BIS central bankers’ speeches  5  7.0  Measures to reduce interest rates  Although interest rates have trended downwards in the recent past with commercial banks average lending rate at 26.2% in March 2011 from 54.5% in 2001, the reduction is not in tandem with the fall in inflation and yield rates on government securities. The Government and the Bank of Zambia continue to take measures to provide macroeconomic stability necessary for the reduction of interest rates in Zambia. Some of the measures undertaken so far include the following: (i)  Inflation: the other challenge with regard to lowering lending rates is to attain and sustain low (preferably single digit) annual inflation. An upward trend in inflation is undesirable, as it raises inflationary expectations causing banks to increase their lending rates. Prior to 2006 inflation in Zambia was persistently high and above single digit. However, from 2006 inflation has been contained in single digit except from the 2008 when the financial crisis resulted in the increase of inflation to 16.6%. Inflation was recorded at 7.9% in December 2010 from 30.1% in January 2001. This has resulted in a fall in interest rates with banks Average Lending Rate coming down to 26.2% in March 2011 from 54.5% in December 2001. (ii)  Domestic financing: to contribute to efforts aimed at lowering lending interest rates, the Government has adopted prudent fiscal policies with domestic borrowing significantly reducing over the recent years.
The reduction of borrowing by the Government reduces the crowding out effect and more resources are available to lend to the private sector. This has also contributed to the lowering of yield rates on Government securities which is the opportunity cost for loanable funds. The composite yield rate for Treasury bills was 8.2% at end-December 2010, down from 49.1% recorded at the end of 2001. The fall in yield rates on government securities reflected reduced inflationary expectations and improved fiscal management. (iii)  Reduction of Statutory Reserve Ratios: banks argue that statutory reserve ratio is a critical in determining interest rates as a high ratio tend to raise the operating cost for banks by locking up loanable funds in a non-interest earning asset. The opportunity cost of these funds is therefore included in the cost of conducting banking business. On 1st October 2007, Bank of Zambia reduced the statutory reserve ratios on both Kwacha and foreign currency deposits from 14.0% to 8.0%. This followed the earlier reduction in October 2003 from 17.5%. The reduction in statutory reserve ratios entails a release of more liquidity into the financial system which is expected to provide more loanable funds to banks and contribute to lowering interest rates. (iv)  Establishment of Credit Reference Bureau: the first and only credit reference bureau (CRB) in Zambia, Credit Reference Bureau Africa Limited (CRBAL) was licensed in 2006 and commenced operations in 2008. The CRB is expected to enhance positive credit behaviour by providing lenders with information on borrowers’ payment histories.