Summary of Regulation In Zambia
- REGULATED ENTITIES
- Commercial Banks
- All Non-Bank Financial Institutions (NBFI)
- TYPES OF REGULATION
- LIST OF TRUTH IN LENDING ACT
Truth-in-lending Legislation in Zambia
The truth-in-lending legislation in Zambia was established by the Banking and Financial Services (Cost of Borrowing) Regulations of 1995. The Cost of Borrowing regulation applies to any type of financial institutions including Banks and NBFIs. However, certain categories of transactions are exempt from the regulation, namely: a loan in respect of which the principal amount is less than 250,000 Zambian Kwacha; a loan under any act of Parliament, where the interest rate is prescribed under such Act and disclosed to the Borrower; a loan resulting from the discount or negotiation of a promissory note or other instrument payable by a person other than the Borrower; and a loan made pursuant to a letter of credit.
In December 2012, the Central Bank of Zambia, introduced a margin cap on lending interest rate for Banks and NBFIs. The maximum lending interest rate cap was updated in April 2014 for NBFIs, following the Bank of Zambia’s revision of the factor used in the interest rate cap calculation.
The Regulations establish disclosure requirements requiring Lenders to communicate the terms and conditions of the loan agreement to the Borrower only through a written form. The Regulations also require that the Lender display the marketing materials containing the lending offer for credit in a conspicuous location and provide sufficient information regarding the terms, the total cost of credit (based on an annualized interest rate) and the rights and obligations of the Borrower.
When concluding the loan agreement, Lenders must disclose the manner in which the total cost of credit is computed and the determination of its rate per annum.
If the total cost of credit varies during the course of the loan agreement, the Bank or NBFI is required to disclose to the Borrower the effect of the variation before the conclusion of the loan agreement.
Remedies and Enforcement Mechanisms
The Regulations do not create any specific enforcement mechanisms or legal procedures in case of their violation by the Lender. However, the Bank of Zambia has responsibility to supervise the compliance of Banks and NBFIs and authority to apply penalties in the event of violations.
For more detailed aspects of the truth-in-lending legislation in Zambia, please download the Legal Summary Document referenced above.
National Truth-in-lending Formula
The Regulations define the effective annual interest rate as the total cost of credit expressed as an annual percentage of the amount of money borrowed. Such total cost of credit is the total cost known to the Lender, including interest, commissions and any other kind of fees which the Borrower is required to pay in connection with a loan agreement, and any other costs in respect of ancillary services relating to the loan agreement, if the conclusion of a service contract is compulsory in order to obtain the credit or to obtain it on the terms and conditions marketed. Other charges, including optional insurance and charges unrelated (unpegged) to the loan agreement, are excluded from the calculation of the total cost of credit.
The Regulations require a discounted rate method to be used in the calculation of the effective annual interest rate. The discounted rate method finds the effective annual interest rate that equates the present value of the loan received by the Borrower to the present value of the repayments and charges paid by the Borrower (please see the Formula section for more details)
Lending Interest Rate Cap
Under the authority granted by the Regulations, the Bank of Zambia imposes a maximum margin cap on lending interest rates. The lending interest cap was categorically imposed as follows:
- Lending interest rate cap on Banks – the maximum effective annual interest rate a bank can charge cannot exceed the prevailing Bank of Zambia policy rate plus the product of a maximum margin of 9 percentage points and a factor of 1.
- Lending interest rate cap on NBFIs – the maximum effective annual lending rate for NBFIs are linked to the maximum effective annual lending rate for commercial banks. The Bank of Zambia calculates the maximum effective interest rate for NBFIs by multiplying the commercial bank maximum effective annual lending interest rate, with a fixed factor prescribed by the Bank of Zambia.
- Lending interest rate cap on other lending entities – the maximum effective annual lending rate for other Lender entities is linked to the maximum effective annual lending rate for commercial banks. The Bank of Zambia calculates the maximum effective interest rate for other Lender Entities by multiplying the commercial bank maximum effective annual lending interest rate, with a fixed factor prescribed by the Bank of Zambia.
The Bank of Zambia may periodically revise the factor applicable and or the margin on the policy rate, depending on changes in economic conditions and the policy itself.
The Regulations provide the following formula to equate the present value of the drawdowns with the present value of the repayments and charges:
- X – is the effective annual interest rate,
- m – is the number of the last drawdown,
- k – is the number of a drawdown, thus 1 ≤ k ≤m
- Ck – is the amount of drawdown k
- tk – is the interval, expressed in years and fractions of a year, between the date of the first drawdown and the date of each subsequent drawdown, thus t = 0,
- m’- is the number of the last repayment or payment of charges,
- l – is the number of a repayment or payment of charges,
- Dj – is the amount of a repayment or payment of charges,
- Sj – is the interval, expressed in years and fractions of a year, between the date of the first drawdown and the date of each repayment or payment of charges
Pricing Components in the National Formula
Pricing Components Included
- Nominal interest rate
- Commissions in connection with the loan agreement
- Processing fees
- Mandatory insurance
- Compulsory deposit
Pricing Component Excluded
- Optional insurance (however, optional charges are not prohibited)
- Other charges (however, no such other charges are prohibited)