Interest rates on loan facilities should not be expected to drop if government remains a heavy borrower on the domestic financial market, says the Bankers Association of Zambia.

Last month, Finance Minister Margaret Mwanakatwe blasted some commercial banks in the country in the habit of offering expensive loans with high interest rates, despite the Bank of Zambia’s move to lower the Statutory Reserve Ratio (SRR) to five per cent and maintaining the Monetary Policy Rate (MPR) at 9.75 per cent.

She expressed dismay during the Zambia-South Africa Business Council Meeting that while government, through the central bank, had done its part to help reduce the cost of credit on the market, some banks were still lending money at 25 per cent.

But BAZ chief executive officer, Leonard Mwanza, outlined that the cost of borrowing has been exacerbated by the government’s own action through its incessant borrowing on the domestic market that is sustaining higher interest rates for average lenders.

He also noted that the high Non-Performing Loans (NPLs) ratios prevailing in the market were keeping interest rates on loan facilities high.

“So, the elevated levels of Non-Performing Loans also holds back the reductions in terms of reducing interest rates further, but we shouldn’t expect that interest rates can fall below the risk-free rate of 17 per cent. There is a substitute where banks can lend to and this is the central bank through government securities and the government is borrowing at 17 per cent. So, the question goes back to government to say; ‘why are you borrowing at 17 per cent?’ And you expect the lending rates to drop to what percentage? I’m not being political. So, where I am standing, I can tell you that, indeed, banks have done a lot to reduce interest rates to where they are now given where the risk-free rates is right now; given where the non-performing (loan) rates are,” Mwanza said in an interview in Lusaka.

“So, if you look at it, it’s not like banks are just holding out [like] they don’t want to reduce [interest rates]. They have done their best to reduce, and these rates I am sharing with you what is applying in the market. You can borrow at 20 per cent or you can borrow at an average of 24 per cent, depending on your risk profile and the sector you are coming from and the Non-Performing Loans of that particular sector.”

He insisted that lowering of lending rates was equally dependent on how much government decided to borrow via government securities.

“You cannot start talking about interest rates that are going below 17 per cent because that is what government is borrowing from banks. If you look at the margin between 17 per cent and 24 per cent, it is within what we might call an acceptable threshold that a bank demands as margin between the risk-free rate and the lending rate. So, basically, margins range from anything between four to let’s say 10 per cent, depending on the risk profile of a particular borrower,” Mwanza, a former Natsave managing director, added.

“So if you look at risk rates being at 17 per cent, if you are a good borrower, maybe your risk profile is good, the margin could be as low as three to four per cent. Then you find that your lending rates could be somewhere around 20 or 21 per cent. And if your risk is higher, definitely, then you will be on the high rank. So, it’s not like we have one interest rate that is lumped on every customer. There are other factors that are considered. If you are less risky, you are well-secured, your cash flows are good, you can pay back, you will borrow maybe at 20 or 21 per cent. That’s the margin that the banks demand. The risk profiles are different depending on the sector, which you are looking at, but suffice to say that we are sitting on high Non-Performing Loans, which are around 12.8 per cent as at end of May. That again increases the risk profiles of certain sectors.”

He also pointed out that the NPL ratio, currently way over the acceptable threshold of 10 per cent, ought to drop if there was ever going to be any significant reduction on lending rates.

“I think one of the key things is just to say we need to see a reduction in the Non-Performing Loans. Because at 12.8 percent we are well above what would be the minimum threshold of 10 per cent. So, we need to develop a better credit repayment culture as a country so that it helps to mitigate against the risk profiles and pricing of risks,” said Mwanza.

“Because if the Non-Performing Loans were below 10 per cent, it goes without saying that the risk profiles will be lower and then the pricing also would take note of that particular risk. But right now, it’s in the red line meaning, it is above the acceptable threshold. So, in that case what we are saying is that, it’s either you don’t lend, or you lend and the probability that the money will be paid back. You look around and say what is the probability?”

Government’s domestic debt has ballooned to K50.9 billion as at March 31, 2018, compared to K38.6 billion in May last year, according to official Ministry of Finance data.