Rate Cap Signals Closer BoZ Involvement

BMI View: The Bank of Zambia recently announced that it would cap interest rates on commercial bank loans at 18.25%, in a move which it says will help borrowers straining under the high cost of loans. While the cap is relatively high and should not be an overly onerous burden on banks, the decision demonstrates that the government is willing to use a heavier hand in the banking sector.

The Bank of Zambia (BoZ) announced at the end of December that it would cap commercial lending rates at 18.25%, in a bid to lower the cost of borrowing and help stimulate a broader-based economy. We believe that the move is not a cause for immediate alarm in the banking sector given the cap is set at a relatively high level; however, we interpret the decision as an indication that officials are open to using more direct controls to manage the economy, potentially opening the door to more substantial changes.

Headline inflation is on the rise, reaching 6.9% year-on-year in November, the most recent month for which data is available, compared to 6.8% in October and continuing a slow steady upward trend which began in July, when price growth was 6.2%. Authorities have blamed rising food prices for the increase. In response to rising inflation and the ongoing weakening of the Zambian kwacha, the BoZ elected to increase its benchmark interest rate - on which the central bank's overnight lending facility is based - to 9.25% in October, the first time it has altered its stance since the benchmark was inaugurated in March. We expect that further hikes could be on the horizon, as inflation has yet to peak and currency weakness persists (the kwacha has depreciated more than 10.0% since its highs in July, standing at ZMK5,230/US$ at the time of writing on December 27). Officials are likely concerned about the possibility that in response to the hikes, commercial banks may increase their lending rates to prohibitive levels, spurring the decision to set the cap.

BoZ To Use Heavier Hand To Manage Inflation, Borrowing Costs
Zambia - Inflation & Monetary Policy Benchmark Rate

Nevertheless, for now the rate cap of 18.25% is unlikely to cause much of a n immediate burden on banks ' margins. First, the rate, which the bank indicated will be determined by adding 9 percentage points to the BoZ benchmark rate of 9.25%, will only affect new loans, effective January 2. Furthermore, a lthough the Bank of Zambia has yet to release more recent data, in September the average lending rate stood at 16.3%, the lowest rate in years ( down from 23.2% at the beginning of 2012 ), and well below the new cap .

New Rate Cap Unlikely To Affect Most Loans
Zambia - Interest Rates

In a broader sense, however, we note that Zambia's willingness to more directly intervene in the banking sector is a significant development. While we retain our belief that the administration of President Michael Sata is keen to retain good relations with the business community and international investors, we will be monitoring the business climate closely in the months ahead.

This article is tagged to:
Sector: Country Risk
Geography: Zambia

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