Women in Zambia Avoid Banks’ High Interest Rates Through Informal Lending Groups

Zambian banks demand substantial collateral and charge high interest rates for loans, so local women are increasingly turning to informal lending cooperatives, called village banking, for loans large and small. The groups operate on trust, but the high volume of money outside the formal banking sector comes with risks.

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Women in Zambia Avoid Banks’ High Interest Rates Through Informal Lending Groups

Prudence Phiri, GPJ Zambia

Members of a chilimba, a women’s banking cooperative, gather to pool their money together to make a loan to members on a rotating schedule.

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LUSAKA, ZAMBIA — A group of 24 women are dancing and singing in Alice Mwale’s home. This month, Mwale is the recipient of the group’s cooperative loan, so she’s invited them here to celebrate.

“We gather here every month to put money together and give it to one of the members of the group,” says Doreen Nzila, a member of a chilimba, a lending group for women.

With the growing collateral demands and soaring interest rates of bank loans, women in Lusaka, Zambia’s capital, are finding alternative ways to build their businesses and meet their families’ needs. Locals use the term chilimba to describe this style of informal lending, which allows women to pool money together and make loans to different members on a rotating schedule. Recipients use the loans to start or invest in their businesses, buy cars or even pay their children’s school fees.

The loans can have extraordinary impact for women who can’t afford traditional loans, but they also come at a greater risk, because the groups don’t secure or insure the loans.

Lending rates at the Bank of Zambia, the country’s largest financial institution, ranged from 16 to 82 percent for small- and medium-sized entrepreneurs in 2017. The central bank’s interest rates on personal loans that consider salary as collateral range from 1 to 24 percent per year.

These informal cooperatives are more feasible for women, Nzila says, in part because her group does not charge interest.

“Five years ago, I got a loan from the bank. I had to repay the loan in 30 months, but the interest kept going up every year,” she says. “Even after I had finished paying, some deductions were taken out of my salary.”

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Prudence Phiri, GPJ Zambia

Women have taken to informal lending schemes because interest rates in traditional banks can exceed 80 percent.

After that experience, Nzila says, a friend told her about another chilimba, which means village banking in Nyanja, a local language here.

For the most part, she says, it has been a good experience, although trust among group members can be a challenge.

“We usually lend [in pairs], so if I contribute money to my partner, after six months she has to contribute to me,” Nzila says. “But my partner disappeared soon after getting the money. I think it was about 15,000 kwacha [$1,210].”

These kinds of losses worry group members and banking institutions alike.

The Bankers Association of Zambia warns that keeping money outside the formal banking sector carries risks. An estimated 5.6 million kwacha (about $470,000) was outside the banking sector as of December 2017, according to the Bank of Zambia.

“We appreciate the ideas that women are coming up with to empower themselves, but we are worried that this money is not safe, if it is not in the bank,” says Mirriam Zimba, public relations officer at the Bankers Association of Zambia. “If money is not kept in the bank, it’s a risk.”

But the point of the groups is to offer financial options for those otherwise excluded from the formal financial system, says Elizabeth Lifumbo, a secretary of another chilimba.

“We have never insured this money, but we trust each other,” she says. “Each person that comes here is recommended by a longtime group member, and we visit each member’s home, so we transact purely based on trust.”

Lending rates at the Bank of Zambia, the country’s largest financial institution, ranged from 16 to 82 percent for small and medium sized entrepreneurs in 2017.

Some lending groups have placed more parameters around the informal loans.

Loreen Phiri, a fish vendor, says her group pools money among the whole group, not in pairs, and only gives loans at a 10-percent interest rate. Repayment plans range from one to six months at a maximum.

In three years, Phiri says she has yet to be cheated. The informal group was her only option, she adds.

“Getting a loan from the bank requires collateral, and I had nothing. Even my business could not stand as collateral, but, with the village banking scheme, I easily got the loan,” she says.

But these informal cooperatives carry risks for the whole banking sector, Zimba says.

“Having too much money outside the formal banking sector leads to high lending rates from the banks, because the banks have less money to lend out, and borrowing becomes expensive for people, which becomes a burden,” she says.

Others don’t look at it that way. Reform needs to come from within the banking sector, says Denny Kalyalya, governor of Zambia’s central bank.

“Banks have to shape up and come up with products that will suit the needs of the people. If you don’t innovate, you will be overtaken,” he says. “At the end of the day, women have to put money somewhere, so we are also encouraging banks actually to work with these groups.”

Prudence Phiri, GPJ, translated some interviews from Nyanja.