Ngoma, Cleopatra
(2025)
Heterogeneous monetary policy pass-through in Zambia.
PhD thesis, University of Nottingham.
Abstract
This study examines the extent of monetary policy passthrough in Zambia to different credit segments, focusing on SMEs, large corporations, real estate (mortgage), and personal loans interest rates. It also investigates the role of foreign banks in shaping monetary policy transmission and assesses the influence of external financial conditions, including global risk-free investment decisions, global risk sentiments and monetary policy spillovers from foreign banks’ countries of origin. To support the empirical analysis, the study compiles a previously unavailable Monthly Indicator of Economic Growth (MIEG), a high-frequency proxy for GDP that aligns well with official quarterly GDP estimates and is applied in the empirical analysis.
The study uses novel data collected from Zambian commercial banks to make three main contributions to research on monetary policy passthrough in Zambia. First, more recent data are used covering the period of interest rates targeting from 2012 to 2022. Second, the extent of passthrough is estimated for four different credit segments – small and medium enterprises (SMEs), large corporations, real estate (mortgages) and individual borrowers. Third, bank heterogeneity is addressed by investigating the role of foreign banks in monetary policy transmission, the extent to which they are affected by external financial conditions (including global risk and monetary policy spillovers from their home countries), and how foreign and domestic banks differ.
Employing a newly constructed dataset spanning April 2012 to July 2022, the study uses a combination of econometric techniques, including Johansen cointegration technique, Panel ARDL estimated by dynamic fixed effects model with Driscoll-Kraay standard errors and bank-by-bank time series ARDL. Results reveal significant heterogeneity of passthrough across borrower segments and bank ownership. Across borrower segments, the passthrough is higher in the SME lending rate, followed by the personal loan lending rate, and lower for the mortgage and corporate lending rates, suggesting less responsiveness of these credit market segments to monetary policy changes. In terms of bank ownership structures, the results show that domestic banks exhibit twice as high monetary policy passthrough to lending rates compared to foreign banks. This suggests a stronger responsiveness of domestic banks to monetary policy than their foreign counterparts. Additionally, the study results reveal a structural shift in Zambia’s credit market after 2016, and this appears to have further weakened overall monetary policy transmission.
Overall, the findings provide critical insights into the challenges of monetary policy effectiveness in a highly globalised banking system and have important implications for policymakers in Zambia and other low-income economies with similar financial structures. To avoid policy misalignments, there is need for the Bank of Zambia to adopt a monetary policy formulation approach that actively engages with specific monetary policies of parent countries for influential foreign banks, beyond the global developments it actively follows. Finally, the paper calls for policymakers to develop policies aimed at encouraging the development and expansion of domestic banks to moderate the influence of foreign banks and enhance monetary policy effectiveness. These results also underscore the need for targeted policy interventions to enhance monetary policy effectiveness given lower passthrough is some borrower segments.
Actions (Archive Staff Only)
 |
Edit View |
Tools
Tools
