HIGH LENDING RATES HINDER GROWTH OF SMALL BUSINESSES

A government official recently caused a stir when he accused commercial banks of deliberately keeping lending rates high despite the mushrooming of banks in the last one year. But his comments where greeted with applause by his audience largely composed of small and medium enterprises!

Lending rates in Zambia have remained stubbornly high ranging between 25 and 30 percent. Inflation which is one of the key factors in fixing interest rates, has reduced from a high of 19 percent two years ago to 9.8 percent today. This has sparked outrage from the private sector and some politicians suggest that commercial banks have formed a curtail. President Rupiah Banda recently said the high lending rates are harming economic growth.

The President said this when he officially launched First National Bank, the fifth commercial bank to open doors in less than 12 months. "I'm deeply concerned that while inflation has reduced to less 12 %, interest rates have remained very high." President Banda said." This has the effect of limiting the expansion of the economy because Small and medium enterprises can not borrow money to expand their business and employ more people."



Kingsley Mwewa,50, is a shoe maker in Zambia capital city Lusaka who says his business would have expanded were it not for the high lending rates. From his two meter squared stall in Chilenji Market, Mr Mwewa slams a small hammers on the edges of a piece of leather to smoothen it out. He has already made four pairs of leather shoes for school going children selling at only at 10 dollars. Mr. Mwewa says he once borrowed about 500 dollars from a microfinance institution but the loan left him poor than before. “The banks will ask your for collateral and so many other conditions before they can give you a long at a high rate. The only people who can give a loan are microfinance institutions but their interest rates are so high that after servicing the loan you become poorer than before.” Mr. Mwewa said.

Interest rates average 31 percent in Zambia

In an effort to lower interest rates through competition, the central bank attracted into the economy several banks to open shop. From only nine commercial banks operating by the end of 2008 the number has grown to 17 banks. But interest rates have only marginally reduced.

Economic analyst, Yusuf Dodia says there is not enough competition among commercial banks to push lending rates. “Zambia needs more investors in the financial sector because at the moment the newly opened banks are comfortable not to jump out of the band wagon of high interest rates. It is a fast way to recoup their investments if they keep interest rates high.” He says.

But commercial banks have recently justified the high lending rates as a reflection of the high cost of doing business in Zambia. Bankers Association of the Zambia Chairperson and Managing Director for Citi Bank, Savior Chibiya says banks like other business operate in the same economy where the cost of doing business is very high. “ We also have to pay a very high cost for Telecommunication and electricity among other cost which also add up to our cost of operation.” He says.

Central Bank dates Islamic Banks

The Central Bank is now dating Islamic banks with a view of attracting them to enter the Zambian financial sector. Islamic banks do not charge interest rates but will enter into an equity arrangement with the borrower. Until the loan is serviced, the two partners will share profits.

Central Bank Governor, Dr Caleb Fundanga says officials from his bank have had meetings with Islamic banks from Saudi Arabia. “Yes we have had meeting with some Islamic banks but we can not disclose yet the outcome of the meeting at this point.” He says.” But it must be understood that it the private sector not the central bank will introduce Islamic banking in Zambia.

Meanwhile, Kingsley Mwewa the shoemaker sustains his business by re-investing into the business but given the demands from his four children, one them a college student , the business is unlikely to expand.

Joshua Jere