This report documents the results of an assessment of the payroll lending sector in Zambia. The study was commissioned by FSD Africa on behalf of the Bank of Zambia and was carried out between July and November 2014. The study forms part of a broader theme of work initiated by FSD Africa on credit markets within the region.

The study aimed to understand and quantify the extent of systemic and operational risks that may have arisen as payroll lending in Zambia has grown in prominence. Based on data collected from the largest payroll lenders, the research estimates that payroll loans now account for one-third of all Zambian banking system loan value, up from 25% at the end of 2008. Personal loans, driven by payroll loans, have been the largest contributor to commercial bank loan portfolio growth every year since 2011, accounting for just under one-third of the total growth of the Zambian credit markets between June 2010 and June 2014.

Yet even though payroll lending is a key driver of Zambian credit market growth, information is scant and oversight and regulation is limited.

Given the growing exposure of banks and micro-finance institutions (MFIs) to payroll lending and the concentration of portfolio growth within particular market segments the assessment raises significant questions about the operational and systemic risks that have already been introduced into the Zambian financial sector, or that could become risks in the future.