Bank Of Zambia places Caps on Annual Interest Rates of Non-Banking Financial Institutions

According to a press release from the Bank of Zambia.BOZ has placed Interest rate caps on Non-banking financial institutions and microfinance institutions.

BOZ Press Release

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-bank financial institutions licensed by the Bank of Zambia can charge their customers. This measure has been necessitated on account of the exorbitant interest rates that some non-bank financial institutions have continued to charge their customers. The capping of interest rates therefore is aimed at making borrowing from non-bank financial institutions more affordable and equitable especially to the vulnerable micro-borrowers served by this sector.

As a consequence, the following measures have been taken:

1. The maximum effective annual lending interest rate for non-bank financial institutions designated as microfinance service providers by the Bank of Zambia shall not exceed 42%. Consequently, the Bank will designate non-bank financial institutions qualifying under this measure.

2. The maximum effective annual lending rate that will be charged by all other non-bank financial institutions will not exceed 30%.

The interest caps of 42% and 30% indicated above have been arrived at by multiplying the commercial bank maximum effective annual lending interest rate, which currently stands at 18.25%, by factors of 2.302 and 1.644, respectively.

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 measure is with immediate effect and the conditions will apply to new loans written. Existing loans will, however, be allowed to run their course on the current terms unless refinanced.

Economeka Capital View


Now some people would ask why is this even important.Well it basically means you can now borrow money for less.Some Banks actually have way lower interest rates than most microfinance institutions.The only tricky part is from who between the two is it easier to get a loan, the truth however is microfinance and other non-banking finance institutions are more lenient than most banks when giving out loans(given that they charge more interest).

Now Follow me, Evidence from numerous interest rate targeting central banks indicates that the policy rate should be aimed at influencing developments in the interbank rate, which is then expected to affect borrowing costs along the yield curve. The interbank market is therefore expected to play a crucial role in the implementation of the interest rate targeting framework.
The Bank of Zambia carried out a survey where
 The question posed to commercial banks was:
What factors do you take into consideration when determining the base lending rate for Kwacha/Foreign currency loans?

Overall, it was observed that the most common factors considered in the rate setting process were, as expected, the regulatory cash reserve requirements – namely, the statutory reserve ratio (8%), core liquid asset ratio (9%) and the BoZ supervisory fee (0.2% of deposits). Other factors which were considered significant in the determination of base lending rates included: Treasury bill and GRZ bond yield rates; operating costs; cost of funds, i.e. weighted average deposit rates; return on shareholder’s equity and the cost of non-performing loans. The qualitative factors highlighted included, credit risk premiums, the demand and supply for credit and the industry trend in base lending rates. Some of the other findings of the survey where suprising even for me.
The survey results indicated that only half of the banks surveyed considered inflation explicitly in their determination of base lending rates; although some banks indicated that inflation was taken into account when calculating real returns. It was also found that almost all the banks DO NOT CONSIDER the interbank rate, or the BoZ overnight facility rate in their calculation of base lending rates.
Now why am I going on about the survey,well it means that If BoZ uses the Interbank rate to try to influence Banks to drop their rates when Banks themselves do not consider the Interbank rate when setting rates, Connect the dots and you will see that it would be a waste of time by BoZ.

Long story short...What BoZ has done by placing caps on the interest rates for micro finance and non-banking financial institutions will effectively bring down the weighted average lending base rate.This will be good for the cost of doing business in Zambia.