caleb m fundanga : innovative financial products on the zambian market in relation to credit interest rates and the private sector development remarks by dr caleb m fundanga, governor of the bank of zambia, at the zambia international trade fair symposium on “ innovative financial products on the zambian market in relation to credit interest rates and the private sector development ”, ndola, 30 june 2011. * 1. 0 * * introduction financial development contributes to economic growth in a very significant way and it has been demonstrated that countries with more developed financial systems tend to grow faster. therefore, the financial sector is key to economic development and policies aimed at developing the sector would be expected to contribute to economic growth. 2. 0 the current financial sector policy environment in zambia during the 1970s and 1980s zambia pursued a policy of fixing interest rates for long periods and at relatively low levels, with the ostensible purpose of promoting growth. however, these administrative actions introduced economic distortions into the financial structure of the economy including the following : the hindrance to economic growth arising from the inefficiency in the allocation of resources ( with credit controls and distorted price indicators ). these controls resulted in both low levels of domestically generated savings and investment, thereby reducing the economy ’ s growth rates. the financial system remained generally under - developed with inefficient lending patterns that failed to achieve their distributional goals. with interest rates set at low levels, financial repression curtailed domestic resource mobilization thus making the economy dependent on foreign savings as reflected in huge foreign debt at the time. low interest rates provided an incentive for fiscal indiscipline as the government obtained almost zero - interest - denominated resources to finance its deficit. in the state - owned banking sector, poor lending decisions ( often politically influenced ) and low repayment rates ultimately led to large budgetary bailouts. in the face of high inflation rates and fixed nominal interest rate, real interest rates remained negative for the larger part of the period, leading to low domestic savings and other forms of capital flight. a growing awareness of these economic costs led to financial “ liberalization ” as the dominant policy paradigm. zambia embraced financial - sector liberalization policy prescription and embarked on a fairly ambitious reform program. this program entailed a variety of measures including the liberalization of interest rates ; the establishing of the freedom and the procedures for entry into and orderly exit from the financial sector ; the reduction of commercial banks ’ reserves and liquidity requirements ; the elimination of credit allocation

board, the esrb. the main idea with the esrb was to look beyond the supervision of individual institutions and focus on the risks relevant to the financial system as a whole. there was a widespread feeling that supervisors in many countries could not see the wood for the trees – and certainly not any woods in any other countries. so the new body should work with issues systemic to parts or to the whole of europe. as time has passed, this task has become known as “ macro - prudential supervision ”. the institutional set - up of the esrb legally, the esrb is an independent eu body located in frankfurt and with a secretariat provided by the european central bank. the president of the ecb is also the chair of the esrb. the esrb has no binding powers. instead, it can issue warnings and recommendations to national authorities and to eu institutions. these warnings and recommendations can be either public or private. the effectiveness of its recommendations will depend on the attitude of the addressees to the “ comply or explain ” principle. this principle simply says that either you do as recommended or you explain why you have chosen not to comply. to work, it requires respect for the institution issuing the recommendations. bis central bankers ’ speeches figure 6 the structure of the esrb secretariat ( about 20 people ) ecb general board ( 65 members, 37 voting members ) steering committee ( 14 members ) advisory technical committee ( 62 members ) advisory scientific committee ( 16 members ) the esrb is unique in that it brings together representatives from central banks and financial supervisory authorities from all 27 member states, as well as representatives from the three european supervisory authorities and from the european commission. however, this also makes the general board a large body consisting of 65 members – 37 voting and 28 non - voting. decisions are taken by simple majority, but a majority of two thirds is needed to adopt recommendations or to make a warning or recommendation public. the fact that esrb decide by voting rather than by consensus is important, since blocking minorities can be avoided. the majority of voting rights are held by the national central banks ( 27 voting rights ) while the national financial supervisory authorities have one non - voting representative per member state in the general board. this gives the central banks a strong role. figure 7 voting rights of the general board bis central bankers ’ speeches obviously, this requires efficient preparations for meetings. a steering committee with 14 members has therefore been established with the purpose of guiding the work to be presented to the general board.