The Danger of High Interest Rates on Businesses in Africa

Mr. Abraham was a young everyday person who had dreams of making it big in his local food processing business in the Eastern part of Nigeria. Unfortunately for Mr. Iheanacho, his little establishment was gutted by fire.

After such a major setback and without insurance cover for his business, the only way Mr. Abraham could move was forward. Hence, he started building again from the ashes. However, his best efforts were being frustrated by insanely high-interest rates on available loans.

Just to procure a new machine for his business, he has to obtain a loan from the bank at an outrageous interest rate of 22% per annum! This interest rate presents Mr. Abraham’s greatest

fear. Many other African entrepreneurs find themselves facing this same fate, and this effectively

hampers the growth of their businesses.

Akin to how the products of Mr. Abraham makes their way from his factory to supermarkets, the banks act as the connectors between borrowers and lenders, payment of interest on savings amount as well as charging said amount on loans.

An interesting fact to note is that the gap between lending and deposit rates in Sub-Saharan Africa is the highest in the world! Several factors have led to this reality. Chief of which is the steep cost of banks that tend to negate their impressive returns.

According to the world bank, net interest margins in Sub-Saharan Africa was pegged at 6.8% in

2017. This is an impressive markup. It helps to cover the ever-increasing overhead costs that are quite gigantic when compared with other regions.

It however gave room for banks in Africa to generate as much as 17% return on shareholders’ equity value. As a result of this, the situation has now developed two opposing sides.

While it puts banks in Africa as the most profitable in the globe, it also means they have the least operational efficiency.

Just last year, the central bank of Uganda reported that a good portion of its interest margins had inevitably been swallowed up by its ever-increasing operating cost. The head of the East African operations for the standard bank (the largest lenders in Africa), Mr. Patrick Mweheire

suggested that opening another branch would cost almost a million dollars!

Banks with limited financial muscle tend to be overwhelmed by the cost of storing data, electricity, and even the cost of moving deposits. This is the sad reality and is one that appears it has come to stay.

In many countries, the advent of high-interest rates can often be explained with the high rate of

inflation. This is however becoming increasingly difficult in recent times.

Interest rates also tend to factor in risk. Banks usually face a hard time assessing borrowers especially those without a credit history. Recovering bad loans/debts then seems very hard and in some cases, impossible!

Reports submitted by the world bank have shown that creditors only have a one in five chance of recovering loans from defaulters at various times. In some extreme cases, such recoveries can take as much as five years to complete fully!

Many banks in Africa have sought to break out of the struggle by lending strictly to the state. It is common practice for the double-digit interest rates that the government sets to act as strong floors for the rates paid by other institutions and individuals.

The European Investment Bank reported that the rate of public debt being held by lenders in the average African country moved from 14% of their total assets in 2008 to 19% in 2017.

In some quarters, there are critics that banks in Africa constantly abuse their power over the market to extort innocent customers. The world bank suggests that Africa does not have a larger

collection of banks when compared to Europe. So, the presence of such huge returns on their books suggests a high level of market power.

In Nigeria, banks that do not meet up and stick to strict lending policies are penalized by the

Central Bank. However, the central bank also employs monetary policies to push up interest rates in a bid to make the naira remain valuable. This thus presents a dilemma.

Government and banks in Africa can do more to support small businesses as studies have shown these businesses make up a large part of the economy of any country.

 

 

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