Columnists

Is village banking solution to high bank charges?

NGOSA Chisupa.

Analysis: NGOSA CHISUPA
THE important role banks play in supporting economic growth cannot be overemphasised as they channel money to different sectors of the economy and ensure the smooth operations of these sectors.However, despite the financial sector reforms undertaken through the Financial Sector Development Plan (FSDP), bank interest spreads, while fees and other charges have remained high. The World Bank in its economic brief on financial inclusion observed that the high cost of formal banking services in Zambia was attributed to the small size of the banking sector and this had resulted in high interest rates, fees and other costs of banking, thus excluding a considerable size of the population.
At a regulatory level, the Bank of Zambia’s policy rate is the major monetary policy tool used as a price signal to guide the banking and financial sector in the setting of interest rates. Notwithstanding the policy rate, the banking sector has continued to charge high bank and account maintenance charges. According to research by Prospery M Chalwe (2017), the interest rates being charged by the banking sector in Zambia are deemed to be amongst the highest in the SADC region. In his findings, Chalwe notes that the average interest rate charged by commercial banks in Zambia was 417 percent above the inflation compared to 117 percent above the inflation rate charged in one well-developed neighbouring country.
These high charges have been widely condemned by members of the public and clients seeking financial services from financial institutions. These charges are a concern as well for policymakers in Government, whose objective is to promote a financial system that does not increase the cost of doing business.
This concern was further echoed by President Edgar Lungu in September 2017 during a meeting with a visiting international banking executive at State House, where the President stated that “Government was concerned with failure by commercial banks to significantly reduce interest rates despite the Central Bank having lowered the monetary policy lending rates to trigger the banks to support government initiatives”.
Even customers with savings accounts have not been spared from bank charges that in most cases exceed the interest being paid for minimum balances. The call for bank charges to be regulated is presently under discussion with a view to addressing the present imbalances where bank customers are literally being levied all kinds of charges from withdrawal charges on ATMs, maintenance fees for bank accounts and printing of mini statements.
Though the Bank of Zambia continues to make efforts to engage the banking sector on the need to reduce the cost being charged on banking services, very little, has come out of this engagement. This year, one of the major banks recently increased the cost of a mini statement from K2 to K3.8 on its ATMs despite the huge cries from the majority of the country’s 10 percent of its banked population.
This, therefore, begs the question, are Zambians seeking alternatives that are less costly than the status quo? Recently, there has been a significant move by Zambians to engage in the concept of village banking. In most homes and communities, it’s common for Zambians of all walks of life to meet on weekdays or weekends to conduct business in this flourishing village banking activity. These groupings of between 10 to 20 individuals are generating savings from amongst themselves, and then loaned out at 10 percent rate of interest.
What is village banking, what is its genesis and is it the answer to the high bank charges being charged by the formal banking system?
Village banking was an initiative by Professor Muhammad Yunus, who launched a research project in 1976 on the design of a credit delivery system that would provide banking services to the poor in Bangladesh.
In 1983, the work from the project led to the establishment of Grameen Bank that was authorised by Bangladesh National Legislation to operate as a bank. Grameen Bank operates as a microfinance organisation and community development bank, whose core business is the provision of small loans (known as microcredit or “grameencredit”) to the impoverished without requiring collateral.
Between 2003 and 2011, Grameen Bank grew so significantly that its total borrowers reached 8.4 million and the majority of borrowers were women.
This work on village banking has won worldwide recognition. In 1998, the bank’s “Low-cost Housing Programme” won a World Habitat Award and in 2006, the bank and its founder Yunus were jointly awarded the prestigious Nobel Peace Prize.
By 2015, Grameen Bank has 2,568 branches, with 21,751 staff serving 8.81 million borrowers in 81,392 villages. On any working day, Grameen Bank collects an average of US$1.5 million (which is equivalent to K15,000,000) in weekly instalments. Of all the borrowers, 97 percent are women and over 97 percent of the loans are paid back, a recovery rate higher than any other banking system. Grameen methods are applied in projects in 58 countries, including the US, Canada, France, The Netherlands and Norway.
There are important lessons that Zambia can draw from the village banking model, given the high interest rates, and account maintenance fees being charged by the local banks and the local microfinance institutions. From an economic standpoint, it may be prudent to ease on monetary and fiscal policies that impact indirectly on the high charges being experienced in the financial sector.
It was heartening to note that Bank of Zambia Governor Denny Kalyalya, during his address to the Livingstone Chamber of Commerce in March this year, reiterated that the Central Bank is making efforts to address the policy monetary rate and provide a conducive environment for commercial banks to further reduce interest rates to enable the private sector to grow.
The Seventh National Development Plan (2017-2021), which is anchored on the theme ‘Accelerating development efforts towards the Vision 2030 without leaving anyone behind’, states that the provision of a conducive environment in the banking sector would require an integrated approach that recognises the multi-faceted and interlinked nature of various models.
This would include models such as village banking and other progressive models that contribute towards the promotion of stability in the banking and non-banking sectors, through financial market deepening and addressing the cost of conducting business.
The author is a development policy consultant.

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