Zambian bank interest margins highest in region

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The Bank of Zambia

…Lending rates reduction key to quick economic recovery

 By Mwansa P. Chalwe

The Zambian economy will not recover quickly enough as long as Commercial banks continue charging unjustifiable and exorbitant interest rates.There is no doubt that the high interest rates are constraining economic activity and improved business confidence. It is also apparent that Commercial banks are also slow to react to market changes like reduction in inflation, improved Central Bank liquidity, stable kwacha exchange rate etc but quick to increase their rates when there is an  increase in the aforementioned variables.

The Zambian private sector and households have borne the blunt of the high interest rates in the last couple of years resulting in massiverepossessions of farms, vehicles,houses, reduction in disposable income of households with loans and closuresof businesses and consequential loss of jobs.

It is gratifying that the Zambian governmentis rightly concerned and has recognized the fact that commercial 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.

This article is meant to ask questions as to why the interest rate margins are so high compared to two SADC countries- Botswana and South Africa.The margins for the purpose of this article are the difference between what the banks charges its customers and the three major determinants of interest rates: The risk free interest rates as represented by Government Treasury bill, Bank of Zambia Policyrate and the inflation rate.

The current average Commercial bank lend interest rate is about 40% but there bank that have been charging as high as 48%. The Government Treasury bill rate averages around 25% which means the premium on risk free rate is 15% which gives a margin of 60%. 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 policy rate which was set roughly two years ago is 15.5% . This is the rate at which commercial banks borrow from the Central bank and other banks. The difference between the policy rate and what commercial banks are charging customers is 24.5% which is 158% above the policy rate.

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 merely focus on the margins so that comparison are likewith like.

According to the latest information available,  the  average commercial Bank interest rates in South 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% and 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 Daily Nation of February 23, 2017 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.

The Bankof Zambia recently reduced the Policy rate to 14% and the annual inflation rate dropped to 6.8% in February, 2017 but we have yet to see by how much Zambian Commercial Banks will adjust their interest rates so that they earn reasonable premium on risk and achievepositive interest rates comparable to the region which will in turn spar economic activity in the country.

Although weare 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 surprising that even after Government’s goodwill gesture of removing the capping of interest rates a few years ago in order to make banks profitable, the 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 justify a charge of K110 per page for a duplicate bank statement by one of the South African Banks? Is the Central bank happy with such practices?

In the light that the  small number of banks  in operation and almost all of them being foreign owned, allegations by some observers that there is some collusion in interest rate pricing by our banks may be justified. It is this light that the Competition Commission in Zambia should take an interest in the business practices of Zambian Banks.

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.

The writer finds it rather surprising that organizations like Zambia Chambers of Commerce and industry (ZACCI), whose members have been adversely affected by the exorbitant interest rates and other NGOs have not engaged the Central Bank and the Bankers Association of Zambia to find a suitable solution that ensures banks remain profitable without killing other parts of the economy. There is need for urgent dialogue on this issue by all stakeholders like it happens in all properly functioning economies.

 

 

The Writer is a former financial Advisor to Botswana Confederation of Commerce, Industry and Manpower (BOCCIM) under the USAID Botswana Private Sector Development Project (BPED)

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3 Responses to Zambian bank interest margins highest in region

  1. Zambia is a ruined country with massive corrupt elements everywhere. There is a lot of sanity that need to be carried out in order for business to stabilize in this country. Everywhere you go, the economy is fast falling apart and nobody seem to care. The Mines especially KCM Plc, the production of the company is absolutely pathetic and all warning signs indicate that the company is fast heading for closure because it’ ll only be a day and everything shall come to a stand still. The government is quiet as if they do not know what is happening because it has been corrupted. How does one expect things to work out right under such an environment? It’ s a shame and all of this is happening because of corrupt elements both in government and private sector. Today, ordinary Zambians are treated more like animals by the same elements who impose harsh conditions upon them so they become richer at the expense of the already suffering majority. At the end of the day, they go to hide in the church and claim that they are God fearing, where on earth ? South Africa and Botswana are not far away countries from where we can learn. The taxes and Bank interest rates are lower but why only in Zambia ? In Zambia, people especially the Miners, the tax they pay, one would think they have committed a crime to the government. And in return, what help does the same government render to the Miners ? Absolutely nothing. When other countries are planning to reduce the already low taxes even further, in Zambia, it’ s quite the opposite because very soon, the rates shall move from 37.5 to may be around 50%. What a country ?

    American Sizembi
    February 25, 2017 at 6:13 am
    Reply

  2. Please help me.

    HOW CAN CONTRACT A LOAN FROM A FOREIGN COUNTRY.

    THESE ZAMBIAN BANKS ” KALOBA SPECILISTS” CHACHILAMO.

    APPARATCHIK
    February 25, 2017 at 11:38 am
    Reply

  3. The Zambian government,it’ s Banks, ZRA including other related wings of the government, the councils and so on and so forth are broad daylight robbers who do not care for a common man. Zambian Banks comprise crooks in the name of Bank employees/ managers. Instead of serving people according to the way the colonial masters left things, they are busy servng their own interests. They want to amass wealth from the same people they are supposed to offer a good service. Zambia calo caba kabolala including the President of the republic.

    Nkusianaza Sortine
    February 25, 2017 at 11:59 am
    Reply

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