WHEN ROBERT MATSIKO was a younger man his grain-milling enterprise in Sheema, western Uganda, was destroyed by fireplace. Lately, after constructing it again up from the ashes, he’s being burned by excessive rates of interest. To purchase a brand new machine he should borrow from a bank at an annual fee of 22%. “You fear to do that,” he says. Many different entrepreneurs really feel the identical, which stops their companies from rising.
Simply as Mr Matsiko funnels grain from farms to supermarkets, banks are the bridge between savers and debtors, paying curiosity on financial savings and charging it on loans. And in sub-Saharan Africa, the hole between deposit and lending charges is greater than wherever else. In 2017 internet curiosity margins within the median African nation have been 6.8%, in keeping with the World Bank. That wholesome mark-up partially helps cowl overheads which can be chunkier than these in different areas. But it surely additionally allowed African banks to generate a 17% return on fairness for shareholders. On that measure, Africa’s banks are essentially the most worthwhile on this planet—whereas additionally being the least environment friendly.
Final yr Uganda’s central bank estimated that half of banks’ curiosity margins are swallowed by working prices. “Opening up a branch probably costs half a million dollars,” says Patrick Mweheire, who heads east African operations for Customary Bank, the continent’s largest lender. Smaller banks are floor down by the price of electrical energy, knowledge storage or just shifting cash, he provides. “If you look at a highway you will see six cash-in-transit trucks, one for each bank, all a quarter full.”
In some international locations, excessive inflation can assist clarify excessive rates of interest, albeit much less so than up to now. Rates of interest additionally price in threat. Assessing debtors is tough once they typically lack credit score histories. Chasing up unhealthy loans is a battle. Collectors can solely anticipate to get well one shilling in each 5 they’ve lent to a enterprise that goes bancrupt in Tanzania, in keeping with the World Bank. In Niger, the decision course of takes 5 years, on common.
Many bankers save themselves the trouble by lending to the state as an alternative. The double-digit rates of interest that the federal government pays set “a floor” on the charges paid by everybody else, says Adam Mugume of Uganda’s central bank. Within the common African nation, in keeping with the European Funding Bank, lenders’ holdings of public debt elevated from 14% of their belongings in 2008 to 19% by 2017.
Critics say that banks are abusing their market energy to tear off prospects. The World Bank estimates that the banking system within the typical African nation isn’t any extra concentrated than in Europe or Latin America. However the truth that banks can maintain excessive income may recommend they’ve some market energy. And in some smaller international locations, the market is extra concentrated. Competitors for small enterprise loans is weaker than for company offers.
Governments have tried and didn’t carry charges down. In 2016 Kenya capped commercial-loan charges at 4 proportion factors above the central bank’s coverage fee. The transfer backfired. Bankers slashed credit score to small companies, reasoning that the rewards of lending now not matched the dangers. The cap was scrapped final yr.
In Nigeria the central bank penalises banks that don’t meet lending targets. But it surely additionally pushes up rates of interest by way of tight financial coverage, meant to maintain the naira robust. Banks should maintain plenty of liquid belongings, reminiscent of cash and treasury payments, and hold readily available at the very least 27.5% of their deposits, one of many highest ratios on this planet.
New fashions may spur change. Joshua Oigara, the boss of KCB bank and chairman of the Kenya Bankers Affiliation, says that cellular banking, credit-information sharing and, earlier than the pandemic, a steady economic system helped to carry down lending prices. Others are saving on bricks and mortar by enlisting native brokers, reminiscent of shopkeepers. Barely 18 months after adopting this model, Customary Bank’s Ugandan subsidiary processes extra transactions by way of brokers than at branches.
Innovation can carry down prices, however it can’t loosen demographic constraints. It prices extra to borrow domestically when there are fewer financial savings to go round, notes Charles Robertson of Renaissance Capital, an funding bank. African households save lower than these in Asia, say, partially as a result of staff assist extra dependants. “If you’ve got six kids you’ve got no savings, whether you’ve got a mobile phone or not,” he argues. Till beginning charges fall, rates of interest will keep comparatively excessive. ■
This text appeared within the Finance & economics part of the print version underneath the headline “Borrower beware”