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Tuesday, 11 February 2014

Banks and Credit Growth

The chart below is good news because we are witnessing increased delivery of financial services in rural areas through rapid expansion of bank branches. Current GRZ plans to improve titling of customary land will also hopefully translate into improved credit access for many rural dwellers. No point of having access to banking services if you are still struggling to borrow.


However, even with the growth in bank branches the borrowing rates are still beyond the reach of ordinary Zambians. More must be done than merely increase of land titling. We have previously noted the large risk premium (lending rates minus savings rate) currently standing at 12.8% gap. Clearly the reason for high lending rates is partly due to lack of collateral and credit history.

But it also has to do with alleged collusion among banks that Finance Minister Alexander Chikwanda has previously mentioned. Rapid expansion in banking services will only come with lower rates if there is increased competition among Banks. The banking system is highly concentrated, with the top four banks’ assets amounting to about 60 percent of total banking sector assets. That is hardly a platform for competition especially when there is no strong competition regulator.

To make matters worse the GRZ decision to increase minimum capital requirement for foreign and domestic banks which is now in force will only lead to even to more consolidation! The capital requirements were increased in 2012 from $2.4 million to $20 million for locally owned banks and to $100 million for foreign-owned banks. These are now in force.

The decision has led some foreign banks merging with Zambian banks. This good news from the "Zambianisation" perspective, for those who believe prosperity requires Zambian ownership. It is certainly good economically in so far as the new capital requirements should make the banking system more resilient financial shocks which should help prevent collapse of local banks in particular, lessening the need for GRZ rescue in the future.

Unfortunately this may come at cost to competition and credit access. Higher requirement may reduce banking competition (particularly fom domestic banks) leading to lower credit creation! The result may be ever higher cost of borrowing, precisely the opposite of what GRZ is aiming to achieve. One can only pray that there is some logical and beneficial pattern of some sort in the ever increasing contradictory chaos that characterises GRZ policymaking!

And of course it obvious that one of key reasons why the risk premium is likely to remain high is due to the cocktail of factors afflicting our financial system. It remains 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.

And on top of all this Chikwanda's poor handling of the economy is not helping by failing to consolidate the hold on the external value of the Kwacha (exchange rate ) which introduces more risks in the system. Our friend has not realised that there's a direct relationship between macroeconomic management and the risk premium. That ignorance means sadly all the benefits of the current rapid expansion of banking services may not be fully realised.

AUTHOR
Chola Mukanga | Economist
Copyright © Zambian Economist 2013

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