Zambian Credit Market Reels as COVID-19 Hits Economy Hard

The COVID-19 pandemic continues to have a major impact on the Zambian economy and the country’s credit market. The newly-released TransUnion Q2 2021 Zambia Market Analytics Report showed a sharp decline in the number of active accounts as the economy slipped into its first recession since 1998. The report reviews emerging trends in the Zambian credit landscape to help lenders identify shifts and inform lending decisions.

The effects of the pandemic saw the Zambian economy shrink by 4.2% in 2020, with significant implications for consumers. Many jobs have been lost, and the savings of households have come under severe pressure, reducing their resilience to future shocks. Inflation remained in double digits throughout 2020, averaging 15.7%, and reaching a high of 22.2% in February 2021. A gradual recovery is expected, with GDP growth projected at 1.8% in 2021 and averaging 2.8% over 2021–23.[1]

TransUnion’s analysis shows the recession has had a major impact on Zambia’s lending industry. The report reveals a 15.8% drop in the number of active accounts between Q1 and Q2 2021, from 1.9 million to 1.6 million, largely because of more paid-up and written off accounts.

While the microfinance sector remained active, with marginal growth in terms of new accounts opened (0.2% growth in Q2 over Q1), the total amount disbursed and average lending limit remained relatively low. The average lending limit for accounts opened in Q2 2021 was ZMW7130, which went down by 4.9% from Q1.

The FinTech sector saw a 39% decrease in the number of active accounts from Q1 to Q2 2021, but still held nearly three in four (74.4%) of loan accounts in the market. However, this only represents 3.9% of the total disbursed amount, with the lending average decreasing from ZMW397 in Q1 to ZMW394 in Q2.

The number of new accounts opened in the banking sector also declined. Between Q1 and Q2 2021, the number of accounts decreased by 29.3%. However, principal values went up by 8.4%, and lending average went up from ZMW151,000 to ZMW154,000 per account. As a result, the sector held a balance of ZMW24.1 billion, which was around 60.8% of the value of all loans. This shows banks have reduced the number of accounts being opened but increased the lending limit, leading to an increase in the current balance.

TransUnion Africa’s director of product, Samuel Tayengwa, said the impact of COVID-19 would continue to dampen economic activity, especially in sectors like tourism, retail and wholesale trade, and that a return to macroeconomic stability would largely depend on progress on debt restructuring, fiscal consolidation efforts and the availability of COVID-19 vaccines.

“The lending sector experienced a continued reduction in demand and supply for credit in Q2 2021, with high inflation rates, coupled with a rapidly depreciating currency, tipping many Zambians into financial hardship,” said Tayengwa.

The TransUnion report also observed that the non-performing loan (NPL) ratio had increased, largely because of the effects of the COVID-19 pandemic.[2] Over the past three years, the NPL ratio for banks fluctuated from 9.5% in 2018, to 8.2% in 2019, to 12.6% in 2020. Overall, this represents a significant reversal of the gains made in prior years.

“For many businesses, the COVID-19 crisis has prompted an accelerated transformation to new technologies and new ways of working. To compete in this changing environment, lenders need to reimagine the role of lending in the economy and adjust operations to suit current circumstances,” said Tayengwa.

“This means lending institutions must understand the emerging needs in different portfolio segments and then decide how to satisfy them efficiently and effectively. Customer segmentation and data analytical insights will be critical for lenders to make informed decisions, and risk-based pricing will become an industry standard in this new credit landscape.”

Tayengwa also observed that lenders will require deeper insights into their customer base and general market trends to develop and implement appropriate pricing strategies across products and consumer segments. He also stressed how important it was to focus on identity verification, fraud prevention and collections solutions that can assist in managing risk and optimising growth throughout the portfolio.

“Lenders that fail to evolve their ecosystem and take a more insight-led approach to customer segmentation will be the ones less able to recover from the impacts of COVID-19. Digital lending platforms allow lenders to automate the decision-making process and assess risk more accurately while creating a superior customer experience. A single integrated digital lending platform ensures lenders can run the customer application through background checks and verifications instantly, and auto-decisioning ensures customers can get a response almost immediately,” said Tayengwa.