Zambia: Selected Issues
Author: International Monetary Fund. African Dept.
Publication Date:
16 Jun 2015
eISBN:
9781513556253
Language:
English
Keywords:
ISCR; CR; cost; Zambia; rate; IMF staff calculation; lending interest rates; interest rates in Zambia; participation cost; credit culture; lending interest rates in Zambia; Financial inclusion; Credit; Collateral
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Zambia: Selected Issues

Abstract

Zambia: Selected Issues

Enhancing Financial Inclusion in Zambia1

A. Introduction

1. The authorities are concerned about high lending rates and limited access to credit, particularly by small- and medium-scale enterprises (SMEs). Despite various measures taken, the authorities believe that lending interest rates in Zambia remain very high, which has limited access to credit by SMEs in particular. Credit to the private sector remains low at 14 percent of GDP in 2014, below the sub-Saharan regional average.

Figure 1.
Figure 1.

Bank Lending Rate

(Percent)

Citation: IMF Staff Country Reports 2015, 153; 10.5089/9781513556253.002.A002

Source: Bank of Zambia and central Statistics Office.
Figure 2.
Figure 2.

Credit to the Private Sector

(Percent of GDP)

Citation: IMF Staff Country Reports 2015, 153; 10.5089/9781513556253.002.A002

Figure 3.
Figure 3.

Financial Inclusion and Deepening Indicators

(Percent)

Citation: IMF Staff Country Reports 2015, 153; 10.5089/9781513556253.002.A002

2. The authorities have continued their efforts to enhance financial services delivery by addressing obstacles to financial inclusion and deepening in Zambia, which can be broadly grouped into three categories: access, depth, and efficiency.

  • Access. The number of bank branches has been increasing, particularly in rural areas, and the BoZ has prepared draft regulations on agency banking to increase financial access. These measures would probably reduce the cost of participation in the financial system, particularly in rural areas.

  • Depth. Collateral requirements, which determine depth, can be high when the rule of law and institutions are weak. To address these problems, the authorities have strengthened the Credit Reference Bureau. To further enhance credit culture and cover all forms of credit transactions, the BoZ has prepared a Credit Reporting Bill that will unify the collateral registration system which is currently fragmented across various registries. Moreover, currently security over movable assets of non-incorporated entities cannot be generally registered. To address this problem, the BoZ is developing a Personal Property and Security Interests Bill. Furthermore, an Insolvency Bill has been prepared to consolidate the related laws and strengthen the insolvency/bankruptcy procedure, and the authorities plan to improve land titling.

  • Intermediation efficiency. Efficiency is generally associated with the state of competition and is reflected in interest spreads and banks’ overhead costs. Concerns about high lending rates and limited access to credit by SMEs prompted the introduction of ceilings on lending rates for banks, nonbanks, and microfinance institutions in early 2013.2 The ceilings on commercial bank lending rates have become increasingly binding as treasury bill rates have increased substantially

Figure 4.
Figure 4.

Zambia: Number of Bank Branches and Agencies

Citation: IMF Staff Country Reports 2015, 153; 10.5089/9781513556253.002.A002

Source: Bank of Zambia
Figure 5.
Figure 5.

Treasury Bill Rates and Lending Rate Ceiling

(Percent)

Citation: IMF Staff Country Reports 2015, 153; 10.5089/9781513556253.002.A002

Source: Bank of Zambia.

B. Model and Application to Zambia

3. To study the impact on growth and inclusion of various measures to enhance financial inclusion and deepening, the paper uses a micro-founded general equilibrium model developed by Dabla-Norris et al. (2015).3 In Dabla-Norris et al’s model (2015), various measures affect growth, inclusion and inequality through three channels. First, more developed financial markets channel more funds to entrepreneurs, thereby increasing their output. Second, more efficient contracts limit waste from frictions leading to higher growth. Third, more efficient allocation of funds in the financial system brings about an increase in total factor productivity (TFP). The model is calibrated with Zambian data.

4. The model is calibrated using two Zambian data sets from the World Bank: the Enterprise Surveys provide firm-level cross-section data and the World Development Indicators provide data on economy-wide gross saving, nonperforming loans, and the interest rate spread. The calibrated model matches Zambia’s economic situation pretty well (Text Table).

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5. To identify key constraints to financial inclusion in Zambia, three policy experiments are conducted using the calibrated model: (i) reducing financial participation costs; (ii) relaxing borrowing constraints in the form of collateral requirements; and (iii) increasing intermediation efficiency. Comparison of results for policy experiments shows that different financial inclusion strategies have different effects on growth, firms’ access to credit, and inequality. Relaxing collateral constraints appears to offer the greatest benefits in terms of growth and TFP (Figure 6). This suggests that high collateral requirements on firms’ borrowing are an important binding constraint to financial inclusion and deepening in the Zambian context. The share of firms with credit also increases strongly but is lower compared with the case of reducing the participation cost. The effect on inequality is largest when the participation cost decreases.

Figure 6.
Figure 6.

The Impact of Various Measures on Growth and Firms’ Access to Credit

Citation: IMF Staff Country Reports 2015, 153; 10.5089/9781513556253.002.A002

C. Conclusions

6. Some financial inclusion measures may not have the result that policymakers are hoping for. For example, a decrease in collateral constraints increases interest spreads as firms leverage more. Increasing intermediation efficiency does not appear to bear a strong effect on any variable in the Zambian context; GDP is not responsive as lower intermediation costs only benefit highly leveraged firms due to low financial access and tight borrowing constraints.

7. This study’s findings indicate that the authorities’ ongoing reform efforts—particularly measures to enhance financial access and address collateral constraints—are likely to have substantial positive impact on growth and inclusion of firms. However, some efforts such as the lending rate ceilings to enhance intermediation efficiency are not likely to produce any substantial positive impact on both growth and inclusion of firms in the current Zambian context.

1

Prepared by Byung Jang. This paper summarizes the results from a draft working paper of the same title.

2

The ceilings were initially set at 18.25 percent for banks, 30 percent for nonbanks, and 42 percent for microfinance institutions, with the levels tied to the BOZ policy rate, which was 9.25 percent at that time.

3

Dabla-Norris, E., Y. Ji, R. Townsend, and F. Unsal (2015), “Identifying Constraints to Financial Inclusion and Their Impact on GDP and Inequality: A Structural Framework for Policy,” IMF Working Paper (WP/15/22).

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Cover IMF Staff Country Reports
Zambia: Selected Issues
Author: International Monetary Fund. African Dept.
Volume/Issue:
Volume 2015: Issue 153
Publisher:
International Monetary Fund
ISBN:
9781513556253
ISSN:
1934-7685
Pages:
32
DOI:
https://doi.org/10.5089/9781513556253.002

Bank Lending Rate

(Percent)

Credit to the Private Sector

(Percent of GDP)

Financial Inclusion and Deepening Indicators

(Percent)

Zambia: Number of Bank Branches and Agencies

Treasury Bill Rates and Lending Rate Ceiling

(Percent)

The Impact of Various Measures on Growth and Firms’ Access to Credit