Caping of interest rates an act of excitement, jobs will be lost

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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[1] 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.

By joz365

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39 Responses to Caping of interest rates an act of excitement, jobs will be lost

  1. Money markets in Zambia, so bad!

    Amon Gold - January 14, 2013

  2. Let the minority suffer and the majority enjoy especially civil servants and miners.good work boz,keep it up.

    2720 - January 14, 2013

  3. The writer should quote figures and statistics to justify their arguments. And the argument seems to be centred on the alleged illegality of BoZ to introduce caps as a reason that will put the said lending institutions out of business.

    May be I start by saying every country has to have some kind of ‘official’ interest rate – it’s not really a ‘cap’ per se but it is some sanity comparative figure that act as a ‘guide’. Usually lending institutions will lend out at a relatively higher rate to this ‘official’ figure.

    In Zambia, even the reported 42% cap is still ridiculously high. Seriously how do you justify these Zambian lending rates… 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 actually borrow. It must be mentioned that people probably have a hard time paying back because the rate is too high and paying back will simply just put them out of business. The justification that this is a way to protect themselves against defaulting is flawed… you protect yourself by lending to the right people (background checks on their credit history, including ability to pay bills on time; good, stable job or some other ‘collateral’ or insurance, etc.).

    High interest rates are about RISK. And you can’t protect yourself against risk and people defaulting by charging the ‘good guys’ that exorbitant high rates. What we are missing in Zambia is an independent regulated and stable credit rating and history, so that people with good credit history could easily borrow lots of money to do business – the ‘good guys’ must be ‘rewarded’ to borrow more and even at a lower rate. And the best way to make profit is lend to many more ‘good guys’ even at a cheaper rate than charging 300% to protect yourself against defaulters.

    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 doubt if they borrow from international lending institutions, they don’t borrow at this reported 18% or even 10%.

    Good_Credit_History - January 14, 2013

    • Valid agruements

      Suggestor - January 14, 2013

  4. Credit culture in zambia is so poor; government has not done much to improve it; MFI’s cannot easily collect deposits; and credit data is still at its infancy. So taking the populist shortcut way out by coercing institutions to charge not more than a level is not wise. The learned BoZ body should appropriately advise government. I see jobs being lost and reduced lending and therefore less money in people’s pockets this year. The PF had better be more consultative on this one.
    They could find their own wholesale funding for example and fund small businesses and microborrowers for example and hence compete with these MFI’s to control price

    sweetie - January 13, 2013

    • Whilst appreciating your educated points, I think we must acknowledge that the reduction of interest rates is the way to go, but as to the method employed to implement this yes I agree perhaps its not the best way. But for the good of business activity reduced interest rates help alot in aiding financing of projections.

      Suggestor - January 14, 2013

  5. PF should learn to be consultative and it is sad to see that the whole lot of professional heads at the BoZ are not advising the government properly. The government should learn to be more consultative. Such forced price controls are not the way to go, a properly functioning government should have thought of various policies that could help control prices. Credit culture in Zambia is so very pathetic and you cannot force MFI’s to lend in such a pathetic credit culture which the government and the supposedly learned BoZ body has not helped to improve. Court processes for debt recovery are pathetically long; MFi’s are restricted on collecting deposits; data on the citizenry and their credit history is still at its infancy. Can we have a properly thinking cadre of professionals at BoZ please. People will surely lose their jobs, and these institutions will lend much more selectively to reduce their risk

    sweetie - January 13, 2013


    janzel - January 13, 2013

    • You can’t go beyond a dictated interest rate by Boz just like millers can’t go beyond 50 kwacha price on mealie meal.

      Bus - January 14, 2013

  7. The writer has made a good analysis.
    comparing banks 2 mfis is abit unfair.
    Firstly, zambians are borrowing more than before & so the high demand increases the interest rate. Now since banks dont give any guy who walks in a loan, we turn to these MF’s for help becaus they’re easier. But this puts them at higher risk of defaulters. And chasing payments can be expensive in itself. So high risk needs high return.
    Further, compared to banks, MFIs have lower funding to cover for a default. They also do little assessment of the credit worthines of a borrower. Add to that poor liquidity of today’s securities which leads to your cash being tied up for longer. And as you advertise to sell the security, you’re again incurring expenses. Its not as straightfwd as may seem.

    Spyglass - January 13, 2013

    • I think the point is how exactly are we reduce interest rates to mutually sustainable levels? I do feel that the rates and conditions that MFI’s offer are not only too high but choking to borrowers, but on the other hand the your point of high risk is true and very important in credit assessment. But I think the potential for good(that can come out by deciding to push for lower rates inspite of high risk) outweighs the risk of MFI’s going down. If we crease liquidity(by encouraging economic activity) in the economy some of these risks are offset. It may sound naive or drastic but I think its exactly how USA developed.

      Suggestor - January 14, 2013

  8. I am amazed by how many respondents seam to support the exploitation of upcoming business by these lawn sharks. With interests rates of more than 100% per anum charged by some institutions, how do the borrowers survive? Do we realise many a borrower have lost valuable assets through these unscrupulous ‘businesspeople’? Not all of the these micro lending institutions charge extortionate interest rates, but the majority of them do. They undervalue your asset to almost 30% of realistic market value and lend out at exorbitant rates. Bravo to Bank of Zambia and Government! Sanity will prevail in the micro ending sector as only genuine institutions will remain standing!

    Noah Ndlovu - January 13, 2013

    • I inclined to agree with you on this score

      Suggestor - January 14, 2013

  9. I fail to see the value of this interest cap and I doubt it came from the intelligent folks at BoZ. The economist there would have been able to see the consequences easily …but I doubt there was any chance to conduct research by them.

    The banks will now have an incentive to be classified as an Mfi and operate as they used to, whilst the current Mfis are driven out and street lenders come to the fore.

    Some sober research, planning and consultation with all the parties in the sector would have been appropriate.

    Mfi - January 13, 2013

    • The micro credit institutions charge obscene interests. In a market where others charge as little as 12%, they were charging close to 100%. What’s the Bank’s role if not to rein in excesses. Get your facts.

      Moi - January 13, 2013

      • Others are charging 12% you say? So why don’t all the customers of the Mfis go to them?

        If that was the fact BoZ would not need to rein in the excesses and concentrate on their duty of regulation

        Mfi - January 13, 2013

  10. the Starting of kaloba in real sense

    Syber - January 13, 2013

  11. The decision to CAP the rates will surely send a lot of people on the streets.

    Zambia has been a free market economy from 1991 till now. The decision made by BOZ under will have a lot of negative effects not only on the micro-finance sector but also the economy of this country.

    Killing the SMEs
    The same SMEs they say they are trying to protect were heavily supported by the micro-finance sector because banks could not avail loans due to lack of collateral. What guarantee is there that things will change now? To access a loan from the banks it takes more than two weeks at least whilst it takes a day or two to access a similar facility from the micro-finance institutions. In other words banks are not ready to take the risk of loosing out on their money whilst the micro-finance has always been the risk takers.

    What the PF government could have done
    Through the CEEC act the government could have best created an SME fund which could have been offering cheaper loans at as low as they have ordered the micro-finance sector to implement and thereby create competition. Such an intervention could have in the long run led to a market led competitive environment that is usually promoted in a free market economy.

    Impact of the decision
    I believe that some of us voted the PF on the premise that they were going to protect our jobs by making decisions that were going to create a win-win situation but with such improptu decisions being made now we do not think our lives will be any better.

    On issues such as mealie meal we believe it is okay for the government to intervene especially that maize is a heavily subsidised commodity. But the micro-finance sector involves money that has either been saved or borrowed by investors which in turn is sold out at a margin to assist lot of individuals and SMEs sort their personal and business needs respectively. The microfinance has made many Zambians successful by providing cheaper loans compared to the unregulated street loan sharks that at one time made people’s lives miserable and i see a lot of Zambians going that way especially with the unwillingness of the Banks to lend out money without suitable collateral.

    Which direction are we really headed to with such impromptu decisions? Is Zambia now a communist or socialist state?

    GOD help us.

    Mwansa - January 13, 2013

    • Mwansa I think if govt was to involve itself in giving out loans(taking over the job of MFI’s)that in itself doesnt solve the problem but increases chance for abuse. We all know who is award CEEC funds. But what I think govt can do is act as guarantee for the high risk loans that MFI’s make out at reduced rates. This way it protects MFI’s from going down by sharing the burden of risk with govt.

      Suggestor - January 14, 2013

  12. BOZ hasnt directed these ‘tu ma’ institutions to give money free but to charg reasonable interest 42% not enough? The problem is some people want to get reach overnight.lets fight against exploitation of the poor.The mojority victims are civil servants with very low income becoz they strugle to take their children to schools&colleges.This time BOZ must b supported.the majority are the ones being exploited not the ones employd.why shuld you rejoice when majority are suffwring

    joe - January 13, 2013

    • Coercion is not the way to go my friend. There are other means of properly controlling the price of money. Credit culture is still very poor in zambia, zambians generally have problems paying back what belongs to someone else….there is so much “natolele fye” culture in zambia. I don’t blame MFI’s. Let prices control themselves with the environment as it prevails as well as other proper measures/policies. Price control neeeds more hard work from a government and not coercion my friend

      sweetie - January 13, 2013

  13. I am also going through it. It is SAP Structural Adjustment Progam. Lol.!!!!!!!!!!!!!!I realy dont know because I am not campaining Iam not complaining I am mistaken My Zambia!!!!!!!!!!!!!How long is it going to take me to correct all these wrongs?

    Syber - January 13, 2013

  14. The writer of the article is shooting all over the place without being specific. I suggest he take some of the arguments such as the powers of BoZ to the courts for determination. As regards the interest rates capping, the article is has no mention of actual figures to support the claim that now these MFI will fail as a result of BOZs caps. Mind that these MFI have been exploiting our brothers and sisters with the rates that they charged which were unfair and did not support entreprenueurship with rates as high as 50-60%! BoZ are just doing the right thing. The caps for Banks is at 18.25%pa, no bank can charge over this while the MFI can charge up to 42%. Surely, even if these MFI borrow from the Banks and then lend onwards to their more risky borrowers 23% is still enough space to maneuver! Can someone educate me on what I’m missing here…

    Kingly Jullian - January 13, 2013

  15. i dont whether the auther is the mouthpiece for mojority zambians who are exploited by the money lending institutions or for himself as a benefitialy.revist your you know the interests these institutions were charging or u are speaking from blues.where on earth would get a & payback more than double the the amount after 5 years& u cal that genuine business.BOZ has not directed the to charge

    joe - January 13, 2013

  16. This analysis is a misrepresentation of facts with intent to mislead the general public.

    Interest rates are within the highest levels for micro-finance institutions to make abnormal profits and stay in business.

    How is the caping of interest rates by Boz going to lead to job losses of jobs?

    The answer is it will never happen if anything, it will lead more jobs as more and more people dash to the micro-finance to borrow and this entails more profits.

    Boz is the only institution mandated to deal with monitary policies of government as comfirmed by the current capping of interest rates.

    It also deals with fiscal policies too.

    FiFA - January 13, 2013

  17. The effective interest rates charged by these “shylocks in suits” is staggering! Let them publish their old rates and you will see that for some of these chaps, it was sheer legalised robbery!

    Chief Little Big Horn - January 13, 2013

  18. I work for a microfinance institution. As at Friday mgt suspended disbursements untill further notice. Cetzam have done the same. This implies that entrepreneurs who can not meet commercial bank credit requirements will suffer as they will have no source of extra capital. We are fearing for our jobs now as the new rates mean MFIs can not break even. I hope BOZ rescind their decision as they meet AMIZ this week.

    La - January 13, 2013

    • If these chaps can’t survive at 42% rates, they were never viable to start with. You tell me one business that will give you 42% return on your investments. You might survive borrowing for consumption, but not for production.

      Moi - January 13, 2013

  19. Where has capping of interest rates in a free market ever been successful? Learn from other peoples mistakes, you will not live long enough to make all their mistakes!

    CASSAVA REPUBLIC - January 13, 2013

    • IN SOUTH AFRICA and the US. Interest rates in south africa are strictly regulated (currently at Prime 5%/year), in the US, its about 2% prime

      chiny ochandi - January 13, 2013

  20. Just get a loan at cheap rate and build a house for you brother

    Aluta - January 13, 2013

  21. what boz has done is ok these pipo have been taking to much from cvo sevants. good job boz reduce further.

    mebzo - January 13, 2013

  22. When you look at the current scenario in the banking sector, I think the regulation is welcome. Of course, it goes against the tenets of the free market economy but because banks did not abide by the BOZ policy rate, the cap will ensure they get in line. For me, BOZ also needs to look at the bank charges. Banks are more comfortable to make from charges than they are from interest on loans thus failing to support entrepreneurial growth in the country.

    Falling revenue will hurt the NBFIs as well as the banks but perhaps this is an opportunity to seek alternative revenue sources and realign business to fully support enterprise and investment.

    Real McCoy - January 13, 2013

  23. As an employee of one AB Bank we are sick worried about our future otherwise good observation.

    Akanya Kapye - January 13, 2013

  24. @Joz365, excellent observations and well said.

    Junior Citizen - January 13, 2013

  25. Dear fellow blogger.

    My 26 year old young brother has already suffered the ignominious fate of being laid off at the end of February 2013 at the hands of this ignoramus BOZ. At the height of the 2011 election campaigns, as a youth, he vehemently sang and danced to the ‘DONCHI KUBEBA’ Slogan. Having voted in 1991 and having experienced the character of the current President during FTJ’s reign, I had warned my young brother of the pain and misery that PF was going to inflict on us. My counsel fell on deaf ears. He is now regreting, and is preparing to move into my servant’s quarters with his wife and 3 year old daughter. I’m in a dilemma now because where will my garden boy with 4 dependants go if I kick them out of the quarters. My young brother with his PF are now heaping a burden on me which I could clearly see prior to September 2011.

    Chambeshi Metals - January 13, 2013

    • @ Chambeshi Metals, Hmm, thats tricky but he is your brother and you can not kick him out on the streets with his family, hope he has already learnt his lesson already and he will vote wisely in 2016.

      good girl gone bad - January 13, 2013

    • BOZ released another press statement changing the interest rests for microfins. The new one is a max of 42% for microfins only.

      sosa - January 13, 2013

    • you are not alone in this dilemma

      sosa - January 13, 2013