Bank lending channel in Zambia: empirical evidence from bank level data

Abstract

Purpose– The purpose of this paper is to explore the effect of monetary policy on the lending behaviour of commercial banks in Zambia using bank-level data.Design/methodology/approach– Dynamic panel data econometric analysis is used to uncover the evidence of monetary transmission mechanism in Zambian banking industry. Other specifications are used as robustness checks.Findings– Contrary to received evidence, the authors find that the bank lending channel in Zambia operates mainly through large banks. The effect of monetary policy on medium-sized banks is moderate while it is virtually non-existent for smaller banks. Furthermore, the data does not show evidence of relationship lending for smaller banks.Originality/value– Overall, the findings of this investigation suggest that price signals, rather than quantity aggregates, matter the most in the transmission of monetary policy in Zambia. The results therefore lend support to the central bank’s recent shift in monetary policy framework from using monetary aggregates to interest rate targeting as a means to strengthen effectiveness of monetary policy.