Dreaming of growth
Getting a loan from a commercial bank or a microfinance institution is usually not a problem in Zambia - but what is, is the cost of borrowing. With interest rates ranging from 15 to 30 percent, many small business men cannot afford to take a loan.Kingsley Mwewa, 50, makes shoes in a market stall measuring just two square meters of floor space. An old sewing machine rattles everyday from his little stall as one pair of shoe after the other is produced. A pile leather material, shoes both old and new and shoe soles are disorderly heaped on shelf on the opposite wall to a huge stall window where Mwewa displays the latest produced shoes. The leather, glue, rubber and sweat forms a cocktail of smells that is difficult pin point in description.
Mwewa and his teenage assistant have been working in this little stall for the last eight years and the only problem their business has is not the smell or the floor space - it is access to loans to expand the business. “It’s very difficult to get a loan from commercial banks”, Mwewa says. “They will ask you for collateral and even the interest rates are very high. The only people who can give you a loan are the microfinance institutions but they charge even higher interest rates.”
But its not only small business people that complain about the lack of access to finance. Zambian President Rupiah Banda recently cautioned banks that the high lending rates hinder the growth of small business and therefore limit employment opportunities for Zambians. He said this at the official launch of the First National Bank in November 2009. First National Bank was the fifth bank to open shop in Zambia in less than one year.
The reason why small businessmen like Mwewa as well as economists and politicians complain about lending rates in Zambia is that the inflation rate which is a major factor in determining the interest rates that the banks charge is at 9.8 percent. Why then is access to finance so expensive at 30 percent when inflation is barely 10 percent? But commercial banks claim the cost of doing business in Zambia is very high and that is reflected in the cost of borrowing.
From her glass demarcated office at the top of the most prestigious bank in Zambia, Mizinga Melu, the Managing Director of Standard Chartered Bank and also Vice chairperson of the Banks Association of Zambia, looks closely into her computer screen to analyze the latest financial data sent to her e-mail box.
“Yes, inflation has come down, but If you look at the statutory reserves banks are required to have with central bank and the cost of some of the fixed deposits. They cost quite a bit,” Melu says. “We also have to pay a high cost for the telecommunication and other expenses which all have to be reflected in the lending rates.” She adds that although the average lending rates in the country are between 25 and 30 percent, some people can access loans at rates as low as 15 percent.
Poor credit culture
The background to special treatment is the poor loan repayment culture in Zambia. Until two years ago, Zambian businessmen and farmers would borrow money from banks without the slight intention of paying back. Others would hoop from one bank to the other borrowing money and simply disappear.
To nab this culture, the Bank of Zambia created the Credit Reference Bureau, an institution that tracks activities of borrowers and shares that information with lenders with the intention of keeping bad characters out of the financial system. Although it has been in existence for the last two years, the Bureau has done very little to help synchronize the lending rates and the inflation rate.
Economic analyst Yusuf Dodia says the problem is bigger than the credit reference bureau. “Although the country has 17 of banks there sector is largely dominated by four banks with a network of branches spread throughout the country. The problem is that there is no competition to push lending rates down”, Mr. Dodia says. He however predicts that in the next two years the competition among banks will impact on lending rates.
Central Bank dates Islamic Banks
The central Bank which regulates financial institutions is currently plotting several plans to compel commercial banks lend money cheaply. The Bank of Zambia wants bring to the market Islamic banking. “Islamic banks do not charge interest on money borrowed,” Caleb Fundanga, the Bank of Zambia Governor says. “What they do is that the loan is converted into shares in the project the borrower wants to invest in.”
But until Islamic banking is introduced, Mr. Mwewa banks on customers support not financial institutions to make his shoe making business grow. He plans to employ five other people but this is a long term vision. “I believe my shoes will be worn the world over. And I want my grandsons and daughters to take over this business and what I believe in is that it will grow!” Mwewa declares.
It’s a dream many small businessmen and women in Zambia have. But these dreams would have been easily realized were it not for the unaffordable lending rates that banks charge on loans. Joshua Jere, Brian Mwale, Hadijah Nabbale