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]
In fact this is how the global crisis started in America and spread to other countries. Those who mortgaged their houses were in default. Even foreclosures could not help recover the loans leading to a chain reaction.
And the global crisis is now worse because THE CONSUMER is taking caution!! This is what they all call recession!! The money is there but there is less security and so people reduce spending. Zambia will be better off if more positive momentum is added to the economy. I liked that news from Nissan this week , wanting to do more business in Zambia. We can not afford negative propaganda coz thats what is keeping investors away. We should also stop spreading fear and aim at winning the consumer trust!!
This is what leads to poverty. No security checks just giving out loans. Please take Caution. The Governor is right!!
Jamaco. your statement that we can not afford negative propaganda and we should stop spreading fear and aim at winning the consumer trust is right on the mark. Investors do check the mood of the country by reading our newspapers and also by interaction with the people. if we write or say bad about our country so that govnt fails and gives chance to the parties we support then we are simply shooting ourselves in the foot. when govnt fails the one who suffers most is the ordinery person on the street and not the leaders we hate. We can do well by concerntrating on the positives of our country and identify viable programs that we can support in these hard economic times.
Exactly!! Thanks for the extension. Positivity is the way froward!! Let us renew the spirit of positive reelection.
I meant positive reflection and not reelection!!!
Why has it taken the BoZ Governor too long, and for that matter at a conference to highlight this threat? I though the BoZ should have been holding weekly press conferences to address such concerns to the general public. I know for sure that Stand-Chart and Barclays Banks have in the last 4 yrs been offering personnel loans to civil servants and those in the private sector with probably no due foresight to the credit crunch being explained by BoZ Governor. Now we would like to have a reaction from all the banks affected and the insurance companies wether they will be caugth up in the credit crunch net and what repercusions is this going to bear on these financial situations. Hello!? banks??
And the Insurance companies too shud be serious they will also be in liquidation things are bad in Zed
Its sad; newly retrenched miners did not use the Insurance factor, the banks had to deduct the amounts from the terminal benefits.
timely caution…insurance companies must sit with banks. iam sure other working surities/colaterals were given to banks by borrowers who should help with the credit load plus many other alternatives of repayments. secondly, banks should engage borrowers to renegotiate payment terms, strike a profit balance and see that they dont depend entirely on insurance cover.
These personal loans are being used to fund weddings, buy japanese cars, keep up with the joneses. People have the priorities mixed up when taking these loans it’s about what they WANT not NEED .
If I hear barclays bank does not owner there contracts,in their contract it is stated that when someone is retreched the insurance will pay the rest on defaulting customer.In Ndola miners from bwana mkubwa are in poverty coz of the same.The governer has mention interests on borrowing e.g 25% but the question is what his he doing about it? I say so coz all I hear from this man is ‘it a free economy’when we ve countries like US,Brazil reducing interest on borrowing to as low as 1%.Can we see some actions not just talking.
I think the most important tip you provide here is to stay plugged into what??s important in the industry, so that we can fill the needs, and provide solutions to our readers needs.