- Regional economies are grappling with widening fiscal deficits and tightening of lending to the private sector which may ultimately reduce economic growth, bankers said at a recent East Africa Business Forum.
Dar es Salaam. Economic growth across member states of the East African Community (EAC) may be derailed by high levels of non-performing loans (NPLs) across the region as lenders concentrate on internal consolidations and reduce the amount of loans to the productive sector, bankers have said.
Regional economies are grappling with widening fiscal deficits and tightening of lending to the private sector which may ultimately reduce economic growth, bankers said at a recent East Africa Business Forum.
Swift, a global provider of financial messaging services, organised the forum in Dar es Salaam.
Data, produced at the forum by the Tanzania Bankers Association (TBA) show that in Kenya, the ratio of NPLs to total gross loans rose from an average of six per cent in 2016 to 12 per cent.
Data, presented by the TBA chairman, Dr Charles Kimei, also showed that in Rwanda, the NPL to total gross loans ratio jumped from 5 per cent to 7 [er cent between December 2016 and May 2017 while in Tanzania, it rose from 9.5 per cent as of December 2016 to10 per cent in May, 2017.
Similarly, in Uganda, it rose from seven per cent to 12 per cent in May, 2017.
“Growth momentum for 2017/18 remains quite fragile across the region….the region’s financial system is weak as it grapples with NPLs and insufficient capital across East Africa Community (EAC). This could undermine growth,” Dr Kimei said at a forum that brought together senior bankers, policymakers and representatives from the region’s corporate community to discuss economic trends, financial policy and opportunities for growth.
Last year, East Africa registered the fastest economic growth on the continent when it grew at an average of 5.5 per cent and is being projected to increase to 6.0 per cent in 2017 and 6.3 per cent in 2018, backed by a robust performance in Kenya, Rwanda and Tanzania.
According to Dr Kimei however, with retarded growth of credit to the private sector, the growth remains elusive.
“There is an issue to tackle here…without giving credit to private sector there is no way we can have stable economy,” noted Dr Kimei.
Commercial banks are currently lending to private sector at the lowest pace in the East African economies, leaving key economic and job growth drivers such as manufacturing and agriculture struggling for funding, newly released data shows.
Bank of Tanzania (BoT) figures show that credit to the private sector grew by a minimal Sh516.6 billion during the entire 2016. This translated into a measly 2.5 per cent growth rate as compared to growth of 26.8 per cent registered during the preceding year.
Similarly, the Central Bank of Kenya (CBK) reported recently that lending to the private sector expanded by a paltry 3.3 per cent in the year to March 2017, the lowest growth rate since January 2005.
Analysts attribute the trend of low lending pace to private sector to liquidity problems.
Extended broad money supply in Tanzania increased by Sh645.1 billion during the year ending December 2016 to Sh22.7 trillion.
The increase implies a twelve-month growth rate of 2.9 per cent, which constitutes a continuation of the general slowdown in the growth of money supply observed throughout the year.
In East Africa, the fiscal deficit widened from 4 per cent to 4.6 per cent in 2016.
Failure to narrow fiscal deficit, according to the International Monetary Fund (IMF), may push up the costs of tapping international credit markets.
“With high NPLs, it would be more difficult to approach creditors in global markets,” Dr Kimei said. “That doesn’t mean that we won’t have access, but that normally translates into more expensive financing.”
The sector is also facing a challenge of unpredictability with regard to regulation, bankers say, citing the example of how Kenya adopted an interest cap which abide commercial banks in the neighbouring country not to charge more than four percentage points above the Central Bank’s benchmark rate, which is currently 10.5 per cent.
According to a senior manager for financial institutions at the National Microfinance Bank (NMB), Mr Mohamedhussein Aldina, increasingly stringent banking regulations in the region were changing the way financial institutions conduct their businesses.
Tighter regulation, according to him, is designed to improve standards, but one unintended consequence is how the same disincentivizes talented investment bankers.
“The problem is that tightening the reins can also have the unintended consequence of forcing some bankers to move away from the positions where their expertise and experience is sorely required and instead go to where they are able to use such expertise in a more risk-friendly environment,” he said.
Stakeholders are of the view that regulators needed to ensure that changes are thought through with as much consideration of the effect on present and future effects of the same on businesses.
They must consider the longer-term effects of regulation, rather than just solving immediate problems and reacting to public anger in knee-jerk style.
The Swift head of Sub-Sahara Africa Denis Kruger said only big and profitable banks would be able to comply with tighten of capital requirements.
“Tighter monetary conditions and economic uncertainty cause lenders to remain relatively risk averse,” said Mr Krugger.
Tanzania Women’s Bank managing director Japhet Justine said regulations should be friendly so that operators can match with technological changes.
“Digital transformation in the banking industry moves very quickly…we need to cope with the changes,” said Mr Justine.