An Examination of the Macroeconomic Factors that Affect Bank Capital Position in Zambia

Abstract

The Zambian banking sector has experienced a recurring pattern of institutional failures and regulatory seizures driven by persistent undercapitalization. This has led to growing exposure of the banking sector to macroeconomic instability. The occurrence of bank insolvencies indicates that regulatory adjustments alone have not resolved the underlying vulnerabilities affecting bank capital positions. The study aimed to establish the factors affecting the capital position/solvency ratio in Zambia and to analyse the effect of exchange, interest rates and GDP on capital position over the period 2007 to 2024.
The study adopted a quantitative research approach using secondary time-series data covering the period 2007 to 2024. An AutoRegressive Distributed Lag model and Error Correction Model framework were employed to estimate both short-run and long-run relationships among variables. Descriptive statistics and diagnostic tests were conducted to ensure model validity and reliability.
The findings indicate that the average capital-to-asset ratio was 11.15%, reflecting moderate capital adequacy within the banking sector over the study period. The findings reveal that the model is statistically significant and explains 52% of the variation in bank capital position (R² = 0.5202). In the long run, lending interest rate has a negative and statistically significant effect on CAR (β = −0.0362, p < 0.01), while GDP growth exerts a positive and significant influence (β = 0.2459, p < 0.05). Exchange rate depreciation negatively affects bank capital (β = −0.1868, p < 0.05). Similarly, unemployment rate shows a negative and significant effect (β = −0.7276, p < 0.05).
The study concludes that macroeconomic conditions play an important role in shaping the resilience of the banking sector in Zambia. Stable exchange rates, moderate interest rates, and sustained economic growth are associated with stronger bank capital positions. Therefore, policymakers should promote macroeconomic stability and banks should strengthen risk management practices to improve capital resilience.