The Credit Crunch in Zambia

Commercial banks - mostly subsidiaries of foreign banks - are the most dominant financial institutions in Zambia. The banking system is comprised of 14 commercial banks, holding 90 percent of financial assets. Foreign equity participation is significant, accounting for three quarters of the banking system capitalization with regional leaders such as Standard Chartered, Barclays or Stanbic controlling a sizable part.

However, a financial sector diagnostic carried out by the World Bank Group noted that by the end of 2005, credit to the private sector by banks represented only 8% of GDP in 2005. Furthermore, only 5,000 people hold 90% of loans, and just 8% of Zambia's adult population had a bank account as of 2005.

In addition to low access, credit was very hard to come by. The average annual interest rate on loans was 48% in 2005 (the inflation rate was 20%) and microfinance loans hovered between 50-60%. According to the study “poor credit culture, a volatile macro economic environment, and a lack of credit reference” increased the cost of credit and reduced the number of borrowers. The Central Bank of Zambia reported that “the poor credit culture is attributed to the lack of precision in identifying deserving borrowers [and this] can be mitigated through the activities of credit reporting agencies (CRAs)."

During the “Doing Business in Zambia” Workshop organized on February 18-19, 2008 by the Zambia Ministry of Commerce, Trade and Industry, the World Bank Group and USAID to present the results of the Doing Business 2008 report and take stock of the government’s efforts to improve the business environment. Dr. Fundanga, Gov. of Central Bank of Zambia, announced that inflation was now in single digit territory, 9.6% in April 06. In addition, he declared the imminent creation of a credit reference agency that would help reduce borrowing cost and simplify the assessment of credit risk.

This suggests that the Zambia government is moving in the right direction towards improving access of small and medium sized enterprises to credit, which will help grow the activity of SME’s and promote a diversified broad based economy. This will also impact the high collateral currently requested by banks in Zambia. Estimates put this between 100% to 200% of the loan amount!