Maravi

BoZ warns against rise in salary-based loans

COMMENT - Only rightwing tools blame minority loans for the global economic recession. This recession has been 30 years in the making, through deregulation, privatisation and corporate capital, which lead to not only the subprime crisis. The subprime crisis is merely a subset of the consumer credit crisis, caused by keeping interest rates artificially low for a prolonged period of time (1992 onwards) by the Federal Reserve. The reason that it was kept low, is because after the neoliberal policies of the 1980s, the economy was damaged to such an extent, that it did not bounce back on it's own. However, in certain rightwing circles, it is convenient to blame minorities, instead of dealing with the fact that neoliberalism is a toxic ideology, which has been destroying economies 3 times this century (the Bank Panic of 1907 [deregulation], the roaring twenties followed by the Great Crash of 1929 and the Great Depression, then again in the 1980s (roaring 80s, followed by the Crash of 1987, followed by a recession). Deregulation leads to corruption and criminality, just as privatisation leads to fleecing the public and reduces incomes, which reduces demand. Bank deregulation leads to bank scandals and crisis (Saving & Loans, junkbonds, and now the subprime crisis, and more than that, the giant derivatives bubble).

BoZ warns against rise in salary-based loans
Written by Chiwoyu Sinyangwe
Tuesday, September 29, 2009 4:55:35 PM

BANK of Zambia (BoZ) has warned that increasing salary-backed loans risks plunging the domestic financial sector into a subprime crisis, similar to the source of the global economic recession, as most recipients become too overburdened to pay back.

And BoZ has cautioned financial institutions in the country to explain clearly to customers the implications of the loans to avoid the acrimony experienced in the recovery process of some loans from the dismissed Copperbelt miners.

The subprime crisis which started in the United States in 1997 ripped apart the Western financial institutions, triggering the worst global economic recession in almost 80 years.

Latest statistics from the Central Bank indicate that although commercial banks and other non-baking financial institutions had slowed down the extension of loans to most key sectors since last December in the advent of the global economic crisis, personal loans had continued to account for the highest share of the total lending portfolio by the country’s financial sector.

According to latest official estimates from the Central Bank, during the first half of this year, household (personal loans category) received about 25.4 per cent of the total credit portfolio from the country’s financial sector, followed by the agriculture sector at 15.8 per cent; manufacturing at 10.3 per cent while wholesale and retail credit took up 9.4 per cent.

The average sectoral lending portfolio by the country’s financial sector declined by almost 1.0 per cent in the first half of this year compared to the same period last year.

However, despite the decline in credit availability during the first half of this year, financial services and the transport and communication sector recorded marginal increase in the share of loans from the financial sector to 8.5 per cent and 7.9 per cent from 7.9 per cent and 7.0 per cent respectively during the period under review.

But Dr Fundanga stated that the BoZ would prefer to see non-banking financial institutions increase lending to the private sector to spur economic growth in the country unlike to the households which mainly went into consumption.

“The chairperson [BoZ governor Dr Caleb Fundanga] reiterated concern over the exposure to households as it could lead to sub-prime lending problems experienced in the United States as there was a risk that customers would be overburdened with debt so much that some would eventually fail to pay,” according to minutes of the Governor’s meeting with chief executive officers of non-banking financial institutions held recently and made available to the Business Post. “Dr Fundanga further indicated that it would be desirable that domestic lending was concentrated to the private sector in order to boost production in the nation.”

Most market analysts contended that non-banking financial institutions preferred to extend credits which were salary-backed at the expense of the private sector because households were considered less risky as they were backed and guaranteed by employment contracts.

And Dr Fundanga urged non-banking financial institutions not to give loans to their clients without explaining the full implications of the transactions.

Recently, there was a vicious confrontation on the Copperbelt when Barclays Bank Zambia froze some of the retrenched miners’ terminal benefits in an attempt to recover the loans.

“BoZ governor urged non-banking financial institutions to clearly explain the implications of the loan agreements to their clients to avoid misunderstandings as was the case between lending institutions and miners on the Copperbelt,” the minutes read in part.

“The chairperson [Dr Fundanga] gave an example of the miners on the Copperbelt who lost terminal benefits on account of borrowing from the commercial banks following the closure of some mining companies.”

Labels: BOZ, LOANS, SALARIES

posted by MrK @ 3:56 PM