Changing credit culture key in economy’s liquidity

LATELY, banks in Zambia have been placing advertisements in newspapers for the sale of properties by mortgage in possession.
These repossessions have been necessitated by firms and individuals who have failed to pay their loans due to various reasons.
But what causes people and banks to reach a point where certain credits begin to fall under the non-performing loans (NPL) category? Why do they fail to pay back?
• Bad credit culture
Most NPLs are caused by borrowers’ failure to make concrete decisions about their short to long-term investment plans and this has resulted in defaults.
• Sudden market changes
Any sudden change in the loan market can affect how much money people have to take out as loans and make payments.
If the market suddenly changes and the prices of items increase due to shortages or huge demands, borrowers will have less money to pay off their loans, which can lead to non-performance.
•Bank performance
Banks are also a key cause of NPLs. An efficient and well-run bank should be able to adjust loan rates and terms to the current market trends to provide borrowers with some space, thus reducing the number of NPLs
What is an NPL?
An NPL is a debt on which the borrower is late on making pay-outs or is in danger of missing payments or repaying the principal. But at what point is a loan classified as non-performing by the bank, and when does it become a bad debt?
This depends on certain regulations.
Nonetheless, banks normally set aside money to cover for potential losses on loans and usually write off bad debts in their profit and loss account.
Although NPLs have slightly reduced from the 13.2 percent reported earlier in May this year, the current 12.8 percent is still high.
Economics Association of Zambia president Lubinda Haabazoka believes that the bad credit culture among most Zambians has contributed to the spike in repossessions by the banks.
Dr Haabazoka observed that most of the people who get credit have a tendency of diverting resources to other things they did not budget for, and that has led to some of them losing their assets to creditors.
“The major reason for NPL has everything to do with our own credit culture as citizens. Most of the banks in the recent past have blamed or heaped blame on retrenchment in the mining sector and also in other industries, but of late we have seen stability,” he said.
Dr Haabazoka, however, explains that most commercial banks provide credit to those in stable employment as this gives them hope that should anything go wrong, there is a possibility of recovering the money from one’s pension or gratuity.
“When you look at the type of loans commercial banks give to borrowers, they are much more guaranteed kind of loan repayment through the salaries they get and probably the gratuity and pension also act more like collateral.
“The move by quasi-government institutions from contract-based jobs to permanent ones has helped reduce the risk at which banks lend because an employer guarantees the commercial banks while payments are collected through the payroll,” Dr Haabazoka said.
However, the Bankers Association of Zambia (BAZ) feels that there is need for Government to quickly dismantle arrears owed to local contractors to help unlock liquidity in the banking sector.
Currently, liquidity, which refers to how easily assets can be converted into cash, stands at over K1.2 billion.
BAZ chief executive officer Leonard Mwanza said the problems the banks are facing are a result of NPLs, which stand at 12.8 percent across the industry.
External debt as at end of June this year was at US$9.37 billion while domestic was at K51.7 billion.
“There is less liquidity in the market and part of the [money is that] Government owes suppliers and contractors. There is quite a dent on that. However, we are hopeful that the measures Government is taking will help to unlock liquidity and give life to those who have given a service to Government.
“We hope that as Government dismantles the arrears owed to the local contractors, it could help to dismantle the arrears of the banking side in terms of NPLs,” Mr Mwanza noted.
He feels that the high indebtedness in the sector has resulted in banks advertising mortgages for pledged assets that were guaranteed as collateral.
The banks are hopeful that by advertising repossessed properties, they will raise money to recover what they might have lent out to the defaulting creditors.
“But this gives you a signal in terms of the true story of the status of the levels of NPLs across the industry. Banks are now trying to recover. However, this is also an indication that the market is stressed. There is less liquidity especially, for the borrowers because they are unable to pay back due to various reasons,” Mr Mwanza notes.
He said banks do not delight in seeing people fail to pay their credits, but the financial institutions have to recover the money by way of ensuring that the pledged assets are sold in an open and transparent way.
Individuals’ lifestyles and other factors such as drought and electricity shortages, especially in the last three years, could have had a negative impact on remittances and businesses.
First National Bank (FNB) Zambia chief executive officer Leonard Haynes notes that the past economic cycle that Zambia has just come out of might have contributed to the rise in NPLs and repossessions by banks.
Mr Haynes cites the rise in interest rates, and the depreciation of the Kwacha in 2015 and 2016 as among the challenges that have negatively affected the payment power of individuals and institutions.
“In 2015 and 2016 the Kwacha went from K6 to K14 to K10 to K9 and interest rates became elevated for a long time leading to people struggling to meet their commitments.
“On average NPL is somewhere in the range of 13 percent, which is quite high and by world standards is to have it way below five percent. The central bank has a benchmark of 10 percent and they would want to increase supervision on banks that have gone through it,” he explained.
While it is true that anyone can get a loan as long as they have the capacity to pay back putting the money to good use is another story.
Therefore, there is need for banks and Government to put in place strategies that will help to empower people with knowledge on financial matters especially on the effects of misusing money meant for investment.
Currently, the average lending rates in Zambia are too high, at about 26 percent, and this is not helping growing the economy in any way.
Instead, it is choking most citizens’ disposable income.
Zambians can’t wait to see a reduction in NPLs.

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