Micro Finance Service Providers’s lending interest rate capped at 42% by Bank of Zambia

1. You mean people lend money at such high rate? No Wonder the poor who can’t borrow from The bank will continue to get poorer. How can PF with their so called pro poor polices allow this?

   • Yes, they do. The problem started long before PF came into office. In fact this intervention by BoZ is long overdue. Rates were as high as 240% per annum. Most most people who borrowed from MFIs are already highly leveraged and usually use one MFI to liquate a loan/loans obtained from another. The scenario has been that of formalised ‘Kaloba’ hence the proliferation of MFIs in the last few years.

   • #1 Observer do your maths properly and you will discover that this is a positive action. Do you know that previously when say you borrow a ZMK 1 Million for a month you would per back a total of K 240,000 as interest. With this action in place you would only pay back K 35,000.

   • Ba Bayport, no more stealing. The (my) money money you stole; not any more

2. #1 Observer how do you go blaming PF for this when they have just instituted measures to redress the situation that they found. Sounds like criticizing PF just for the sake of it.

   That said interest rate caps are always a controversial issue especially when it comes to microfinance. The rates that MFIs charge should not be compared to that of commercial banks as the operating costs relate to loan size are far much higher in micro-finance.
   Credit scoring can not be relied upon hence MFI have to resort to detailed case by case evaluation of every loan which brings in inherent inefficiencies which can only be covered by higher interest rates,

   • You PF cadre, I blame them because they are in their second year in charge and it is the only party that can change things. If you can’t take the heat call for a presidential by election so we put somebody else we can blame.

   • Observer I will ignore your comment about me being a PF cadre and rather stick to the issue. First of all the regulatory environment for the financial sector can not be changed overnight. You may want to note that the interest cap for the micro-finance sector is linked to the interest rate caps that were introduced for the banking sector about a year ago. It is clear that a strategic and well thought-out process is at play and it is commendable that this cap was not just introduced overnight.

   • Probably in RSA the procedure is detailed hence the cost. In Zambia, the high rate is more a reflection of the high risk of default. The compliance rate in Zambia ranges between 60% – 85%. The bigger MFIs tend to enjoy the higher end of the compliance spectrum. The problem is that when your rates are too high compliance tends to suffer so the few good borrowers subsidise the bad ones. The lending formula is simple in Zambia, just present a payslip and a letter of confirmation from your employer and you are good to go in most cases.

3. This is madness. How long will it take the borrowers to make enough profits above the capital investments before they break free from their lenders? This is another IMF,World Bank scenario where those who borrow do so in the hope of coming out of poverty, only to discover that they actually sold their own souls and families to the “Devil”.

   These rates must be revised downwards. They cannot be nearer to 50%.

4. These rates currently go between 100 and 200percent depending on the period of borrowing and the so called PF works to reduce that not to exceed 42percent but one iz complaning! Think before critising please. Thanks pf for saving the poor employees.

5. does this include all the kaloba traders that are charging 50% per month interest rate? these guys need to be taxed, controlled and arrested!
   i mean if you collect 10 million, by the end of a month you pay 15 million and by the end of the year you owe 1.3 billion because the interest is compounded every month on top of the principle and the interest plus principle turns into principle each month!
   some even use juju so people are losing property because to collect 10 million you must offer collateral worth atleast 50 million, but by the beginning of the fourth month you already owe over 50 million and with their juju they ensure all your income is blocked
   BOZ needs to step in here because sometimes people are just too desperate

6. this is PF is working up after HH said this a long time ago. any good that finally it is been implemented. thanks to HH.

   • Who is the Kapoli you are refering to and why is he not in power? Tribal foo.l!!!!!!!!

   • HH czn only yapp without any action. His is like a grammephone sphewing out theories.
     Go on Pf and reduce the rate further to less than 25%

7. There is too much ignorance on the blog people like #1observer who does not know the difference between a Commercial bank like Barklays capped at 18.% and MFI like Baypot which charges 200% now be capped at 40%. I have seen a lot of PF cadres being called dull but from here they seem to understand better than the educated UPND.
   This is commendable because even with my Ntemba now I can go to Baypot and get money if I am currently making good profits.

   • Your Bayport will wind up

8. And for Kaloba it is mutual understanding between you and the other individual. The gorvernment has nothing to do with it. In a way going for Kaloba without checking yourself kaloba bupuba. You will just make your loved ones sufer.

9. An egg or the chicken, which came first? IMF, World Bank, Lending institutions, Banks, Microfinance, Kaloba, Sharks, Money monger, etc its a thicket of things in money matters. The principle is there is a borrower and a lender. Terms of lending and borrowing are set and agreed. When payment comes, you have those who pay and those who offer protracted reasons for not repaying in time or the borrowed cash. In either way there are predatory lenders and predatory borrower, watch out for these, they suck and cause problems (bad debt to the lender and unfair loan terms to the borrower). Be wary if you lend and/or if you borrow. What comes first, the egg or the chicken?

10. Let people keep the 42% lending rate in mind, next time they say something like “we don’t have a culture of putting money in the bank” or “we don’t have a culture of paying back loans”.

    There was a time when lending rates over 25% were considered usury, and were illegal. Now all the banks are doing this, all over the world where there are no restrictions on lending practices.

    No legal business can borrow at that rate. Is it a surprise that there is this huge unemployment rate to go with it?

    Here is a plan for developing a Zambian middle class:

    1) Lending rates near the rate of inflation
    2) High taxes on the mines, to pay for
    3) No charge education and healthcare,
    4) Infrastructure projects – irrigation, roads,
    5) Emphasis on agriculture and manufacturing

    All…

    • Good ideas. Just to comment on the first idea, the owing to the fact that your benchmark rate (T/Bill or Bond) is already at least 9% p.a. the lending rate can not be near the rate of inflation. If you account for inflation then the borrowing rate should be at least 18% p.a. before any margin. It is the margin that also needs to be regulated albeit in a free market economy. Just like sanity was brought to the exchange rate in the late 1990s when BoZ introduced a maximum 2% trading margin on FX.

    • Space,

      (ZAMBIAREPORTS) Zambian Inflation Rate Makes Marginal Rise
      Published November 29, 2012 By Peter Adamu

      ” The inflation rate for the month of November has increased compared to last months. Central Statistics Office acting director Goodson Sinyenga said the inflation increase is from 6.8 percent last month to 6.9 percent this month. He said the 0.1 percent increase has been attributed to non food products. “

11. 42% is that the mafia or a loan shark….

    • per year so its fine!! kaloba n mafia charge per month, even per 15 days

    • It is still hideously high..how can our local entrepreneurs attain a competitive edge in the region or even achieve growth. Here is another reason why foreign companies thrive in Zambia….another reason why we should allow Dual Citizenship like in Ghana where overseas based nationals are taking advantage of overseas lending rates to invest home.

12. I see that most bloggers talk or write without any background research. Only recently Bank of Zambia produced, in all our major newspapers alarming lending rates both from all banks and micro lending institutions. There were instances, where some micro lending institutions charged well over 100% interest per year. The move therefore by BoZ to provide a cap is a reaction from what has been existing in our country over a long period of time. To imagine that some bloggers are even alarmed at the 42% cap, speaks volumes about our ignorance. What BoZ has done is a good step in the right direction. It should have been effected long time ago. Our people, who ideally cant escape the shackles of loans be it from a bank or micro lender will end up benefiting from these right policies.

    • Teachers’ pay slips are a nightmare because of these chaps,non-bank financial institutions

13. This is daylight robbery. Normally, lending rates are supposed to be inflation + a risk factor. The risk factor is dependent on many issues including market conditions, people seeking loans, availability of cash and so on. In the case of Zambia, the last three factors are low. This means that the risk factor becomes lower. Hence in my opinion, interest rates in Zambia should be around 10%. i.e inflation (7,3) plus a risk factor of 2.7% while MFIs – 18%.
    However, this will increase demand for loans. In the short term, it will foster consumption and thus economic debelopment. In the long run, you run a risk of defaults. It is the bank’s duty to protect itself from default by carefully selectinmg customers to lend to. Banks must NOT protect themselves agaisnt default by not lending at all.

    • What about the risk free rate (prime)? Shouldn’t you be starting with that plus inflation plus margin? If you do that you see why it cannot be 10% p.a.

      The cap may also lead to a reduction in default rates among genuine borrowers. The problem at the moment is that some borrow for consumption purposes while others want to invest long-term e.g. construction. In both cases, they end up with the wrong end of the stick. MF loans are typically short-term financing sources.

      The primary source of revenue for MFIs is loans so they cannot afford not to lend. What I forsee happening is that there shall be less adverse selection and probably better portfolio quality.

      Otherwise, I do concur with you that the rates before the cap were exhorbitant.

    • I like your contribution my pal, its simpler for people who have difficulties to grasp.

14. These are slave interest rates guys. They want you to owe them for the rest of your life. Jay Jay is right, only the Mafia and the Loan sharks exploit the poor this much because they have nowhere else to go. Lets not forget alot of loans to 3rd world countries have been written off and yet it never trickles down to the lay man.

15. Thats good patriotic front. The microfinancial institutions should be fined for stealing from the poor zambians who depend on them.

16. You must consider that Banks use different interests with different individuals/entities. Large corporates do not pay large interest rates, they are charged something within the range of 12-15% depending on the tenure of the credit. However SMEs which are high risk are charged more, one reason is that they require closer monitoring which requires a larger number of relationship managers, whereas that isn’t the case for corporates. Thats why some local banks only serve corporate customers e.g. Citibank. However in the absence of a good and fully functional credit bureau high interest has been charged to entities the banks consider high risk.

    Another issue is that insurance costs in Zambia are expensive, as are internet costs and various other support system costs.

17. As a result of the high cost of doing business in Zambia, particularly for banks with an extensive branch presence since that means more insurance, larger staff complement, etc. Banks have historically placed a large margin above inflation so as to cover their expenses and make their profit. SMEs in Zambia have terrible governance cultures and as such frequently fail, even some which grow to become large eventually implode years later, not all do- but the majority probably do as such credit risk for SMEs is a problem. As such to compensate for the risk, banks have historically increased the risk premium for such loans.

    The cap on MFIs is good because many of them focus on tenured employees of the state, and those have a low risk as such the interest charged is really usurious

    • The focus on tenured employees is probably the source of the problem. A lot of government employees do not earn much in salaries but yet they comprise the majority of the borrowers on most MFI books. Some of these people get negative salary because they have overborrowed from MFIs. Believe or not the next major abusers of MFI loans are bankers. They take staff loans then also borrow from a multitude of MFIs, whom they give ‘rubber’ Cheques. Among the worst culprits in issuing bounced Cheques are BoZ staff among other bankers. And one would think that bankers would set a good example of compliance yet not.

18. I write to express my displeasure at the way mentally ill clients that are admitted to Kabwe General Hospital are being discriminated against. I am a paramedic with a military background working within Kabwe District.
    The situation at the General Hospital’s Psychiatric section is bad. Mental illness is at various levels and affects all sectors of society. The priority of care is that if a mentally ill client comes to a health facility with a medical or surgical condition, e.g. a wound, fracture or malaria, that condition must be treated first, provided the mental illness is not interfering with such treatment. More over, all nurses, clinicians and doctors are trained in basic psychiatry so as to handle any life-threatening condition before referring to a psychiatric ward.
    Basically what…

    • Get them a loan, now that the interest rates are low

19. Ok, Back to price controls where the wisdom of the market is invalidated and the foolish arm of man takes over! Cheers

20. They will hide the interest in exorbitant arrangement fees (which are also high already)..

    • The cap refers to the EFFECTIVE interest rate. That means it takes into account all the fees that the institution charges…. management, arrangement, plus interest and what ever other fees the lender is charged.

21. I love this discussion, because does not have too many insults.

22. PF through BOZ deserve praise for this imagination.This is what the government should be doing.When you talk of more money in peoples pockets,this is the real money.Some of these MFIs were charging as high as 360% per annum and the cheapest was between 60% to 108% per annum.

23. The borrower is a slave to the lender. Under any circumstance, do your best to be the lender.

24. These Kaloba people have come up with other skims such as forward sale of an asset. What you should do is sign everything and get the money and then the very next day go to court and nullify the sale and turn it into the loan that it is with the correct interest rates.

25. this a good move by the bank but has implications;

    The bank has been encouraging MFIs to go rural where the % of people that do not have access to financial services are is high. But with this move, many MFIs will concentrate their lending around lusaka other major towns because the cost of doing business is high in rural areas or evening consumer lending to govt worker which is low risk.

    There will be no motivation for any organisation to target the poor and as such the poor in rural areas will continue to have no access financial services.

26. Most people have looked at the intention of the cap and ended their. The intention is good of cause, but its naive for anyone to just base

27. Most people have looked at the intention of the cap and ended there. The intention is good of cause, but its naive for anyone to just base a policy on its intention and disregard its effect. For those so excited, the effects are that the lenders will close shop for they can not make money at those capped rates and the very borrowers the gov’t is trying to help will be left in the cold. Interest rates are a price of money and in Zambia there is just not enough to go round like in developed countries. If these lenders where making a killing in the market, we would all go into it. Does anyone know the operating costs in this market? My suggestion is fire the economists in the PF gov’t.

    • It is common sense to look at any issue on both sides of it, i mean the prose and the cons. i totally agree with common sense that only the powerful shall remain in this business of lending as MFI and the weak shall exit the market. In mansa today no one can access a loan from MFI, they are saying try to call next week. In short all financial institutions are not comfortable with the move by government. and maybe this will result in reducing the workforce so as to make profit.

28. It’s very high, I was hoping to be on same level as commercial banks. Secondly its important that the Bank keep on monitoring this rate, and also put up regulations which will be uniform in all these Micro lending houses. This rate of 42% should be monitored against the inflationary rates. They should also be inspected on how they keep their business houses. Should be able to provide save environment up to stands just like Commercial banks.

29. What else is next? There is far too much control and intervention from this government without consideration of the consequence.

    Micro finance firms take on much more risk and lend to those thAt banks ignore (or those that require finance quickly without the bureaucracy and delay associated with banks)….with the low return to risk imposed by BOZ, the result may be less micro finance institutions and less choice for customers. The fact is, the price (interest rate) is a function of the value created…and in a “free market economy” (? Under current government) the number of current customers these institutions have shows that the current interest rate is fine.

30. The cap is welcomed but BOZ should lower interbanking lending rates to nearly 0% so banks can lend at lower rates. introduce quantitative easing to make sure that there is enough money to lend to commercial banks. If commercial banks have money to lend at lower rates. no one will go the loan sharks. Citizens borrowing at these rates is suicide .BOZ get a grip

31. BOZ should let market forces determine the rates. Capping the rates will only lead to stifling lending institutions. There are other fees included in the total interests charged including insurance which is transfered to insurers just in case the borrower fails to pay back the loan. All the best Mr. Gondwe with your stifled capitalism. The best way to reduce interest rates is to have proper control of funds leaving the country by having mining firms to bank their monies in Zambian banks which will compell banks to lend at lower rates. Why should money obtained from copper sales be banked in Switzerland or Cayman islands?

    • marrie ann i like your comment

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33. l feel some of these re Mfi sponsored comments. its not true that Grz employee is a risky client demand interest 100% plus interest when payroll deducted but a greedy intention capitalising on desparation of the poor. if England has caps why should zambia have? there no thing 100% free mkt economy anywhere in the world bcoz greedy take over in some areas. so regulation is necessary in some areas. i wud all to go boz web and at mfi and banks quaterly fin stat. and chech the profits. thank u.

    • Actually in England the Mfi institutions (eg Wonga) have rates of 1,000- 3,000% annualised, look it up. Regulation is about making sure clients are aware of what they are getting and institutions not taking advantage. Control is a different thing and promotes the black market.

      Also, you are correct payroll finance is low risk but the Mfi sector is much more than that…how about sme loans, the type that are rejected from the banking sector because they are risky or don’t meet the criteria? How about the informal sector (let’s be honest, it’s a large sector) that is ignored by the banks?

      We should expect the Mfi to leave the market or concentrate on less risky loans (payroll), either way it will result in a less developed financial sector.

34. Has the Govt also capped rentals? Wages ? Other operating costs which the Micro lenders incur?

    Ok you borrow K1000,000 you pay back principal plus K35,000 after one month. Fair enough, so who is going to lend you at that rate? Your PF govt? Next week there will be no MFI lending to you. That will be enough protection of poor people. No lending no money in your pockets he he he. Viva PF, archaic economics you are going reap results of price control soon – shortages. With the shortage of cash flow only Kaloba will stand to win. Who will be the looser? MFI are now making arrangements to withdrawal their from this sector. PF BOZ will be will bepowerless stop them he he he. You should be borrowing from your relatives or PF at 0%
    he he he

35. 42%, are you kidding me? Seriously who do you justofy these figures… what kind of business would bring you even a 10% Return on Investment (ROI)? This is day-time robbery and I’m shocked that people actaully borrow.

    It must be good to do business in Zambia. At the time when interest rates in developed world are almost 0%, we have 42% in Zambia… holy cow! Quick question: where do our local banks borrow money from and at how much rate? I would like to know… because I doub’t if they borrow from international lending institutions, they don’t borrow at this reported 18% or even 10%.

    The justification that this is a way to protect themselves against defaulting is flawed… you protect by lending to to the right people (background checks, etc). High interest rates is about RISK.

36. The other issue BOZ should look at is the high interest rates on Miners getting a loan compared to a GRZ employee and yet miners pay a lot of tax.E.G a miner getting a loan of 10 million and GRZ employee getting 10 million for period of one year, will repay different amount and the miner will pay more than the GRZ counterpart but same bank.

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38. Ba Bayport can not content the pressure they have started downsizing. Is it one of the institutions that the Finance Ministry was say some Microfinance companies have formed a catail to manupiate lending rates?

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