African Central Banks Push Lenders to Fund Companies Rather Than Buy Debt
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‚Äôs 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 percent in October compared with 14.2 percent in January last year even after the central bank cut its key rate to a record low of 6 percent. Ghana‚Äôs key rate of 13.5 percent compares with an average 28.5 percent charged by banks. Nigeria has capped lenders‚Äô purchases of treasury bills and Mauritius may do the same.
Africa‚Äôs ‚Äútop-tier corporate banks feel the risks are still too high,‚Äù said Graham Stock, chief strategist at London- based Insparo Asset Management, which oversees about $193 million in its Africa and the Middle East fund. ‚ÄúPoor decision- making led much of the developed world‚Äôs banking system into this crisis, so banks generally are right to be cautious.‚Äù
Spurring the commercial-loan market would give industry funds in a region the International Monetary Fund expects to grow 5.5 percent in 2011, less than its 6.4 percent estimate for all developing nations. The main concern for African central bankers is that inadequate lending may curb growth.
‚ÄúWhat we haven‚Äôt seen, and people have been complaining about this,‚Äù is commercial banks following the trend to the same extent, Kofi Wampah, the first deputy governor of the Bank of Ghana, said in an Oct. 7 interview in Accra. The gap between the bank interest rates and the central bank should be 5 or 6 percentage points and because banks‚Äô funds are ‚Äútrapped in treasury bills,‚Äù it takes them months to follow the central bank in paring their rates, he said.
Banks say a lack of credit-profiling systems and legal consequences for those who default raises their caution.
‚ÄúI would like to grow my loan book, but they have to be good loans,‚Äù said Sanjay Rughani, finance director at Standard Chartered Plc‚Äôs Ghanaian unit. Advances since the start of 2010 to end-September are largely unchanged from last year at 500 million cedis ($350 million), he said. The lender increased its holding of government debt to around 550 million cedis this year from 300 million cedis for the same period in 2009.
Kenya‚Äôs central bank has taken steps to improve transparency, granting CRB Africa the country‚Äôs first credit- rating agency license in February. Average rates for customers have remained high because banks are still seeing defaults on repayments, said Gideon Kariuki, chief executive officer of Co-operative Bank of Kenya Ltd., the country‚Äôs fourth-biggest bank by assets. Co- operative‚Äôs net non-performing loans rose 25 percent to 2.9 billion shillings ($36 million) in the year through December.
Still, ‚Äúthere is increased uptake of loans and the rates at commercial banks have come down,‚Äù he said. ‚ÄúThe central bank has influenced that.‚Äù Co-operative offered a five-year loan to corporate customers for as little as 8.7 percent in September compared with as much as 13 percent a year ago.
Co-operative‚Äôs stock has more than doubled on the Nairobi Stock Exchange this year and three banks are among the 10 best- performing shares.
High lending rates are spurring companies to seek funds through less expensive debt and equity offers. Housing Finance Co., Kenya‚Äôs only publicly traded mortgage lender, sold 7 billion shillings of bonds last month, 80 percent of which pay a fixed rate of 8.5 percent to raise funds for lending. The rest of the securities have a floating rate.
‚ÄúWe opted for a bond as it‚Äôs cheaper than a bank loan and it‚Äôs difficult to get more than a five-year tenor from a bank,‚Äù Housing Finance‚Äôs Managing Director Frank Ireri said in an Oct. 8 e-mailed response to questions. In Nigeria, sub-Saharan Africa‚Äôs second-biggest economy, lending to private industry fell to a nine-month low of 9.91 trillion naira ($66 billion) in July after a debt crisis caused by loans to speculators who used the borrowed funds to buy stocks. Central bank Governor Lamido Sanusi said in a Sept. 27 interview he doesn‚Äôt expect banks to increase credit until at least the first quarter of 2011.
Lenders and investors bought Treasury bills, with the yield on 91-day securities declining to a record of 1.04 percent in March and averaging 2.26 percent this year, compared with a high of 22.5 percent in 2002, central bank data show. Securities with a similar maturity in the U.S. yielded 0.156 percent at 11:48 a.m. in New York. The central bank maintained its key lending rate near a record low of 6.25 percent at its Nov. 23 meeting. Banks‚Äô average prime-lending rate was 16.9 percent in August, Sanusi said. That compares with 18.98 percent in the last quarter of last year.
The country plans to limit lenders‚Äô holdings of government debt to 30 percent of their total portfolio of fixed-income securities and they won‚Äôt be allowed to hold more than 10 percent of the total issue of a single government debt security, the Abuja-based central bank said on Sept. 24.
Mauritius on Sept. 11 proposed capping banks‚Äô holdings of government and central bank debt to ‚Äúencourage banks to lend more aggressively rather than direct all their surplus funds to Treasury bills and official papers.‚Äù About 19 percent of residents in 18 sub-Saharan countries have bank accounts, according to a Gallup survey, and credit is mainly extended to companies, banks and their employees, Yvonne Mhango, an economist at Renaissance Capital, said from Johannesburg on Nov. 18. Land isn‚Äôt always under title deed and can be communally owned, and in cases where collateral is available, it isn‚Äôt always enforceable, she said. Sluggish credit extension in countries like Nigeria and Ghana ‚Äúhas stalled economic activity, reducing growth to below its full potential,‚Äù said Mhango. ‚ÄúCentral banks are doing their part by lowering interest rates, but that alone won‚Äôt solve the problem.‚Äù