Bankers Association of Zambia chief executive officer Leonard Mwanza says local businesses need to learn to pay back loans on time if interest rates on credit facilities will reduce.

And Mwanza says the credit guarantee scheme signed with government will see banks co-share the risks and make access to finance for SMEs easier.

Mwanza said local businesses, particularly small to medium enterprises (SMEs), were failing to repay their loans on time, adding that the trend had forced financial institutions to maintain higher interest rates.

“We are always concerned when interest rates are high because it becomes unsustainable. But I think we have reached a stage where interest rates have been on a downward scale for the last one year plus. From the time the Statutory Reserve Ratio started being reduced, you will notice that interest rates have been going down. And they were at 24.2 on average by end of February so that shows you that there has been a downward trajectory. The major problem that we still see is the fact that the Non-Performing Loans (NPLs) are also increasing. They were over 13 per cent by end of February so the problem we have is when you lend the people and they are not paying back; that becomes a serious consideration as far as risk is concerned. So, if people were paying back loans in a more effective way, we could be surely saying the interest rate could have gone a little down,” Mwanza said in an interview with News Diggers! in Lusaka, Monday.

“But if you had 13 per cent of NPLs on the risk-free interest, which are hovering around 15 per cent on Treasury Bills, which should be saying that interest rates should be somewhere [around] 28 per cent but that’s not where they are; on average they are at 24.2 per cent, which means there is that downward trajectory. It’s a collective effort, banks are responding to the positive downward adjustment or trend on the Statutory Reserve Ratio. But I think what is important is that those that have had an opportunity to access credit from lenders, from banks or any other financial institution should pay back because once they pay it will help to cut into the issue of the interest rates in a more positive way. But when you say that I have lent and 13 per cent of what I have lent is non-performing, it becomes a difficult problem and if it persists, it becomes a capital problem.”

He added that delayed repayment on loans negatively impacted on lending rates.

“When you delay to pay back, banks are forced to extend the payback period and eventually the loan starts eating into their capital, which shouldn’t be the case. All those are issues that we need to consider. And the lesser the risks, the lower the NPLs, the more we will see interest rates coming down to levels of sustainability,” Mwanza, a former Natsave managing director, added.

He noted that high Non-Performing Loans (NPLs) across the local banking sector had hindered the downward adjustment on interest rates.

Mwanza, however, explained that the signing of a credit guarantee scheme between BAZ and government is targeting to make access to funding for SMEs easier, and aimed to address financial inclusion challenges in rural areas around the country.

“What will be happening is that through the credit guarantee scheme, there will be co-sharing of risks and also ensuring that banks keep supporting SMEs to ensure that they grow; to ensure that they expand their businesses. And when you look at the perspective of the rural areas, quite a number of SMEs are agro-based and are in rural areas. And the credit guarantee scheme has special focus on those SMEs that are in business such [as] agro-dealers, or the intro-agro-processing that are at small-scale level and are doted around the country. We hope they can access funding which will be co-shared. The risks will be co-shared between the credit guarantee scheme and the financier,” narrated Mwanza.

“The default rates are very high. So, in trying to bring out the solution, the government has set up the credit guarantee scheme to mitigate against the risks that banks have been carrying alone all these years.”

Zanaco Plc is among one of the country’s commercial banks that has set up a credit guarantee scheme with government, targeting to lower interest rates on credit facilities for SMEs from this month.