Interest rates on loan facilities offered by commercial banks are likely to remain elevated at over 20 per cent because government continues to crowd out the private sector, says the Bankers’ Association of Zambia (BAZ).

But the Association has disclosed that the Non-Performing Loans (NPLs) ratio has marginally improved to 10.2 per cent by the start of 2019 from 11 per cent by the end of 2018.

In an interview, BAZ chief executive officer Leonard Mwanza explained that interest rates on loan facilities are likely to remain elevated at over 20 per cent due to government’s continued borrowing of credit, which had the effect of crowding out the private sector, and constraining access to credit.

Bank of Zambia (BoZ) data shows that commercial banks’ average nominal lending rates edged up to 23.6 per cent by end of the fourth quarter of last year from 23 per cent by September 30, 2018.

The central bank’s data revealed that elevated lending rates had negatively affected credit growth in the local economy during the fourth quarter of last year compared to previous quarter, a situation which even restricted government’s access to credit on the market.

“Quite right, they (interest rates) will still remain elevated in those margins, with further pressure that might emanate from the risk-free rate in terms of the interest rates that are going towards government securities because that in itself is an alternative way of lending. Banks, the public, are now lending to government at quite elevated levels. Right now, banks are happy to place their funds on securities, which are fetching the same rate as the lending rate,” Mwanza said.

“So, for now, if you were to be in the shoes of a (commercial) bank, it’s much easier to just sit back and pump money into government securities, which are giving you an equivalent return as you would get from lending out to the private sector. So, what it is; I would rather lend to government and get the 23 per cent (interest rate) and not focus on whether the lending rate should increase or not, for now.”

He explained that interest rates remained primarily influenced by commercial banks’ decision to lend more to government rather than the private sector because the former was less risky.

“The lending aspect is going more towards supporting the fiscal need on securities. That is why, if you look at lending itself from an aggregate perspective, lending has been flat for much of the time, whilst lending to government has been on the increase,” Mwanza explained.

“The question of (interest rates) either increasing or reducing is always difficult one to give a good answer to. Yes, the Monetary Policy Rate (MPR) has been consistent at 9.75 per cent, which is good for monetary stability. But when you further interrogate, there is a problem coming from the fiscus side: the rates on securities, that is government bonds and Treasury Bills, are quite high considering where the lending rates are because you are now able to lend to government at 23 per cent for one-year T-Bills, and 23-24 per cent for government bonds. So, that is what may be a threat in terms of whether we will see interest rates coming down in the short to medium-term period.”

But Mwanza, a former Natsave managing director, revealed that the NPLs ratio had improved to around 10.2 per cent as an industry average from 11 per cent by the end of last year.

This indicates that there have been fewer loan defaults registered by commercial banks of individual borrowers of credit.

An NPL is a loan which the borrower is not making interest payments or repaying any principal.

At that point the loan is classified as non-performing by the commercial bank and becomes a “bad debt”.

“As at end of last year, NPLs had improved to 11 per cent, but we have seen a better improvement end of January to somewhere around 10.2 per cent so that’s quite a positive improvement, but it’s not good enough, especially that the minimum threshold is supposed to below 10 per cent,” said Mwanza.