The Zambian central bank’s decision to limit interest rates micro-lenders can charge may force them out of business, an industry body said.
The Bank of Zambia capped micro-lenders’ interest rates at 42 percent last week, after President Michael Sata complained that high borrowing costs were stifling investment and job creation.
“In the worst case scenario, this could result in microfinance institutions closing down as it would be unsustainable for them to continue operating,” Webby Mate, executive director of the Association of Microfinance Institutions of Zambia, said yesterday in a reply to e-mailed questions. Micro-lenders’ clients “will have no viable alternatives” because financial inclusion in Zambia is less than 40 percent, he said.
The association, based in the capital, Lusaka, represents 23 lenders and wants the government to bring down rates by promoting competition and encouraging commercial banks to give micro-lenders money for onward lending, Mate said.
“Regulation may ensure the microfinance sector is run in an efficient and professional manner,” Peter Langmead, an independent economist based in Lusaka, said in an e-mailed reply to questions. It may also weed out “lenders who are either unscrupulous or do not have sufficient expertise to manage a loan portfolio professionally,” he said.
Still, there is a risk that if the interest rates are too low, it could put lenders out of business because they are “genuinely working in a high-risk business where default rates are substantial and recoveries are challenging,” he said.
The Bank of Zambia capped interest rates commercial banks can charge at 18.25 percent on Dec. 21.