BANK of Zambia (BoZ) has now started issuing licensing to micro financial institutions (MFIs) to be accepting deposits from customers to push down interest rates.
The central bank believes that the measure would help the micro financing firms to have more liquidity of their own rather than depend on borrowing from commercial banks, which would enable them reduce interest rates.
BoZ Governor Caleb Fundanga said in an in interview in Lusaka that the central bank had put in place measures to address the exorbitant interest rates charged by MFIs in Zambia by authorising them to collect deposits.
He said MFIs would now be able to collect deposits at a lower rate of five per cent and then lend it at a considerable charge like what commercial banks are offering at 20 per cent.
“We are now licensing deposits taking in MFIs and this means that they will be able to collect deposits from the public and at the same time it will help reduce the interest rates,” he said.
MFIs would be able to do business at a much lower lending rate compared to the current situation where they were borrowing from commercial banks at 30 per cent.
Dr Fundanga said the MFIs were in turn lending at more than 80 per cent, which was too high.
“People have complained about commercial banks having very high interest rates at 26 per cent but some MFIs are charging more than 100 per cent interest on the loans and people are still borrowing. It is amazing and in fact it is a challenge,” Dr Fundanga said.
The central bank had created a window for them to take deposits so that they can access cheaper money.
“MFIs should not look to Government to subsidise their operations because Government as you know is also hard pressed with funding. We would not like to over burden Government but they can collect deposits from the public,” he said.
Dr Fundanga urged MFI institutions to lend to the production sectors to grow the economy.[quote]
“We can not grow our economy by just funding for consumption we need to lend to the production sector,” he said.
In a separate interview, Bankers Association of Zambia (BAZ) chairperson Saviour Chibiya urged MFIs to also access the global funds that were available for them.
Mr Chibiya said there were global funds set aside for the purpose of promoting MFIs for them to access cheaper funding rather than borrowing from commercial banks.
He noted that commercial banks had commercial motives so if they could access the global fund, they would be able to source affordable funds.
[Times of Zambia]
This is great news. The interests rates for MFI’s where impossibly high. This will most definitely help.
The interest rates are quite high, 26% from a commercial bank is prohibitive the Government needs to do more to at least half the rate. The average interest rate in south Africa is about 13%.
Doesnt BOZ regulate these MFI’s,how can they charge 100% interest on a loan,i might as well go into this business
BOZ and Ministry of Commerce should do more rather than cheap talk. They have both sung about anti dollarization law but no action. They shouldnt leave everything to the markets. In the UK, South Africa, US, Japan and many euro nations, the Central Bank or reserve bank determine the interest rate. Commecial are only interested in making profits.
Good point number 2. 26% interest is very high and I think 13% is about right. Interests should really marginally track inflation rate and what the Governor has done is right from the text book of economics. This problem can properly be solved by competition and by opening the market to other players, competitiveness will force other players to be competitive and in fact competition is the best way to curb inflation and high interest rates than using legislation, price controls and 90 days economic miracle plans from you know who. MMD is for a market full of choices and if there are more choices, there can only be one winner, the consumer and honest businesses.
PS: This topic is too advanced for PF Kanponyas and you wont see any of them here today.
At what rate do banks and now MFI’s borrow from the central bank? i stand corrected but i believe its btwin 7 and 10%. Can someone justify why our banks have interest rates btwin 23 and 30%.
4 MASEBO
I don’t know about other countries, but you have lied by including South Africa in that list. Stick to what you know. The Reserve Bank in South Africa have a clear cut plan on how Interests are determined. They use inflation targeting and they have 3-6% band. If Inflation goes north of that range they start hiking interest rate which is called prime and banks add something on top of that to make profit. So it is very systematic and predictable and everybody know what they need to do to keep rates down and they know what would push rates up. So it is inflation rate that determines lending rates and not Reserve bank
The Zambian economy is currently very exploitative in its set-up and operation. Whoever has the cash or control of the cash goes full tilt ahead to exploit the rest. Just look at the management of the energy sector and the resultant fuel prices, or the commercial bank lending interest rates that have little to do with inflation rates.
The licensing of MFIs to receive deposits is a commendable and positive step, but I think more radical action is needed to bring relief to the majority Zambians in terms of access to affordable finance.
6 At a Glance
No Justification whatsoever, except greed by bank executives. That is why BOZ wants to open up the market. If somebody borrow from BOZ @10% and lends @15% it is still a decent profit if you consider the volume and this would be good for the economy.
MMD Chief Bootlicker you tend to just agree with MMD policies period and your analysis isn’t the greatest. This is a disastrous move by the govt because depositors WILL cry when losses occur! Secondly the biggest cause of high interest rates is the govt itself because Zambian banks are there just for returns on govt securities – lending to individuals and business isn’t top priority as we know banks to do developed economies. I actually cannot believe that the central bank has come up with such a dumb idea.
10 Torontonian from Zed
Well lets hear your great idea my friend,. FYI read yesterday’s Daily Mail , you will see that the is already in motion a legislation to secure people’s deposit by the central bank.
Good news coming from the Governor.These thieving commercial banks are too cruel on consumers all ’cause of their greedy.They have used every excuse to cling to higher rates despite factors such as inflation coming down to a single digit.
#7 Ba Licking #4 said the central banks regulate interest rates in those countries,South Africa included. Is it true? Please dont play genius here you are just a shushu being paid to support MMD. The point is,How does your MMD led government allow loan sharks abusing it own people? So the central banks regulate by either increasing or decreasing the interest rates depending on the situation bearing in mind the welfare of the people. And its not a crime for someone to have a different political opinion. Lets hope you have invested well to maintain the same lifestyle after you are deployed from foreign missions. Some of us are used to looking after ourselves. Ni double tobela no worry about change of government.
PF any comment. Too advanced??
At a Glance
There is what you call a risk premium. Interest rates do react to the inflation rate. If you look at historical inflation rates in Zambia, they have reached even as high as 32% inflation. This is why the interest rates have remained high. It has nothing to do with bank greed, it is just risk involved. BOZ must instill confidence in the Banking sector that they can maintain inflation to single digits like they have done. If there is this confidence, the risk is lower and therefore interest rates will come down. Ecobank offers 19% interest. If you want to borrow at interest rates as low as 11% from Zambia banks, borrow in Euro-currencies. They offer interest rates as low as 11% in Euro-currencies.
MASEBO
You are lying. USA, UK, SA and Japan do not determine the prime rates for commercial banks. They determine the overnight lending rate.
In the Banking sector, banks with surplus money lend to other banks with a shortage of money after all days activities have been carried out. The central bank offers credit in this market. The central bank also has an interest rate it sets called the overnight lending rate. If Bank A is borrowing from Bank B and Bank B sets an interest rate of 6% whilst the central bank sets an interest rate of 5%, Bank A can refuse to borrow from Bank B and go to the central bank since it is cheaper. Bank B then has an incentive to lower interest rates at something like 4.5%. That is a simple idea of how it works.
Enough rhetoric Caleb,let us see action.I must congratulate you however for being the longest serving BOZ Governor.
If i recall you said this in late 2008 before Levy passed on in L/stone @ a business forum8-|8-|8-|8-|8-|
Torontonian from Zed
There is legislation being put in place to protect depositors. If you read the dailymail yesterday, you would know this.
Secondly it is not a dumb idea. This move enables MFI’s to access money from depositors which it can use to lend to borrowers. If Banks cant lend out because everyone is going to MFI’s, they’ll have an incentive to lower interest rates so as to capture this lucrative market. Increased competition lowers costs (in this case interest rates). So the move will lead to lower interest rates. BTW, The govt is reducing on domestic borrowing.
Bootlicker
whatever you posted is a load of bollocks,interest rates have a lot of determining factors,nothing to do with greed,what you need to explain is why interest rates particularly in Zambia have remained at 26% despite all the rhetoric we hear about the economy doing well and having so much in reserves.
BOZ gives licences to these MFI’s to conduct business and they are guided and regulated by boz who always have first hand information about the economic trends and signals,whether negative or positive,but they cant monitor the exploitation being inflicted on the poor people who get loans at 100% interest
The Bank of Zambia does not seem to utilize all the regulatory powers that it has. In some countries the central banks’ actions influence the level commercial bank’s interest rates. Because of the negative effects that high interest rates have on the developing economies it is important for the central bank of Zambia to exert the rightfull position with regard to the levels of interest rate so that people and companies can borrow money for developmental projects. Without deliberate action and influence, the central bank of Zambia will continue to lament over ridiculously high interest rates. Evryone who is in business would like to get the highest return possible hence it is not easy for comercial banks to lower interest rates appreciably on their own.
The banking institutions are more dangerous than standing armies because debt is slavery, if you want to remain slaves of the bankers and pay the costs of your own slavery, let them continue to create money and control the nation’s credit.
Good Afternoon
Quote:“We can not grow our economy by just funding for consumption we need to lend to the production sector,” says Mr. Fundanga.
So, what does this mean for the bottom line? Less imports and more locally produced goods? I wish these economists could speak “klartext” when it comes to such matters, because they affect us one and all.
I clearly understand that the low interests are meant to improve the cash flow of the micro financing firms but I’m just wondering how large the production sector in Zambia is which is supposed to be boosted by this move? The problem is I can’t think of so many Zambian-made leading products which are essential to the Zambian consumer… just think about fuel, industrial machinery and other technical components.
One of the few good news ive heard this year. It is very unfortunate for the SMEs where i belong to do business. I stand to be corrected but i hear in other countries these MFI even go to the extent of helping you once you prove you have the order from a company you want to excute. The song of developing this country will always not end as long as only policies which favours big companies( Where alot of investors are only implemented.) If I grow in my business, u are assured of my money improving Zed coz its my home. Even if somebody argued to say i would settle somewhere, i will have the whole lot of my relatives here who i have an obligation to help. Exctaly wats happening with our investors who are paying us the minimum wage of 268,000 and taking the balances to their countries.
# 5
if electricity and feul prices are regulated why not interest rates after all the US does it.
Saving accounts interest rates are about (4%),not to mention minimuim balance.Current accounts
deposit do not attract interest. Reserve ratios are at 8%.Bank borrows from me at 4% and lends out at 19% base( actual 23% ) gross profit of 475%.
Business men always went to maximise profits.I do not think this will help reduce interest rates besides banking is based on trust most of these MFI will fail to moblise suffiecent deposits.THESE RATES MUST BE REGULATED.
Here is a Kaponya’s point of view. In any economy there exists a devil’s embrace between interest rates and foreign exchange rates. You cannot manage one and forfeit control of the other. SA has strong foreign exchange controls while interest rates (prime) are set by the central bank. The successful BRIC nations all enforce forex controls, ranging from the draconian (China) to the most liberal (Russia).
BOZ will not tame interest rates without managing exchange rates. Quid pro quo, BOZ?
Here is a Kaponya’s point of view. In any economy there exists a devil’s embrace between interest rates and foreign exchange rates. You cannot manage one and forfeit control of the other. SA has strong foreign exchange controls while interest rates (prime) are set by the central bank. The successful BRIC nations all enforce forex controls, ranging from the draconian (China) to the liberal (Russia).
BOZ will not tame interest rates without managing exchange rates. Quid pro quo, BOZ?
I would like to open a small fruit processing company. Will my local products be valued as much as imports from SA?
Kindly advise.
85% of Zambians are unemployed and many small business people cannot access funds from these institutions because they have no security. The majority who access funds from MFI are civil servants who borrow to mitigate their low wages. Lets try and promote lending for production reasons and not for consuption only.
Bravo Dr Fundanga. This is a welcome move & will definitely go a long way…Well done.
15 Mr. Capitalist says:
” BOZ must instill confidence in the Banking sector that they can maintain inflation to single digits like they have done. ”
Just wondering, but if you are a free marketeer, why do you believe tha interest rates should be set or manipulated by the BOZ or anyone else?
In theory, when inflation goes down (and everything has been done to make that one thing happen, at the expense of the economy), then interest rates should be going down to where inflation is.
The problem is that the cost of money is dependent on a lot more than inflation, as we have seen again and again.
(Continued…) If the government borrows all the money from the commercial banks and gives a better rate of return and has more collateral, then banks will not lend to ordinary consumers or small business. Or do so at exhorbitant rates, as is the case in Zambia.
What Zambia needs is a mandatory minimum lent to SMEs and consumers by non-Zambian banks. Zambia needs a more diversified banking system, as well as other things that can be done – like having people live in streets with names and numbers, so they have a fixed address (which takes money and taxing the mines).
However what is clear is that the ‘free market’ does not step in to provide services where there is no infrastructure for those services. Creating that infrastructure is the job of government.
5 MMD Chief Bootlicker, I agree with your last sentence/Post Script.
I also notice that very few of the bloggers on this topic are the usual names on political topics.
The comments are quite illuminating, and such a breath of fresh air from the usual blind folded political “experts” who criticise anything that they see or hear. If this kind of analysis could be used in our political comments, Zambia could be so much better.
Debt is an ingenious substitute for the chain and whip of the slavedriver.Do not accustom yourself to consider debt only as an inconvenience; you will find it a calamity.remember that a small debt produces a debtor; a large one, an enemy.Be wise
The big banks also need to consider reducing their interest rates.With interbank rates as low as 2%,it dosnt make sense for these big banks to still be charging exorbitant rates as high as 25%.
Dr Fundanga is an acolyte of international capitalism and he has abetted exploitation of poor masses. Dr Fundanga is very inept on monetary policy implementation and should be relieved of his job. The rate of inflation is around 10% but why should banks collect 34% on loans?
It pains to hear Central Bank( Boz) not acting on regulating commercial banks for there high charges on intrest rates.This autonomous is dangerous for a developing country.More over most of these banks are foreign and there MDs are remote controlled.In respect of high intrest rates it appears that commercila banks will continue charging the would be borrowers as long there is no regulating policy in place.This is no fair play coz we have ERB regulating oil markerting companies,RTSA for public transport operators e.t.c.So Y should commecial banks be given an olive branch? 😕
This is the normal stuff the BOZ governor has said. Let him also curb excess government borrowing from the banks. This is what is pushing up interest rates. Also lend excess money from taxation to commercial and non bank sectors at very low rates as happened with savings from national debt write off through HIPIC programmes.
Great comments above. Thanks guys.
The govt is the biggest borrower from the banks. BOZ and Parliament and us sould pressure the Govt to drastically reduce borrowing from local banks. The extra free money would cause banks to reduce interest rates as they will have to find a market for it. It has happened before, i think during LPM. Its a pity current budget has increased borrowing due to donors tightening their purse after the Kapoko saga.
Single most blow to interest rates will happen when GRZ scale down borrowing from these banks. All the rest is tinkering with the issue.
Thanks BOZ for this move anyway.
” Single most blow to interest rates will happen when GRZ scale down borrowing from these banks. All the rest is tinkering with the issue. ”
What is in the background in all of this, and the reason the GRZ borrows so much money both domestically and internationally, is that Zambia is losing $2.4 billion in untaxed profits from the mines every year.
If the GRZ taxed the mines at $1.2 billion a year, there is very little they would need to borrow.
If they streamlined their operations and reduced the number of ministries, and made procurement and payments transparant, they would save hundreds of millions of dollars a year more.
Caleb Fundanga and the BOZ team must be encouraged to make positive changes that will take Zambia forward… An exceptional bank governor indeed. Na ba pa market ba la labila of once knowing “singo digit inflation!”
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