Inflation in Sub Saharan Africa has been on the decline following a general recovery from the effects of the global financial crisis. But even as MENA crisis spells a new threat to oil prices, an age old threat has been least talked about: the ever high lending rates by commercial banks.  It is noteworthy that central banks have lowered their REPO rates in favor of commercial banks, a gesture whose effects never trickle down to the consumers of commercial banking products.

Considerably, Central Banks slash REPO rates to counter rising costs and achieve better growth prospects.  In doing so, they hope to influence commercial banks to lower their lending rates thus increasing uptake of loans by the market.  The results have however been a sad affair as very little change has been noted in past months. Notably, monetary policy changes in Kenya saw the base rate change from 9.25 to 6.75 in July 2010 and further to 5.75% points in February this year.  The move in July 2010 saw commercial banks in the country reduce their rates from an average of 20% to the current levels of 14%.  However, there have been no changes noted from the 14% levels.  Consumers had hoped that the move would reduce the average lending rate to below the 10 percent mark.

Comparatively, Uganda’s base rate stands at 13.87% against an average lending rate of 20.14.  The stark contrast is that the deposit rate still stands at 2.35 further widening the interest rate spread.  Tanzania’s case is not far from Kenya’s. The benchmark rate stood at 5.6%, a favorable drop from earlier 6.5.  On average, banks lending rates stand at 15.0% while the deposit rates stand at 8.0.  This represents a huge spread, just like in Kenya’s case.  Rwanda’s central bank has maintained the base rate at 6.0% while the lending rate by commercial banks has remained at 17% on average against a deposit rate of 7%.  

The main central banks in the world offer rates that are beyond match.  South Africa still falls closest to the regional economies with a REPO rate of 5.5%.  However, its lending rates, perhaps the most competitive in the region stand at an average rate of 9%. 

Main Central Banks' Rates   

All the above economies have maintained their lending rates at a single digit.  The U.K for example, even after effects of the global financial crisis in which first world economies were worst hit has maintained a prime rate of 0.80625%, 3.25% in the US, 1.75 in the Euro markets, and 4.6% in the Norwegian market. 

So, why is there such a huge disparity in the East African economies and generally Africa at large?  One most outright reason is the high default rate.  In Kenya for example, the gross non-performing loans/gross loans ratio stood at 9.2 in December 2008.  However, there has been a marginal decline to 6.2 as at December 2010.  This is according to Kenya’s Central Bank.  The high default rate has meant that most banks price their loans with the cost of default on advances already factored in. 

It is also important to note that Africa’s monetary policies have been very weak. This in essence gave rise to central banks with lesser teeth and more political influence. Some countries print more money in order to influence voting patterns during general elections while others circulate more currencies. This over-rides the role of commercial banks in economic development. 

Lack of competition has also been cited for the unchanging lending rates by commercial banks.  Banks have become more and more liquid but the target market has not changed. This has led to the growth of the microfinance movement which has been able to give non secured loans to the market that banks have not been willing to tap into.  The liquidity ratio for Kenya’s commercial banks for example swung from 37% in 2008 to 44.5% in 2010 according to Kenya’s central bank.  MFI’s on the other hand have absorbed the majority of new borrowers in the bottom end of the pyramid. 

Historically, banks have also gained heavily from government securities (treasury bills and bonds) overriding the need to focus on lending.  As these securities’ returns shrink due to increased demand, bank’s lending rates could come down. 

But even talking to most bank executives, majority would argue that the cost of funds is still too high.  Really?  One would wonder what kind of returns banks expect.  Kenya’s saving rate for example stands at 1.25% on average.  The deposit rate is at 3.43 on average. This is against an average lending rate of 14.03 and an O/D rate of 13.93. 

Arguably, Credit Reference Bureau already active in Kenya and Uganda and soon in Tanzania could see a marked decline in number of default rates and further reduction in lending rates.  Its adoption is however not a one day affair.  This could mean that before the market starts fully enjoying the cheaper loans, it could be another year or so. 

In the meantime, investors will still have to pay double digit interest rates as bankers enjoy a cartel of huge interest spreads partly driven by exchange rates and reserve requirements by central banks.

By Michael Musau
Investment Analyst,
Emerging Africa Capital.