Find us on Google+

Saturday, 8 September 2007

The elusive quest for credit....

The Christian Science Monitor article Elusive credit means Zambians build slowly highlights an issue we have touched on many times on this blog from different angles (e.g. here, here, here, and here).

Businesses working with foreign investors can construct buildings quickly. Business is booming in some fast-growing commercial hot spots of Lusaka, like the Manda Hill neighborhood. But banks, until recently, found it more profitable to invest in government securities than to loan money to individuals or even small businesses. In an economy where only 20 percent of the workforce, at most, has a formal job, most people are considered credit risks. Credit bureaus don't yet exist.

While good housing is scarce, securing ownership of land can be difficult and cumbersome. And for those who can get a loan, interest rates are often a huge deterrent. The average commercial bank's lending rate recently exceeded 40 percent, and is currently about 28 percent, according to the government.

According to a 2006 World Bank study, less than 1 percent of Zambia's 11.5 million people had an outstanding bank loan in 2005. More broadly, only 6.2 percent of Zambian adults have bank accounts, and almost two-thirds of those accounts hold less than $100.

5 comments:

  1. According to a 2006 World Bank study, less than 1 percent of Zambia's 11.5 million people had an outstanding bank loan in 2005. More broadly, only 6.2 percent of Zambian adults have bank accounts, and almost two-thirds of those accounts hold less than $100.
    As much as we would like this not to be true (out of embarassment), it is. We are a long way from benefiting on credit facilities. I largely agree that the main reason would be that a large percentage of the population is un employeed formally.

    my question is, is it solely Govts responsibility to have this situation rectified or the people also share some responsibilities? and if the people do have a responsibility, how would they convince the banks to take risks and make loans available to them?

    ReplyDelete
  2. One problem would be the low formal income. The other would be the minimums set by the bank. Or the charges levied by the banks.

    But I think the biggest obstacle is interest rates. Rates are too high to borrow, and there is too big a gap between borrowing rates and lending rates.

    Lastly, rates have not come down with inflation, which is a big failure for the whole IMF/neoliberal ideal.

    ReplyDelete
  3. Anonymous,

    "Is it solely Govts responsibility to have this situation rectified or the people also share some responsibilities?"

    Yes it is solely Government's responsibility. If people can do it on their own they would have done it already. It is my interest to get credit. If I can't then something is not right in the system. People are just agents operating within an economic system. They respond to incentives that the market offers.

    Unfortunately the market does not always get it "right". At the moment the market is saying "elusive credit". If we accept that access to credit is a good thing for the economy and individuals, then it is therefore up to Government to step in and provide policies that shapes people's incentives and the Bank's to deliver low credit.

    We are not talking about Government providing banking services (although some may favour that) but creating the conditions in which banks will have the incentives to offer cheap credit and people will behave responsibly with that credit.

    MrK has hinted at some measures. The blog above has noted where we have discussed these measures. There are some for the Banks (Central Bank engineered NABARD system) and some for individuals (e.g. credit bureaus).

    Your question is fascinating, because understanding the answer provides the basis for economic solutions to all problems. Once we realise that people, banks, corporations etc just respond to the incentives offered to them, we can then see a role where Government can shape those incentives. Assuming of course that Government can create these incentives. Sometime Government action can make things worse - we call that 'Government failures'. As opposed to 'Market failures' - where market fails to deliver e.g. the credit problem we have discussed above.

    ReplyDelete
  4. my question is, is it solely Govts responsibility to have this situation rectified or the people also share some responsibilities?

    Well in a democracy, the government are the people's representatives. So in a fundamental way, the people are the government.

    The government exists off the taxes paid by the people, and the taxes paid by companies which exploit the people's natural resources. The only source of government income that does not come from the people, is 'donor aid'.

    On the question whether it is the responsibility of the government, it is the government which makes the laws, and is the only one which can repeal laws. So when certain legislation is holding back economic growth or development, the government is in a unique position to do something about it.

    ReplyDelete
  5. Line of credit from India to Zambia:

    http://www.africanews.com/site/list_message/24522?data%5Bsource%5D=rss#m24522

    ReplyDelete

All contributors should follow the basic principles of a productive dialogue: communicate their perspective, ask, comment, respond,and share information and knowledge, but do all this with a positive approach.

This is a friendly website. However, if you feel compelled to comment 'anonymously', you are strongly encouraged to state your location / adopt a unique nick name so that other commentators/readers do not confuse your comments with other individuals also commenting anonymously.