Lack of crucial building blocks continue to stifle bank credit growth
The issue of banks in Africa not doing enough to make capital accessible to corporates and the retail market was highlighted once again in a recent article by Bloomberg.
The article noted that African central banks are pushing lenders to cut purchases of government bonds and instead lend more to the local companies that are key to creating a functioning commercial economy.
Borrowing costs in some of Sub-Saharan Africa’s biggest economies have barely budged even after central banks slashed interest rates.
Average lending rates at commercial banks in Kenya were little changed at 13.85% in October compared with 14.2% in January last year even after the central bank cut its key rate to a record low of 6%. Ghana‘s key rate of 13.5% compares with an average 28.5% charged by banks. Nigeria has capped lenders’ purchases of treasury bills and Mauritius may do the same.
We have observed a similar trend in Zambia where the central bank has attempted to drive rates down by lowering TB rates, but while banks have reduced their minimum lending rates to some extent, these still fall short of the levels the central bank would like to see. The banks we met with highlighted the fact that the interest margin they earn is not a profit figure and should not be looked at in isolation, but that the cost of doing business must be taken into account as well, in determining minimum land rates.
Other factors also come into play, for example a few days earlier Bloomberg had another article looking at Rwanda, where the head of that country’s banking association said Rwandan lenders are unlikely to heed a call by the central bank to boost loans until there are more credit-worthy projects to fund and debt-repayment ratios decline. Credit provided by commercial banks in the East African country climbed 5.7% to RWF305.3bn (USD517.4m) in the year through June, according to National Bank of Rwanda data. That is below the desired growth rate of between 15% and 20%, Governor Francois Kanimba said.
“We cannot commit credit to borrowers whose track record is bad, we don’t know, or is hard to know,” Steve Caley, chairman of the Rwanda Bankers Association, said in an interview. “The Governor wants us to lend to new businesses, but they have to be viable. There is ability to pay and willingness to pay, but loan defaulting in this country is still very high.”
A World Bank study on financial sector efficiency in Africa noted that certain building blocks, including rationalisation and clarification of laws, streamlining of court procedures, establishment of credit registries, training of financial professionals, are key components in moving towards more effective financial systems. The lack, or slow development, of these building blocks in many Sub-Saharan African countries thus continues to impede credit extension.
Article produced by the Imara Africa Securities team. Imara is an investment banking and asset management group renowned for its knowledge of African markets.