On the 3rd of January, 2013 bank of Zambia through its public relations office released a statement relating to capping of interest rates. The opening statement was,” further to the recent measures taken on commercial banks, the bank of Zambia wishes to advise that the bank has also decided to introduce a cap on the effective annual lending interest rates that non-banking financial institutions licenced by the bank of Zambia can charge their customers”.
Under section 40 of the banking and financial services Act chapter 387 of the laws of Zambia, the section provides for interest rates and charges. Under subsection 40(1) (e) the provision deals with the prohibition of financial services in a manner that is anti-competitive. The suggestion of this provision is that it recognizes that certain practices in this dispensation are deemed to be anti competitive and recognizes that the competition and consumer protection Act should be applied even in such transactions.
The bank of Zambia also has a supervisory role as provided for in section 81 of the Act. Section 81(1) (a) requires compliance, 81(1) (c) (i) talks about unsafe and unsound practices. The Act does not define what the term unsafe and unsound practices refer to but leaves it to peoples illustrious imaginations. This in itself poses a challenge and in turn brings about a problem as the Act is not clear. It should be stated here that the law should not be an abyss of uncertainty and as such this can be attributed to bad drafting.
The bank is also endowed with regulatory power. Under section 124 of the Act, the bank can prescribe regulations as recommended by bank of Zambia and these will be done through a minister who will issue a statutory instrument. In the event that this is not done section 124A provides for the same to be published in the government gazette. In the event that this is not done, it will seem to mean that such regulations are invalid and void.
Further Section 125 of the Act also gives bank of Zambia power to prescribe guidelines. This provision is problematic as the yardstick to be used in determining what guidelines would be necessary and desirable is not know and is left to imagination. This provision is problematic.
All in all, the stance taken by Bank of Zambia does not seem to be anchored on any proper position of the law as it contravenes the competition and protection Act and the banking and financial services Act which is the principal Act governing its conduct.
I should also be mentioned that Zambia has a market economy which is liberal and the caping of interest rates is an act of excitement and unreasonableness. It will put a lot of institutions out of business and contrary to the current governments promise to create employment, it will cause a lot of people to lose their jobs and languish on the streets.
In the second last paragraph of the press release, bank of Zambia sates that,” The bank of Zambia will periodically revise the factors applicable to the non-bank financial institutions interest caps, in response to changes in economic fundamentals and the commercial bank rate”.
This statement has no blessing of the law and the power to do what bank of Zambia is doing is questionable. There is need for the bank to explain where the power to do what they are doing is coming from and what they ultimately want to achieve, is it to boot all financial institutions out of business and allow banks to take over this business or to completely do away with micro financing? These are the hard questions to answer.