Zambia: Regulatory Implications of a Credit Rating Agency

Zambia: Regulatory Implications of a Credit Rating Agency

The Zambian authorities, led by the Bank of Zambia (BoZ) had developed a Financial Sector Development Plan (FSDP) with FIRST assistance. One of the plan's objectives was to strengthen the credit environment and improve credit culture. A Credit Reference Agency (CRA) was being established to contribute to this strengthening.

A CRA operator had been selected by the Bankers' Association, after a tender, to establish a CRA in Zambia. However, the BoZ requested assistance from FIRST in February 2005 to draft/agree the necessary guidelines/changes in regulation for the CRA to operate effectively. The BoZ also needed to agree appropriate licensing framework for the CRA.


In 2002 the World Bank and the IMF had undertaken an FSAP, which identified poor credit culture as one weakness in the financial sector in general and the banking sector in particular.A study by the BoZ on credit reference services found that insufficient credit available and a volatile macroeconomic environment coupled with a poor credit culture had increased the cost of credit and reduced the number of borrowers.  The poor credit culture was attributed to the lack of precision in identifying deserving borrowers, which could be mitigated through the activities of CRAs.  The credit culture had implicitly forced the best credit risks to subsidize the worst credit risks, which had impinged on the general growth of credit and prevented the provision of diverse credit products that could have been introduced in Zambia’s financial market.

In addition, it was possible for borrowers to default on loans without affecting their credit standing with other financial institutions. This had encouraged some borrowers to cease payments on their outstanding loans in failed banks.  In addition, there was a tendency among borrowers to have their assets (used as collateral) overvalued in relation to the amounts of the loans they obtain. This causes avoidable losses on defaulting loans.

There were no formal CRAs operating in Zambia. However, attempts to establish these agencies on an informal basis had been made before by a few micro finance institutions (MFIs). The Association of Micro Finance Institutions of Zambia (AMIZ) was in the process of creating a semblance of a credit rating agency by linking all the databases on borrowers from its affiliate organizations to a central database.

The Credit Reference Bureau Africa Group Company (which operates CRAs in Kenya and Uganda) was selected by the Bankers' Association after a tender. However, the BoZ still needed to draft/agree the necessary guidelines/changes in regulation for the CRA to operate effectively. For example, the CRA's operation would be covered by the Banking and Financial Services Act and technically the CRA could be covered by the same capital adequacy rules, maximum shareholding limits, etc., that apply to banks. The BoZ had limited experience in drafting regulations for CRAs. The BoZ also needed to agree an appropriate licensing framework for the CRA.

Lessons learned:

Establishment of a credit bureau in Zambia was a firm recommendation of the Financial Sector Development Plan (FSDP) of the BoZ, which FIRST also supported with technical assistance. This project to strengthen the BoZ’s regulation and supervision of the Credit Reporting sector was a good example of FIRST engaging with implementation of the FSDP. It makes sense in other cases where FIRST and the Recipient have developed an effective working relationship to support follow-up projects that flow form processes such as : FSAP-FSDP-Implementation.


  • The Consultants report of August 2006. This contains a summary of the project. The Appendices are potentially useful in other countries: they contain a Credit Data Privacy Code, A Credit Reference Services Act and an Annex outlining the methodology for a Central Bank ion supervising the Credit Reporting sector.