How Banks Rip-off Zambians
Zambian banks are having a field day ripping off their individual and corporate clients, making them poorer as the Bank of Zambia (BoZ) looks away in indifference. Yes – you heard me right: banks in Zambia are stealing money from their clients.
Finance Bank Zambia Limited (“FBZ”)
By Malama Katulwende
If you suppose I am bluffing and belong to the old classical school which espouses taking banknotes to your banker to make you rich, then you’ve got a rude shock coming. It doesn’t make financial sense to save in Zambia because you’ll not earn any real interest. The lending rates are more than the saving rates.
Let’s take the case of this guy – Mwape Wina (not the real names), a forty-three year old man living in Lusaka. Recently appointed administrator of his late uncle’s estate, Mwape walked to a nearby local commercial bank to check how much had remained in Uncle Bwembya’s savings account. For at least nine months since the demise of his uncle, there had been no activity in the account – neither deposits nor withdrawals.
When Mwape read the statement of account, however, he thought something was amiss – so he asked the teller:
“Madam, could you explain this to me? Nine months ago the account balance stood at K 4, 204, 000 but it now stands at K 3, 650, 222. This represents a difference of K 553,778. What does this mean? Where has the money gone to?”
The teller replied politely: “Oh, it’s the bank charges. The bank charges account holders for keeping their money.”
“But don’t you think it ought to be the other way round? I bring you deposits – which you loan out and make more money – and then you pay me interest because you are using my money. Why should I pay you for keeping my money which you later on use to make your bank richer?”
This is the crux of the matter. Does it make sense to save when the bank depletes your account through mysterious charges? Some of these include the use of the ATM card, internet banking, money transfer and even (for shame!) withdrawing money inside the bank!
In case you regarded Mwape’s situation as something to be glossed over, let’s look at the magic of small rates of change. Anyone familiar with calculus will agree that infinitesimally negligible amounts in a system can have far reaching consequences over time. Given 20,000 clients who made similar deposits over the length of ten years, the bank would have made a cool K 110, 075, 560, 000 while the depositors who sweat it out in the streets could never make this kind of money – everything remaining constant. In fact, since they kept the money ‘safely’ in the bank, they would hypothetically have lost that much. But what would the bank have done to deserve to earn this cash? The answer is – absolutely nothing. It’s just money which is given to them on a silver plate – it’s free money.
Let’s take another example of my Indian-born, business associate who refuses to lock his money into the vaults of a bank for “safe keeping”, like some Zambians do. At first I thought the guy was dump until I learnt what commercial banks generally do. The Asian never keeps paper money in the bank – he buys out real estate and spreads out his investments in other kinds of securities and instruments to give him a real return.
“The key,” he keeps reminding me, “is to make sure that vultures such as commercial banks don’t devour your cash.” My Asian friend, however, only keeps a small amount for contingencies.
You might perhaps think this scenario were restricted to individuals alone. Well – I am afraid you’re again mistaken. The Government of Zambia, year in and year out, lends out large quantities of cash to commercial banks through the Bank of Zambia at some interest. Thanks to the consumption habits and extravagant spending of our politicians, the government then goes to the same banks to borrow its own money – at a higher interest rate. Billions of kwachas are thus easily made this way, and the loser is the Zambian tax payer.
To justify the high, bank lending (interest) rates, nevertheless, most commercial banks in Zambia blame the high cost of doing business in the country. For instance, they say they spend a lot of money on fuel, cleaning services, electricity, security, assets in transit, telephone calls, staff, rent, water, courier and other overheads. If these institutions have to survive, therefore, they must fix their rates in view of all these variables – which also include, of course, movements in the exchange rate, inflation, and the base lending rates by the Bank of Zambia. In order to make a quick return, the banks shift their risk premiums and other charges on to the shoulders of the customers, their depositors. They bear the cost of production.
For an enthusiastic entrepreneur who wishes to set up a business in Zambia, he or she would have to contend with the high cost of borrowing from these commercial banks. For example, before the loan is secured and guaranteed, the borrower will provide “collateral” which comes in the form of a house, land, or a vehicle. The bank will then hold the collateral in lieu of default. However, the interest on loans and overdrafts can be as high as 35% – and one wonders how the entrepreneur would calculate his or her mark-up after they have set up the business.
Note, though, that some Zambian banks are reluctant to give you your $20,000 dollars once the money has been wired from a source in New York. It shouldn’t take more than a week to get the cash, yet the bank tells you all kinds of stories. I’ve learnt from a source in the treasury department of some bank that actually, the delays are sometimes meant to make more money for the bank – using your cash. When I shared these challenges last week with Chabu, a friend who works in the credit finance section of a leading bank in the country, he said banking in Zambia was like kaloba (usury).
“Mwana, let no one deceive you. There’s no real banking in Zambia. It’s just kaloba. We deploy much of our resources into retail banking. We target individuals with all kinds of promotions about our attractive products on the market – but the thing is, when banks choose not to lend money out for trade and production then they have no significant role to play in the growth of the economy. Why should the banks’ role only be confined to borrowing money from the government, then lending the same money to the government, or buying treasury bills? Why should banks be there to process salary payments to workers for which they make substantial amounts of money, or be conduits of capital flight by multinational corporations such as the mines? Again, if you look at the high cost of savings and exorbitant bank charges, you then understand why it’s difficult for banks generally to mobilize savings. But without deposits banks cannot have a large pool of capital reserves to service their lending portfolio. If things remain the same in this country, I am afraid the financial market will be as constricted and vulnerable as ever. Banks don’t create wealth in Zambia. Instead they mop up the little wealth which people make. It makes one feel guilty.”
What can we make of this?
I am personally prepared to grant that commercial banks in Zambia do render some service to the communities in which they are allowed to operate. For example, some of them have been consistent in funding various projects in road construction, transportation, agriculture, energy and mining. They also give donations and all kinds of charities to the poor.
Yet to Mwape Wina – and the majority of Zambians – the greatest challenge which these institutions and the Bank of Zambia face today is to redefine their role as agents of wealth creation rather than agents of kaloba. They should structure their roles in the framework of the material needs of ordinary Zambians instead of aggravating their poverty and underdevelopment.