Essays on financial regulation in Zambia
Keywords: minimum capital requirements
Africa
Basel III
bank capital
microfinance policy
lending
bank policy
econometrics
interest rate restrictions
microfinance information exchange
microfinance regulation
Zambia
low-income
Basel I
banking regulation
interest rate controls
prudential regulation
financial regulation
financial repression
interest rate caps
financial stability
banks
developing countries
financial policy
financial development
microfinance
Basel
Basel II
absolute capital regulations

A long literature examines how credit markets play an important role in supporting economic development in lower-income countries. Yet, policymakers can have limited context-relevant research outlining how specific financial regulations might support credit market development in their economies.

This thesis contributes to the body of context-relevant research by examining the effects of two financial regulations implemented in Zambia in the early 2010s. The first is an absolute minimum bank capital regulation, implemented by the Bank of Zambia in 2012. This policy required almost all banks to raise significant sums of equity and was imposed in addition to – and we argue, due to the inadequacies of – the standard Basel bank capital rules. The second is a set of lending interest rate restrictions – more commonly known as interest rate caps – imposed on the bank and non-bank/microfinance sectors, a policy becoming increasingly popular in lower-income countries. Each policy had its justifications, but both were implemented to encourage the financial sector to support lending and local development. The Thesis is as follows:

Chapter 3 uses a detailed bank panel dataset to track how the imposition of Zambia's absolute capital rule: (i) forced banks to raise external equity and (ii) resulted in banks increasing their asset bases and capitalisation rates, but (iii) did not clearly lead to increased lending, at least in the short term; instead, banks resorted to holding additional treasury securities.

Chapter 5 examines Zambia's interest rate cap regulation and how it was associated with significant loan retrenchment in the microfinance market. There is also evidence that once the caps were imposed, lenders began to charge higher loan fees in lieu of interest-based income. Further, such effects appear to have been plastic, not reverting when the caps were lifted.

Chapter 6 attempts a cross-country analysis of microfinance interest rate restrictions. It begins by constructing a new dataset tracking interest rate restrictions across countries and over time. By linking this new data to the World Bank's Microfinance Information Exchange (MiX) dataset, we find that microfinance lenders operating under an interest rate restriction grew their lending slower on average, both on their extensive and intensive margins. These results are consistent with our Zambia case study in Chapter 5

Chapter 7 examines how the interest rate caps may have influenced the cost of bank financial intermediation in Zambia, as measured by bank margins. We do not find evidence that the cap had an effect, possibly due to the interest rate caps being too high to bind the banking sector strongly.