Credit Constraint in Zambia

In 2017 Zambia’s economy was able to bounce back from the economic headwinds experienced in the previous two years. To further stimulate the economy, Bank of Zambia (BoZ) effected expansionary monetary policy measures by gradually reducing the policy rate and statutory reserve ratio to 10.25% from 15.5% and to 8% from to 18% (respectively) by end of 2017.  The Policy rate is a monetary policy instrument used by central banks to regulate cost and supply of money and credit.  The decline in policy rate should effectively reduce household credit burden, increase consumption and promote borrowings (ceteris paribus). All of which are meaningful for any country’s long term growth objectives. On the other hand, the statutory reserves ratio is a monetary policy instrument used by central bank to ensure bank solvency of commercial banks and control the flow of bank credit to the economy.

Despite loosened monetary policy stance by BoZ, there is evident credit constraint to private sector as well as credit to both private enterprises and households. Its no secret that Zambia has one of the highest lending rate on the continent. Lending rates were as high as 25% in September of last year and ranges widened to as high as 39% from some financial institutions. This is indicative that credit supply has not been permeated affordably from various financial institutions to the economy. World Bank 2016 statistics on domestic credit to private sector by banks as a percentage to GDP were as follows – South Africa (64%), Botswana (32%), Kenya (33%), Namibia (53%), Ghana (19%), Nigeria (16%) whilst Zambia had a measly, 11%.

One may inquire as to the importance of bank credit to the economy? In view of the importance of funding, banks and non-banking financial institutions play a vital role in financing various economic activities. Bank lending has an unequivocally positive effect on the private sector. Credit augments productivity potential and growth propensity of SME’s and firms in various sectors. Most SME’s are underdeveloped and cannot reach their acme due to limited financial resources to meet various operational needs and are unable to seize lucrative investment opportunities. If credit is efficiently provisioned entrepreneurs and SME’s alike can provide significant output and employment opportunities. This should be an area of grave importance, if policy makers in Zambia want to attempt to accelerate the growth rate and increase income level of the economy.

Another focal area is the loan-to-deposit (LTD) ratio. The LTD ratio is a measure of the amount of loans dispersed by banks compared to the amount of current deposits -a higher ratio means that the bank is issuing out more of its funds in form of interest bearing loans. As at September 2017 the loan-to-deposit for Zambian banks was 46.9% compared to 64.7% in September 2013. This means the banks have been allocating less of their deposits to lending activities. One could argue that deterioration of macroeconomic conditions together with aggregated indebtedness of borrowers, increased percentage of non-performing loans gravely affected banks risk taking ability. Banks preference has since sheared away from risky entrepreneurs and SME’s, to safer instruments such as government bonds and are not eagerly providing credit to the economy.

It is evident that real sectors within the economy are severely constricted by the lack of capital. The multiplier effect of lack of credit is that it hinders fledgling entrepreneurs from entering market and moreover SME’s because of lack of capital have had to halt operations. Most banks are competing for the corporate market and structured their products to serve the needs of large corporates or more established firms.

Due to the lean credit available, SME’s and entrepreneurs have been known to resort to informal finance in form of loans from money lenders or family to help facilitate their capital and growth needs. Informal finance lenders have been known to charge exuberant rates but known to be more lenient compared to banks with collateral requests. Though they have generally not been pleasantly received by all, they are very complementary to the financial intermediation system and have continued to service the lower end market and individuals who are not able to secure loans from the banks and other non-banking financial institutions.

The level of credit available within an economy is also a measure of financial market development and banking sector and non-banking financial institutions play a cardinal role in the degree of this development. In 2018 and subsequent years we would like banks and policy makers to make a consented effort to ensure that affordable credit flows into the various sectors of economy by providing it to SME’s and entrepreneurs. SMEs and Entrepreneurs have a crucial role to play in stimulating growth, generating employment and contributing to poverty alleviation

To not solely place blame on banks, financial sector loan growth is heavily driven by the propensity of households in the economy to save. Thereby it is cardinal that as Zambians we adopt a culture of saving if we expect mobilization of credit from the banking sector.


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