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Wednesday, 28 August 2013

Quest for cheaper credit

The Commercial banks' real average lending rate (after accounting for inflation) fell significantly in 2012 from 17.6%in end-December 2011 to 6.0% at end-December 2012. Which is a positive development - as the chart below shows.

The fall in real lending rates is undoubtedly magnified by some rise in inflation. But it was essentially due to the introduction of the reduction of corporate tax for banks and the initial setting of the BoZ Policy Rate.

The more worrying thing is that average savings rate remain basically negative. Meaning as a country we are spending more than we earn. So effectively we are forever dipping into our savings to pay for purchases. Which is of course is what one expects in poor households. A poor country is no different.

However it is good to see the risk premium (lending minus savings rate) is reducing slightly. But it is still at humongous 12.8% gap. Clearly the lack of collateral and credit history is part of the reason. But another part is the cocktail of factors afflicting our financial system.

It is my view that in Zambia inflation expectations have not been sufficiently tamed by BOZ. Even though the policy rate is helping with signalling. it remains the case that lending rate are sensitive to variability of inflation and not just the level. Its a fact that inflation in Zambia has not yet been stabilised sufficiently.

Then there's the issue of collusion among banks which Alexander Chikwanda has previously mentioned. Though one does wonders why Chikwanda is so contradictory. One minute he accuses Banks of collusion the next minute he is giving them large corporate tax breaks in the name of helping reduce rates. He needs to realise that only increased competition among Banks will ultimately lower lending rates and make the new Policy Rate policy more relevant. At present the BoZ Policy Rate appears to have little effect going forward in terms of altering consumer lending rates - largely due to these broader structural issues.

And of course Chikwanda is not helping by failing to consolidate the hold on the value of the external value of the Kwacha (exchange rate ) which introduces more risks in the system. Again he needs to realise that there's a direct relationship between macroeconomic management and the risk premium.

Chola Mukanga | Economist
Copyright © Zambian Economist 2013

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