‘Statutory reserve ratios cut may not benefit SMEs'

‘Statutory reserve ratios cut may not benefit SMEs'
By Chiwoyu Sinyangwe
Tue 08 Nov. 2011, 10:50 CAT

THERE is no guarantee that the reduction in the statutory reserve ratio for cash deposit will translate into lower cost of borrowing for small entrepreneurs, says economic commentator Chibamba Kanyama.

Kanyama said contrary to the government's intention of empowering Small and Medium Entrepreneurs (SMEs) through reduced cost of borrowing, the reduction in the statutory reserve ratios for cash deposits from nine per cent to six per cent might just benefit commercial banks and big companies.

The Bank of Zambia (BoZ) last week slashed its reserve ratios to cut the cost of borrowing for commercial banks and consumers in a bid to stimulate economic growth among SMEs.

BoZ also reduced the reserve ratio for both local and foreign currency deposits to five per cent from eight per cent previously.

In an interview, Kanyama described the slashing of the statutory reserve ratio as a "bold step" that was likely to translate into a dramatic downward shift in interest rates charged by commercial banks.

Some commercial banks in the country have announced a reduction in base lending rates in response to the government's recent monetary policy adjustments.

"The base rates are the minimum interest rates charged while giving out loans before other charges are computed," Kanyama said.

"In Zambia, base rates are generally benchmarked against treasury bills, but banks will charge as high as five percentage points above the TB rate. The real winners in this case are the large corporate entities with a long borrowing history whereas the SMEs, who are the focus of government in this initiative, will still have to bear with high interest rates. Worse still, Zambian banks have the tendency to craft loan agreements to favour them in the event that market conditions governing interest rates move."

Kanyama regretted that companies already on the loan book would still have to service the loans based on old rates and any efforts to refinance their loans to take advantage of the current reductions would yield very little in view of charges to be levied on them in management fees.

And Kanyama cautioned that pumping over K800 billion about two per cent of the value of the national budget might pose inflationary pressures, resulting in some marginal erosion of investor confidence.

The BoZ said the cut in reserve limits should inject K700 billion into the domestic banking system.

"As we release the clutch plate of cash injection, one hand should be on the handbrake to manage potential repercussions and this will require an effective use of open market operations, by issuing treasury bills," Kanyama said.

Last week, Bankers Association of Zambia chairperson Mizinga Melu said increased liquidity in the market would in the short term result in commercial banks scrambling for limited treasury bills or government securities on offer, but played down the likely inflationary pressures from the huge liquidity expected to be injected in this week.

And Kanyama said the government was likely to double the deficit financing from 1.7 per cent of gross domestic product to 3.5 per cent of gross domestic product for its budget likely to be around K25 trillion.