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African banks increasingly concerned about funding costs, survey finds By Reuters

By on October 19, 2022 0

© Reuters.

By Marc Jones and Rachel Savage

LONDON/JOHANNESBURG (Reuters) – Banks in sub-Saharan Africa are increasingly concerned about funding costs, according to an annual survey released on Wednesday, as soaring interest rates on the continent and around the world make funding more expensive.

The cost of local currency funding is now the main concern for banks in sub-Saharan Africa, according to a survey by the European Investment Bank of 70 institutions representing 30% of assets on the African continent.

Central banks from Nigeria to Kenya, Ghana and South Africa have aggressively raised interest rates in an effort to rein in inflation and prop up currencies that have been hammered by the US dollar This year.

“The main concerns for banks are the cost of local currency funding, competition from the non-banking sector and deteriorating asset quality,” the EIB report said.

The banks were surveyed between April and June, meaning the impact of the war in Ukraine had already started to shape perceptions.

(Graphic: Top concerns of African banks, https://fingfx.thomsonreuters.com/gfx/mkt/movakmmkova/Pasted%20image%201666210817474.png)

The most significant deterioration in asset quality has been reported in portfolios of loans to small and medium-sized enterprises (SMEs), while loans to large corporations have held up better so far.

The percentage of banks with a significant share of non-performing business loans (NPLs) is close to 21% overall, but 37% of banks have a significant share of NPLs in their SME loan portfolios.

The aggregate NPL figures also don’t tell the whole story, as there are now significant amounts of loans under moratoriums or restructuring that are not necessarily accounted for in the NPL figures.

More than a third of banks have more than 10% of their loan portfolio for small and medium enterprises under moratoriums. Two-fifths of banks have restructured more than 10% of their SME portfolio, although for many it is more than 20%.

Central Africa, which includes countries like Cameroon, Central African Republic, Chad, Democratic Republic of Congo and Gabon, the region with the biggest existing problems with non-performing loans at 19% of gross loans, is about 10 percentage points higher than the other regions, each of which has NPL ratios of 8-9%.

Central Africa (13%) and West Africa (16%) also have lower risk-weighted capital-to-asset ratios than East Africa (19%) or Southern Africa (19%), meaning they have less capacity to absorb any new asset quality issues.

“Concerns over non-performing loans cited by a large proportion of responding banks could mean that they expect NPL ratios to rise, even before this is reflected in official data,” the report said.

(Graphic: African PNPs, https://fingfx.thomsonreuters.com/gfx/mkt/znpnbddbgpl/Pasted%20image%201666213087333.png)