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With elections looming in many African countries, banks are likely to feel increasing political heat to cut sky-high lending costs but are unlikely to unleash growth-boosting cheap credit into their economies.
Many countries on the poorest continent enjoyed annual expansion of 5% or more in the years up to 2008, and their leaders are keen to get rates back to those levels now that the immediate financial and economic crisis has passed.
Lower central bank and treasury bill rates from Nigeria to Kenya to South Africa in the last two years have caused a drop in the cost of commercial credit, especially for big companies.
But politicians say they have not gone low enough fast enough in response to waning inflation and monetary easing, and argue that Africa's banks are getting fat on the margin between what they pay for capital and what they charge their customers.
Lenders such as Nigeria's First Bank posting a 10-fold rise in first-half profits only sharpen the perception of boardroom greed, and increase the chances of governments pushing for cheaper, rather than more stable, banking.
In Ghana, for instance, the central bank has cut rates by 5 percentage points since November to a two-year low of 13.5% but the average rate banks charge customers has held above 25%, putting loans out of reach for many companies.
"No one can force interest rates down," said Daniel Mensah, Executive Director of the Ghana Association of Bankers, articulating concerns about the West African country's stubbornly high levels of bad debts.
"They will come down if there is real stability."
Similar situations exist across sub-Sahara, where many key frontier market states including Nigeria, Kenya, Uganda and Zambia face national elections in the next two years.
Foremost is Nigeria, Africa's most populous nation and its biggest oil producer, with a presidential poll in January.
Its central bank has kept its key benchmark rate steady at 6.0% for a year, despite a "real threat" of inflation last month, because of the competing need to stimulate growth in frontier Africa's most important economy.
Finance minister Olusegun Aganga has also made clear his desire to get cheaper loans flowing to small firms, yet private sector credit growth has been virtually zero this year.
BANK ROBBERY
Nigeria may be anomalous given last year's near melt-down of the banking system, leaving institutions outside a $4 bln state bail-out needing to rebuild balance sheets and lend only to low-risk clients — basically the government and oil majors.
But African banks' reluctance to lend to smaller fry — expressed either by a simple "No" or punitively high lending rates — is far from a peculiarly Nigerian affliction.
Big overheads caused by everything from dodgy power supplies to armed gangs knocking off cash vans are among the more common reasons trotted out by bank bosses to justify credit spreads of as much as 15%.
In Thailand, an emerging Asian economy, the spread between central bank and prime rates is 4.5%.
But at the heart of the issue is that African banks know the current supply of cheap money will not last and that governments have huge borrowing needs that banks would prefer to finance above riskier commercial propositions, analysts say.
In Kenya, for instance, most banks are reluctant to pass on cheaper credit to smaller borrowers because they know government plans for massive domestic debt issuance to pay for new roads, railways and power stations can only push up the cost of money.
"Eight years ago this is exactly what happened. The banks started to reduce and the rates just went back up again," said Mike Davidson, former chief executive of Kenya's NIC Bank. "They don't want to get caught bringing everything down and suddenly treasury bill yields jump back up." In other countries, such as Uganda and Zambia, which both go to the polls next year, the situation is exacerbated by a gradual push to replace overseas aid with more government debt, which will mean higher domestic bond yields.
CHEAP OR STABLE?
Instead, governments' best options appear to be practical steps such as making it easier for banks to claw back bad debts or run credit checks on individuals, such as with Kenya's licensing of its first credit reference bureau this year.
"Efficiency could be improved by enhancing the credit environment through better functioning judicial and legal processes and the accessibility of information on borrowers," a recent IMF working paper on the sector said.
Policymakers also need to be aware that cheaper banking — essentially a regime that has a narrower spread between banks' deposit and lending costs — is less stable banking, because it forces banks to make riskier loans.
The lesson from South Africa is telling: banks in the continent's biggest economy could be accused of making hay during the boom years up to 2008, but were rock solid when financial and economic crises shook the world.
"Sure, we could run leaner, but most other banking systems had a significant crisis whereas South Africa didn't," said one analyst who did not want to be named.
"And the benefit of that on the economy potentially outweighs the drag of banks earning super-profits. You've got to pick which one you want — cheap banking, or stable banking?"
