Analyzing the Determinants of Non-Performing Loans: A Case Study of the Manufacturing Sector in Lusaka, Zambia

This study analyses the determinants of non- performing loans (NPLs) in Zambia’s financial sector in the city of Lusaka, Zambia. The research espoused critical factors basing on theories such as the Theory of Asymmetric Information, Deflation Theory and Patronizing and Die another Day Effects Theories. These theories identify various macroeconomic and bank specific factors that may explain and contribute to the problem of loan defaults. The study was motivated by the consistence of the problem of NPLs in the banking industry and the other financial sectors which undermines the financial stability and adversely affects the availability of credit to important economic driving components such as small-scale entrepreneurship.

The study used questionnaire data collected from bank employees involved in loan disbursement and from Micro finance Institutions. Some data were also collected from randomly picked borrowers in the city. Using a multistage cluster sampling strategy, 06 banks and 06 Micro finance Institutions were randomly selected from a population of 19 banks that are registered in the country.

The study’s key findings highlighted Macroeconomic factors such as high rates of inflation and exchange rate volatility which leads to instability in bank rates as one of the causes of NPLs. Further, Bank-Specific factors such as weaknesses in client appraisal processes, inadequate supervision of clients who are mainly financially illiterate was found to be another factor. Non-Banking financial institutions were also discovered to have regulatory inefficiencies and poorly trained staff whose main aim is to find borrowers without due diligence checks application. Borrower related challenges include financial illiteracy and poor entrepreneurial knowledge.

The study recommends that financial institutions should strengthen credit risk management and enhance borrower engagement. Further, fiscal and monetary policy measures should ensure stability of lending rates.