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The Bank of Zambia (BoZ) has attributed the growing number of loan defaults among public sector workers partly to weak credit underwriting practices by some regulated lending institutions, warning that failure to comply with lending standards was undermining financial stability.
In a public notice issued on Friday, the central bank said recent financial stability assessments had revealed an alarming rise in non-performing loans linked to public workers, with some lenders failing to adequately assess borrowers’ repayment capacity before extending credit.
BoZ said investigations had uncovered instances where regulated lending institutions inconsistently used Credit Reference Bureau (CRB) information or ignored available credit data altogether, allowing borrowers to accumulate debt beyond permissible limits.
The central bank noted that some public workers had obtained off-payroll loans through multiple borrowing arrangements, non-disclosure of existing obligations and misrepresentation of their debt positions.
Read more: Bank of Zambia raises the alarm on rising loan defaults among civil servants
However, it stressed that weaknesses in lenders’ credit assessment processes had also contributed to the problem.
“In some cases, lending institutions have been found to have weak or non-compliant credit underwriting practices, including inconsistent use of the Credit Reference Bureau or disregard of data from the Bureau altogether,” the Bank said.
BoZ warned that such practices undermined debt service ratio (DSR) and affordability requirements designed to protect borrowers from excessive indebtedness and safeguard the financial system from rising default risks.
The regulator reiterated that compliance with debt service ratio limits, affordability standards and the consistent use of Credit Reference Bureau information is mandatory for all regulated lending institutions.
As a result, the central bank has directed lenders to strictly adhere to responsible lending practices and ensure all credit decisions are supported by comprehensive credit assessments.
The Bank further urged payroll administrators to strengthen internal payroll controls and recovery mechanisms to prevent abuse of payroll-based deduction arrangements.
BoZ said it would intensify monitoring of both payroll-based and off-payroll lending activities and take necessary enforcement action against institutions found to be in violation of applicable laws and prudential requirements.
The warning signals increased regulatory scrutiny of Zambia’s lending sector as authorities seek to curb rising loan defaults and promote more responsible credit practices among financial institutions.
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