SURVEY ON HOW COMMERCIAL BANKS DETERMINE LENDING INTEREST RATES IN ZAMBIA

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1 BANK Of ZAMBIA SURVEY ON HOW COMMERCIAL BANKS DETERMINE LENDING INTEREST RATES IN ZAMBIA September 10 1

2 1.0 Introduction 1.1 As Government has indicated its intention to shift monetary policy away from monetary targeting towards interest rate targeting, the Bank of Zambia (BoZ) has embarked on conducting preliminary research to assess the feasibility of an interest rate targeting framework in Zambia. Gaining a thorough understanding of the interest rate decision-making process undertaken by commercial banks in Zambia would not only assist in the determination of an appropriate policy rate, but would also enable the Bank of Zambia to ascertain the transmission channel through which the policy rate would be most effective. 1.2 Evidence from numerous interest rate targeting central banks indicates that the policy rate should be aimed at influencing developments in the interbank rate, which is then expected to affect borrowing costs along the yield curve. The interbank market is therefore expected to play a crucial role in the implementation of the interest rate targeting framework. 1.3 Investigating why the lending rates are high was also an area of great policy interest. 1.4 The main objective of the survey was therefore to identify the factors, both quantitative and qualitative, that commercial banks consider in making decisions regarding their base lending rates. The specific objectives were twofold: (a) Assess to what extent the interbank market influenced the cost of funds in the interest rate determination process; and, (b) Ascertain which factors have significantly contributed to the high level of lending interest rates currently prevailing in the market. 1.5 The key question posed to commercial banks was: What factors do you take into consideration when determining the base lending rate for Kwacha/Foreign currency loans? A formal model of the calculation method for determining the base rate was also requested, as well as the minutes from Assets and Liabilities Committee (ALCO) meetings in which the interest rate decisions were discussed. All of the 18 registered commercial banks in Zambia were surveyed over the period 1 st 12 th March, Overall, it was observed that the most common factors considered in the rate setting process were, as expected, the regulatory cash reserve requirements namely, the statutory reserve ratio (8%), core liquid asset ratio (9%) and the BoZ supervisory fee (0.2% of deposits). Other factors which were considered significant in the determination of base lending rates included: Treasury bill and GRZ bond yield rates; operating costs; cost of funds, i.e. weighted average deposit rates; return on shareholder s equity and the cost of nonperforming loans. The qualitative factors highlighted included, credit risk premiums, the demand and supply for credit and the industry trend in base lending rates. 1.7 The survey results indicated that only half of the banks surveyed considered inflation explicitly in their determination of base lending rates; although some banks indicated that inflation was taken into account when calculating real returns. It was also found that almost all the banks do not consider the interbank rate, or the BoZ overnight facility rate in their calculation of base lending rates. 2

3 1.8 Furthermore, several of the banks stated that qualitative or judgemental factors contributed significantly in the determination of their base lending rates. In particular, they noted that large information asymmetries within the domestic market, as well as the high default culture experienced in Zambia, resulted in large risk premiums being attached to key macroeconomic factors, such as inflation and Treasury bill yield rates. 1.9 These findings have two key implications: the first being for implementation of an interest rate targeting framework in Zambia, and the second being the prevalence of high lending rates. Firstly, as the interbank market is expected to be the transmission channel for the framework, a policy rate that is linked to the interbank rate or overnight rate may not have the desired effects on interest rates in the economy, as it will have no bearing on the banks cost of funds. In particular, further analysis indicated that there is a weak correlation between the weighted lending base rates and the interbank rate (0.50) while there is a stronger correlation between the weighted lending base rates and the OMO rates (0.72). This suggests that, as an alternative, a policy rate linked to the OMO rate may be more effective Secondly, with regards to high lending rates, qualitative factors used widely in the rate determination process may dampen the intended effect of a policy decision. For example, a policy rate adjustment intended to lower interest rates in the economy may not be effective if large information asymmetries and high credit default rates remain Overall, it was clear from the survey that there are several issues that need to be addressed before a significant reduction in lending rates in the market is observed; and more importantly, before an effective interest rate targeting framework can be implemented in Zambia The rest of the report is organized as follows. Section 2 outlines the methodology employed. This is followed by a discussion of the survey results. Section 4 concludes, focusing on the way forward. 2.0 Methodology 2.1 The survey was undertaken using a structured questionnaire over the period 1 st March to 12 th March, 10. The questionnaire was supplemented with interviews between BoZ staff and representatives from all the 18 registered commercial banks. The questions posed in the questionnaire are listed below: (i) (ii) (iii) (iv) What factors do you take into consideration when determining the base lending rate for Kwacha loans? What factors do you take into consideration when determining the base lending rate for foreign currency loans? Kindly rank the importance of these factors, separately for the Kwacha and Foreign Currency lending rates. Does the importance of these factors change? If yes, under what circumstances? 3

4 (v) (vi) (vii) Kindly provide a computer spreadsheet which shows the formula used in computing the base lending rates from 05 to 09. It is expected that the spreadsheet contains all the factors mentioned which are used in computing the base lending rates. A soft copy will be preferred. Kindly provide Assets and Liabilities Committee (ALCO) 1 Minutes and Packs for December 05, 06, 07, 08 and 09. Please assist us with any other relevant information. 3.0 Survey Findings and Analysis 3.1 This section presents the findings of the survey, based on the information provided by each of the commercial banks. These are discussed in turn below. Determination of Base Lending Rates 3.2 Taking all the commercial banks responses into account, we summarised the key factors considered in the base lending rate decision-making process in terms of cost of funds, economic conditions, market conditions and political risks. As can be noted from Table 1, the most common factors considered in the rate setting process are cost of funds: cash reserve requirements namely, the statutory reserve ratio, core liquid asset ratio and the BoZ supervisory fee; operational costs; and yield rates on Government securities. This is followed by market conditions: credit risk, industry trend, interbank rate, overnight facility and demand and supply of credit. 3.3 The survey results indicated that only half of the banks consider economic conditions, in this case, inflation, explicitly in their determination of base lending rates. Furthermore, while it is understood that the interbank rate represents the cost of short-term liquidity, it is evident from Table 1, that all banks, with the exception of one bank, do not take the interbank rate into account while four banks indicated that they consider the BoZ overnight facility rate in their determination of the base lending rate. 3.4 It was also found that the ranking of factors depended primarily on the bank s profit motive. For example, while the Treasury bill yield rates are considered by all banks, and by implication one is likely to rank them highly and thus give them a relatively larger weighting in the calculation method, a fall in the yield rates should result in a fall in the base lending rate. However, this is hardly the case. This, therefore, suggests that achieving the required return on equity and covering operational costs are, among other factors, more important factors in the determination of base lending rates. 3.5 From the foregoing, one is bound to ask the following two questions: (i) What are the implications of these findings for the interest rate targeting framework in Zambia? 1 Assets and Liabilities Committee (ALCO) is a senior management committee in a bank or thrift institution, responsible for coordinating the institution's borrowing and lending strategy, and funds acquisition to meet profitability objectives as interest rates change. 4

5 (ii) What are the implications of these findings for the prevailing high lending rates in the economy? 5

6 Table 1: Aggregate results of the factors considered in the determination of Kwacha base lending rates Bank I H G F E D C B A J K L M N O P Q R Cost of Funds Statutory reserve requirement Core liquid asset requirement BoZ supervisory fee Taxation Weighted average deposit rate Operating costs 2 Economic Conditions T-bill/GRZ bond rates Inflation Exchange rate Market Conditions Credit risk premium Liquidity premium Interbank rate Overnight facility rate Demand and supply Market expectations Industry trend Political Conditions Political risk/country risk premium 2 Operating costs in this case include the following: management fees, staff costs, transaction costs and communication costs, costs of provisioning, internal cash reserves, projected profit and cost of capital (return on equity). 6

7 Percent Interbank Rate and Policy Rate 3.6 Since we have observed that the interbank rate is not a significant input in the calculation of banks base lending rates, the introduction of a policy rate which is expected to influence the interbank rate will not have the desired effects on commercial bank interest rates, and ultimately inflation, in the economy. 3.7 Thus, as an alternative, it may be necessary to consider the possibility of using a policy rate that is linked to the Open Market Operations (OMO) rate rather than the interbank or overnight facility rate. This is because other studies conducted in the Bank have shown that there is a strong correlation between the OMO rates and base lending rates in Zambia with a correlation coefficient of 0.72, compared to a correlation coefficient of 0.50 between the interbank rate and base lending rates. In addition, and as is the case in South Africa, interest rates in the money market are influenced through the use of a repurchase (repo) rate and OMO. This refinancing mechanism has allowed the South African Reserve Bank to effectively administer its inflation targeting regime. Inflation and Lending Rates 3.8 Despite the survey results showing that only half of the banks used inflation in determining the base lending rates, our analysis suggests that inflation is taken into account. This assertion is supported by Graph 1, which depicts a positive relationship between the weighted lending base rate (WLBR) and inflation, over a 10 year period from 00 to 09, with a correlation coefficient of Although Graph 1 shows that overall, the WLBR and inflation moved in the same direction, inflation declined from 16% in 08 to 9.9% in 09, but the WLBR rose from.8% to 22.6%. This could be due to the fact that changes in the WLBR lag those in inflation, or that there are other factors, such as risk aversion in the recessionary climate and large information asymmetries, that result in the WLBR remaining significantly higher than inflation. Graph 1: Weighted Lending Base Rate (WLBR) and Inflation, 00 to Weighted Lending Base Rate INFLATION 7

8 Percent Government Securities yield rates and Lending Rates 3.10 The relationship between the WLBR and Treasury bill yield rates, over the same 10 year period, is shown in Graph 2. As is evident from the graph, there is also a positive relationship between the WLBR and Treasury bill yield rates, with a correlation coefficient of This suggests that, as indicated by the banks, Treasury bill yield rates should play a significant role in the determination of the base lending rates. Graph 2: Weighted Lending Base Rate (WLBR) and T-bill yield rate, 00 to Weighted Lending Base Rate 91 day Treasury Bill yeild rate 3.11 Why then have the lending rates not declined in line with the recent fall in Treasury bill yield rates? From our analysis, we can infer that the commercial banks base lending rates seem to be sticky downwards in response to declining Treasury bill yield rates. This is especially evident in Graph It should also be noted that although inflation and yield rates tend to be relatively unstable, the banks base lending rates tend to generally remain stable for long periods of time, suggesting that there could be other factors that dominate the banks determination of base lending rates. However, over a long period of time, a sustained downward adjustment in macroeconomic fundamentals, such as inflation, should eventually result in lower lending rates in the economy. Base Lending Rate used as a Reference 3.13 Although banks set the base lending rates and announce these rates in the market, it is generally expected that the actual lending rates given on loans and advances differ considerably from the base rates. In addition, it appears that the market is divided between prime borrowers, who are able to borrow at the base rate minus some margin, and individual clients, considered more risky, who borrow at the base rate plus some margin. 8

9 3.14 In addition, it was found that most of the banks set their base lending rates qualitatively during the Assets and Liabilities Committee (ALCO) meetings, which primarily assess the borrowing and lending strategy of the bank, among other things, with the view to attaining the profitability objectives of the bank. This suggests that interest rate adjustments seem to be dominated by the banks profit motives rather than the developments in economic fundamentals. Large Information Asymmetries 3.15 The margins charged on loans and advances are, in some cases, excessively high. We observed that this was partly due to the lack of accurate information on borrowers and the default culture inherent in the Zambian market. The introduction of the CRB is therefore expected to help in eliminating the information asymmetries, and thus reduce the credit or default risk premium that is included by all banks in the determination of base lending rates Nonetheless, while the CRB was noted as a welcome development by most banks, the survey results indicated that currently the CRB falls short of expectations. Banks were of the view that the CRB s scope of coverage was too narrow as it was restricted to information provided to it by commercial banks alone. In this regard, it was suggested that the scope of coverage be widened beyond commercial banks, in that information regarding the credit history of clients and employees of other credit-providing institutions be provided to the CRB as a statutory requirement. Excess Liquidity in the Inter-Bank Market 3.17 During the period of the survey, it was found that the excess liquidity in the inter-bank market had resulted in little activity within the market, as well as limited use of the overnight lending facility introduced by the BoZ. The interest rate on the overnight lending facility was found to be punitive (at a 6% margin to the interbank rate), thus giving the impression that a bank accessing the facility is in distress. In this regard, most banks noted that the margin currently applicable on the overnight lending facility should be adjusted downwards and that the interest rate on the facility should not be linked to the inter-bank market. Rather, the interest rate on the central bank s facility should be independently determined, with the policy rate as a reference Furthermore, it was observed that several smaller banks were unable to access funds within the interbank market, despite the apparent excess liquidity in the market. The reduction of the overnight lending facility rate would therefore make the facility a more viable option for banks that cannot access funds within the interbank market. Operational Costs in the Banking Sector are high 3.19 From the survey, it was found that the operational costs, especially staff costs, for most commercial banks are high and this has a bearing on the determination of base lending rates. In particular, staff loans had, on one occasion, been explicitly included in the calculation of the base lending rate. This, it can be inferred that these loan costs were being passed directly onto clients. The high staff costs may be due to the fact that new banks entering the market have to poach staff from existing banks, therefore resulting in higher salaries which become sticky downwards. 3. In addition, the high operational costs in the banking sector could be an indication of inefficiencies in the banks operations, which are then passed on to their clients through high 9

10 lending rates. In view of the high operational costs, it would be difficult to achieve a significant and sustainable reduction in lending rates regardless of the positive developments in macroeconomic fundamentals, unless competition and innovation are enhanced Further analysis into the nature of the operating costs in the banking sector highlighted specific concerns with regards to efficiency and returns on equity. Table 2 depicts selected operating ratios for each of the commercial banks surveyed, from 06 to 09. Efficiency refers to the ability of a bank to generate enough income to cover its non-interest expenses Table 2 also shows that salaries and employment benefits continue to make up a significant portion of operating costs. Although the average salaries to operating costs ratio was between 30% and 50% from 06 to 09, salaries for several of the banks reached approximately 60% of operating costs over the last 4 years Given improvements in technology and the relative increase in competition due to the entry of more banks in the market, it is expected that the efficiency in the banking sector should improve over time. Efficiency ratio of 60% or less is considered to be favourable The efficiency ratios presented in Table 2 indicate that operational efficiency within the domestic banking sector has been unfavourable over the period. While it is understood that the global financial crisis had a significant negative impact on the income-generating ability of many banks in 08 and 09, several of the banks have had unfavourable efficiency ratios for a number of years. For example, the operational efficiency ratio for Bank H has been above 80% over the past four years, reaching 236% in 09; and the efficiency ratio for bank L rose from 85% in 06 to 140% in both 07 and Further analysis of the relationship between the banking industry efficiency ratio and the lending base rates, as indicated in Graph 3, shows that increased inefficiency partially led to high interest rates. In 06, based on the efficiency threshold of 60%, the industry was inefficient and correspondingly the base rates were high. However, in 07 the lending base rate declined despite the efficiency ratio increasing. This can be attributed to the favourable macroeconomic conditions experienced in 07. In 08, the lending base rate and industry inefficiency increased and worsened in 09, as a result of the global financial crisis. 10

11 Effiiciency (%) Efficiency (%) Lending Rate (%) Lending Rate (%) 100 Graph 3: Average Industry Efficiency Ratio and Base Rates, Industry Efficiency Weighted Lending Base Rate 3.26 From Table 2 for example, we can see that bank G can be considered as the most efficient because its efficiency ratio was consistently below the 60% threshold for the period under review. Graph 4 indicates that with increasing efficiency from 06 to 07, the lending base rate remained the same and an increase in efficiency in 08 resulted in a further reduction in the lending rate. Graph 4: Bank G Efficiency Ratio and Base Rates, G Efficiency G lending rate 3.27 With regard to bank K, whose efficiency ratio was above 60% over the period, it can be seen from Graph 5 that the lending rates declined with an improvement in efficiency from 06 to 07. However, in 08 the lending rates increased despite an improvement in efficiency. In 09, there was an increase in efficiency, and to cover the increasing expenses the lending rates also increased. 11

12 Efficiency (%) Efficiency (%) Lending Rates (%) Lending Rate (%) Graph 5: Bank K Efficiency Ratio and Base Rates, K Efficiency K lending rate 3.28 From Graph 6, it can be seen that the efficiency ratio for bank H was above 80% from 06 to 09 and that the lending rate generally increased with increases in inefficiency especially during the period 07 to 09. Graph 6: Bank H Efficiency Ratio and Base Rates, H Efficiency H Lending rate 3.29 From the foregoing, it can be inferred that an increase in the efficiency ratio indicates that a bank is using a larger percentage of its income to cover its expenses and the corresponding increase in lending rates implies that this cost is being passed on to the borrowers. 12

13 Table 2: Operating Ratios, 06 to 09. Bank Operating Cost 3 /Total Costs Salaries/ Operating Costs Return Return Return Efficiency on Operating Salaries/ Efficiency on Operating Salaries/ Efficiency on Operating Salaries/ Ratio 4 Equity Cost/Total Operating Ratio Equity Cost/Total Operating Ratio Equity Cost/Tota Operating (%) (%) Costs Costs (%) (%) Costs Costs (%) (%) l Costs Costs I , H G F E D C , B A J K L M N O P Q R AVERAGE Efficiency Ratio (%) Return on Equity (%) 3 Operating costs are also referred to as non-interest expenses. 4 Efficiency ratio = non-interest expenses/net interest and other income. Efficiency ratios below 60% indicate good operational efficiency, while those above may suggest that the operations of the institution are inefficient. 5 In this case, a simple average is used. 13

14 Percent (%) 3.30 In addition, from Table 2, it is evident that the returns on equity for several of the banks have been considerably high, although most collapsed in 08 and 09, as a result of the global financial crisis. In particular, the average return on equity in 06 was 39%, with some banks exhibiting returns greater than 50%. However, in 09, several banks experienced significant negative returns of 80% and above, with Bank H experiencing a - 124% return on shareholder s equity. It can be inferred, therefore, that even with the recent decline in inflation and Treasury bill yield rates, the lending base rates in the domestic economy may not come down as rapidly, as banks may be under pressure to cover prior losses and achieve their target returns on shareholders capital Furthermore, a comparison of the returns on equity in the domestic banking sector with others in the sub-saharan region reveals that while the Zambian banking sector does not exhibit the highest return on equity, it has consistently had the highest lending rate in the region from 06 to 09. Graph 7, Graph 8, Graph 9 and Graph 10 illustrate the return on equity and actual average lending rates for selected countries in the region in 06, 07, 08 and 09, respectively. Graph 7: Return on Equity and Actual Average Lending Rates Return on Equity and Lending Rates Namibia Zambia Kenya Mozambique South Africa Uganda Return on Equity Lending Rate Source: IMF IFS and Global Financial Stability Report, 10 14

15 Percent (%) Percent (%) Graph 8: Return on Equity and Actual Average Lending Rates Return on Equity and Lending Rates Namibia Zambia Kenya Mozambique South Africa Uganda Return on Equity Lending Rate Source: IMF IFS and Global Financial Stability Report, 10 Graph 9: Return on Equity and Actual Average Lending Rates Return on Equity and Lending Rates Namibia Zambia Kenya Mozambique South Africa Uganda Return on Equity Lending Rate Source: IMF IFS and Global Financial Stability Report, 10 15

16 Percent (%) Graph 10: Return on Equity and Actual Average Lending Rates Return on Equity and Lending Rates Namibia Zambia Kenya Mozambique Return on Equity South Africa Uganda Lending Rate Source: IMF IFS and Global Financial Stability Report, As can be seen from the graphs, the returns on equity earned in the Zambian banking sector have been very similar to those in Uganda and Kenya from 06 to 09; yet the lending rates have been significantly higher than both countries over the period. For example, in 07, the average return on equity earned by banks in Zambia was 31.2%, similar to 31.4% earned in Uganda, yet the lending rate in Zambia was 24.4%, compared to 19% in Uganda Furthermore, the graphs highlight that it is possible to earn significant returns on equity without charging high lending rates. This is particularly evident in Namibia and Mozambique, where returns on equity in 08 were 52% and 45%, respectively, while lending rates were 14% and 18%, respectively. Thus, holding other things equal, it can be argued that that the profitability in the Zambian banking sector may be generated primarily through high lending rates charged in the domestic economy, rather than through cost efficiencies. Macroeconomic Fundamentals 3.34 The history of consistently high inflation in Zambia has resulted in economic agents rarely adjusting their inflation expectations downwards. In addition, the absence of clear communication, by the BoZ to the public, on its monetary policy strategy makes it difficult for the BoZ to anchor inflation expectations Therefore, it is essential for the BoZ to improve its policy transparency and credibility in order to guide the inflation expectations of market participants. 16

17 Money Market 3.36 In order to fully assess the interest rate channel of the monetary policy transmission mechanism, it is necessary to look at the interaction between commercial banks and the central bank, developments within the inter-bank market, and developments in the deposit side of the market (i.e. savers and the savings rate) to get a holistic view of the money market and to assess how effective the interest rate targeting framework would be in the long-run. Maturity of Financial Markets and Development of a Secondary Market 3.37 The survey also highlighted the fact that an interest rate targeting framework requires well-developed financial markets to provide an effective transmission mechanism of monetary policy. This would have to be supported by a well functioning secondary market, which would result in the creation of a short-term yield curve that would allow banks to appropriately price their loans and advances. The secondary market would also facilitate the trading of Government securities of smaller size amongst commercial banks and other market participants, and thus aid in the liquidity management of financial institutions. Limitations of the Survey 3.38 While the lessons learnt from the survey provided valuable information that will be used in assessing the way forward, it should be noted that there were a number of limitations in gathering information from the commercial banks, notably that: (i) (ii) (iii) (iv) Not all banks provided complete and comprehensive information to the questions asked; Some of the banks did not have a formal calculation method or formula for the determination of the base rate; Some of the factors mentioned as key to base rate determination process were not actually reflected in the formulas provided; and, Some factors were not disaggregated into various components, especially with respect to operating costs. 4.0 Conclusion 4.1 The undertaking of this survey was broadly aimed at identifying the factors that commercial banks consider in making decisions regarding their base lending rates. The specific objectives were twofold: (i) (ii) To assess to what extent the interbank market influences the cost of funds and thereby the lending interest rates; and To ascertain which factors have significantly contributed to the high level of lending interest rates in Zambia. 17

18 4.2 From the foregoing, it is clear that there are common factors which all the commercial banks take into account in the determination of base lending rates. These include cost of funds, economic conditions, market conditions and political risks. The cost of funds include: cash reserve requirements namely, the statutory reserve ratio, core liquid asset ratio and the BoZ supervisory fee; operational costs; returns on economic capital/equity and yield rates on Government securities. This is followed by market conditions: credit risk, industry trend, competitors base rates or the average base rate in the market, inter-bank rate, overnight facility and demand and supply of credit. However, economic conditions and in this case inflation was found to be directly taken into account in the determination of base lending rates by only half of the surveyed banks. The exchange rate is included in the economic conditions. 4.3 The factors vary among the banks according to their impact on the cost of funds and the bottom line. Further, we can conclude from the survey results that the decisions made in setting and adjusting base lending rates are largely decided qualitatively, though some few banks base their decisions on quantitative computations using specified formulas. 4.4 The survey results indicated that the interbank rate, which is expected to influence the policy rate, is not a significant input in the determination of the lending base rates. Our analysis indicated a correlation coefficient of 0.50 between the weighted lending base rate and the interbank rate, versus a correlation coefficient of 0.72 between the weighted lending base rate and the OMO rate. In light of these findings, it may be necessary to consider linking the policy rate to an alternative market interest rate, such as the OMO rate. 4.5 Furthermore, the survey highlighted that there are other qualitative factors such as high default risk and large information asymmetries that contribute to high lending rates, despite the current positive macroeconomic conditions. In addition, we found that operational inefficiencies and the need for high returns on the shareholders equity may also have contributed to the high lending rates in the domestic economy. 4.6 Going forward, it is vital that conditions that will be conducive to an effective interest rate targeting framework are put in place. These will include: (i) (ii) (iii) (iv) An active interbank market, which will improve access to liquidity in the market particularly for smaller banks; A well functioning secondary market, which will make it easier to develop a short-term yield curve; An efficient CRB, which will enable banks to more easily assess credit risk of potential clients; and, Improved communication of BoZ monetary policy strategy to help anchor inflation expectations. 18

19 4.7 On the issue of the high interest rates, it is recommended that: (i) (ii) (iii) (iv) There is need for banks to improve efficiency by lowering the operational costs. Banks should be consistent in the use of macroeconomic factors, i.e., inflation, exchange rates and Treasury bills, in determining lending rates. That is, other things equal, it is expected that when inflation or Treasury bill rates are low, lending rates should also be adjusted downwards. While qualitative factors are important in the determination of lending rates, in a liberalized economic system like Zambia, macroeconomic factors should be dominant to the determination of rates. In this regard, commercial banks are urged to develop formal frameworks for the interest rate decision making process. On the part of the BOZ, we will continue to foster competition by encouraging the entry of new banks for the purpose of improving the provision of banking services. 19

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