Commentary, 29th May – 5th June, 09.

There is news that some micro-financial institutions are financially distressed and this development should concern regulatory authorities. Though micro-lending financial institutions do not take savings from members of the public, their exposure to loans from larger banks and pension houses should be enough motivation for the Bank of Zambia to immediately carry out audits to ascertain the extent of balance sheet erosion. Zambia currently has more than 100 non-bank financial institutions whose focus is to offer unsecured credit to salaried employees. The demand for credits by civil servants, miners and private sector employees has given rise to the huge rise in credit availability in Zambia in the past three years. It is this credit availability that has partly been responsible for rising consumer prices.

In the recent past, most of these financial institutions, including a few large banks, have experienced huge defaults as this facility remains unsustainable. Some micro-lending institutions with weak balance sheet cover have lately been threatened with foreclosures. The impact to the economy will be significant as this has the potential to erode public confidence on the efficacy of micro-lending financial institutions. The reasons reading to the current balance sheet crisis facing a number of these micro-lending institutions and some large banks are associated with:

· The astronomical interest rates charged to borrowers. The high interest rates have exposed these institutions to subprime creditors. When you lend at more than 10% per month, only the most vulnerable and highly risk borrowers will access this kind of debt. The creditors have now started to default such that some of the companies are quickly writing-off these debts while exposing their own cash flows to severe stress.

· The credit crunch has affected large companies that guaranteed these loans on behalf of their employees. This has largely been experienced on the Copperbelt where some mines have shut down or scaled down operations.

· Poor management of borrowers as most employees have accessed loans beyond their limits without the full knowledge of either the banks or employers. This is leading to defaults.

The Bank of Zambia which licenses and supervises these financial institutions will need to assess the full extent of the crisis so that timely remedial measures are taken. Financial matters of this scale can lead to a contagion effect in that the crisis can easily be transmitted to the commercial banks, most of which have equally participated in salary-based loans.