dr Fundanga has continued to express concern over the high interest rates charged by commercial banks in Zambia, saying there is a big disparity between what savers get and what borrowers are charged.
“Everybody on the continent of Africa wants to borrow at affordable rates, and this is particularly so for the weaker producers. Money has got a cost also because it comes from somewhere else, somebody is selling and those people selling need a mark-up. The spread has caused a problem as savers ask why there should be such a big difference,” he said.
Dr Fundanga said most Zambian savers were getting about four per cent interest while borrowers were paying an average lending rate of 25 per cent.
He said this meant that other borrowers were getting loans at a higher rate.
Dr Fundanga said there were many interpretations over why commercial banks in Zambia were charging high interest rates.
He said some people argued that the operations of banks were costly while others thought banking in Zambia was profitable.
Dr Fundanga said recently the BoZ carried out a study which revealed that either banks were running inefficiently or they wanted to get a lot of profit.
[Times of Zambia]
