Caleb M Fundanga: Innovative financial products on the Zambian market in relation to credit interest rates and the private sector development Remarks by Dr Caleb M Fundanga, Governor of the Bank of Zambia, at the Zambia International Trade Fair Symposium on “Innovative financial products on the Zambian market in relation to credit interest rates and the private sector development”, Ndola, 30 June 2011. * 1.0  *  *  Introduction  Financial development contributes to economic growth in a very significant way and it has been demonstrated that countries with more developed financial systems tend to grow faster. Therefore, the financial sector is key to economic development and policies aimed at developing the sector would be expected to contribute to economic growth. 2.0  The current financial sector policy environment in Zambia  During the 1970s and 1980s Zambia pursued a policy of fixing interest rates for long periods and at relatively low levels, with the ostensible purpose of promoting growth. However, these administrative actions introduced economic distortions into the financial structure of the economy including the following:   The hindrance to economic growth arising from the inefficiency in the allocation of resources (with credit controls and distorted price indicators). These controls resulted in both low levels of domestically generated savings and investment, thereby reducing the economy’s growth rates.   The financial system remained generally under-developed with inefficient lending patterns that failed to achieve their distributional goals.
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.