Possible Ways of Mitigating High Lending Rates in Zambia

Topics: Tax, Money, Finance Pages: 2 (671 words) Published: March 25, 2013
POSSIBLE WAYS OF MITIGATING HIGH BANK LENDING RATES IN ZAMBIA The first thing that must be done in order to mitigating the problem of high bank lending rates is by reducing the gap between interest rate on Treasury bills and inflation. It must be borne in mind that the gap must not be reduced by increasing the level of inflation but by reducing the level of interest on TBs so that it comes close to that of inflation. The target will be to reduce the correlation of the relationship between interest rates on TBs and lending rates because 0.91 is very strong compared to 0.56 for the relationship between inflation and lending rates. Reducing the interest rates on TBs will mean that banks will not be very profitable by depending on their treasury activities only but they will be forced to concentrate also the traditional banking business of lending and borrowing. This will mean that there will be more funds set aside for the purpose of lending. When we observe the activities of banks on financial markets today we will discover that there is less completion among banks in the industry because they can easily make profits on financial markets by buying government securities and have less activity on borrowing to the private sector. Reducing the interest rate on TBs to come close to that of inflation in the economy will mean that banks will be less profitable in trading government securities. Reducing profitability of banks in this way will intensify competition in the industry which will benefit consumers in both short and long run. The other issue that must be dealt with is that of government borrowing. The government must reduce its borrowing pattern by being more efficient in its resource allocation and use. The resources should not be used for consumption purposes but for investing in capital goods that will be able to generate some form of income for the government. Reduced government domestic debt will increase the total pool of investment funds for the private...
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