Borrower Switching Behaviour, Market Dominance and Bank Competition of Micro, Small and Medium Enterprises Credit in Zambia

This project examines potential switching costs for borrowers of formal credit and the impact of these costs on the competitiveness of the lending market.

Zambia has been implementing market-based financial sector reforms since 1992, and is currently implementing phase II of its Financial Sector Development Plan. There is some evidence that these reforms have improved the efficiency of bank operations and boosted industrial production. There are still concerns, however, that Micro, Small and Medium Enterprises (MSMEs) have only limited access to bank credit at high cost, and that this has constrained their ability to grow and increase productivity. One explanation for limited access and high costs is a lack of competition in lending markets, which can arise if borrowers find it difficult to switch lenders (giving lenders some market power). Empirical evidence on the existence of switching costs in banking and their effect on competition is modest but growing for high and middle income nations, but is still rare in low income countries. The situation is worse in the case of MSMEs, where there is almost no empirical evidence on formal bank credit.

The researchers carry out an exploratory study of the behaviour of MSMEs when accessing formal bank credit in Zambia. Specifically, they test for the existence of borrower switching costs among MSMEs, and investigate impact of these costs on the competitiveness of the lending market. The impact on lending competition is examined by investigating whether banks price discriminate in favour of new borrowers because of the presence of switching costs. The study collected primary loan contract agreement data for MSME borrowers between 2005 and 2010 from all commercial banks in Zambia. The results will have important potential implications for competition policy in Zambia.