News / Africa

African Banks Decrease Lending to Private Sector

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In the early stages of the global recession, many African bankers and analysts dismissed the decline as a western issue.  Their assumptions were based on the fact that most African financial institutions, especially in sub-Saharan Africa, were not part of the larger network of the global financial structure.  A few others cautiously monitored it.  A few banks in developing countries like South Africa have successfully integrated into the global financial system, but even so, the impact was expected to be minimal or non-existent.

But with time, many African bank executives and economic analysts were proven wrong in their initial assessments.  They acknowledge that they had failed to take into consideration the fact that in the past decade African banks have been working hard to be integrated into the international financial system.  Integration has its economic benefits, but it has also made the continent more susceptible to the ebbs and flows of global financial institutions.

Most African countries were relatively “insulated” from the shock of the financial collapse “because African banks don’t deal in these derivatives and credit default swaps,” says Professor Shantayanan Devarajan, the chief economist of the World Bank's Africa Region. 
   
But that is not enough to guarantee a firewall against a global collapse.  What we are seeing in Africa, he says, is the second- or third-round effects of the financial collapse.
   
Africa was the recipient of over 50 billion dollars of private capital flow from the West, says Devarajan, but most important was the decline in commodity prices.  So when western private investors lose money as a result of the financial crisis, there’s less to lend or invest in Africa.
   
“Africa was also receiving over 20 billion dollars in remittances” He says. The amount of remittances has considerably fallen since 2007.  Lastly he says, there has been a fall in tourism revenue since most westerners have cut back on travel.
   
Local banks affected
   
In Rwanda’s commercial bank, Cherno Gaye works as the chief financial officer. He uses the analogy of the “chicken and 3gg” when asked why banks have cut down on lending.  “The players in the real sector are complaining that the banks are not giving us money, then the banks are saying that business is actually slow…. it is a conundrum.”  He says once the export sector was affected, it had a knock-on effect on other sectors.

The slowdown has made it hard for businesses to service existing loans and access new ones.  Most importantly however, long-term depositors like the Rwanda Social Security Fund are undertaking major real estate investments.  This requires huge amounts of cash on hand to complete projects, which explains fewer deposits and huge withdrawals of millions of francs -- the same money that a commercial bank often uses as rotating funds.
   
“Our assets at the end of last year was over a one hundred billion francs; by June this year it had gone down to just over 900 billion francs.”  But some companies have been able to show strong growth despite the downturn. “… the financial crisis is proving some economic theories wrong”. He gives an example of the telecoms and utility companies. Reports show that Africa has the fastest-growing telecommunications market in the world. Urbanization has led to ever increasing demand for electricity and other power supplies.

Jack Kayonga is the director of the Rwanda Development Bank.  Even though he acknowledges the effects the global crisis has had on local banks, he downplays the impact on the private sector specifically the real estate market “There is still room to grow” He says.
   
Bosco Mugabe is a small business owner in Kigali. He imports products from neighboring Kenya. For the past year it has been hard for him to access loans to pay his suppliers. Local banks are less willing to give him loans and so he was forced to decrease his business.

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