Rising credit risks in sub-Saharan Africa (SSA), which began in 2015, is now threatening to slow down loans availability in the region. At the close of 2015, only about eight per cent of commercial banks’ outstanding loans in SSA were classified as non-performing, on average terms.
The figure then marginally climbed to 10 per cent in 2016. However by the close of 2017, it had steeply jumped to about 13 per cent, all on average terms. This steep upward glide has been driven by three of the region’s banking sector heavyweights, namely Nigeria, Angola and Ghana. Indeed, in the three countries alone, 23 per cent of banking sector outstanding loans were classified as non-performing by the close of 2017, up from 17 per cent at the close of 2015.
In Nigeria and Angola, the region’s biggest crude oil producers, the surge in loan non-performance is closely linked to the plunge in global oil prices that begun in mid-2014, as the fall in proceeds from oil sales suddenly couldn’t accommodate servicing of reserved-based loans that had been advanced when global oil prices hovered in excess of $100 per barrel.
The problem was also exacerbated by the fact that oil and gas sector accounted for the largest share of bank loans—especially in Nigeria. Apart from direct lending, the plunge also triggered decimation of oil and gas related supply chain. In Ghana, which began crude production not so long ago and is largely an outlier among the three, it has been a unique case of unpaid energy sector subsidies (by the government) and tenuous lending activities. Broadly, there are two identifiable causes of the rise in credit risks.
First is the synchronised slowdown in global output, which sucked in sub-Saharan Africa; and was exacerbated by the fall in commodity prices. Second, at the micro-level, tenuous lending practices exposed a number of balance sheets to macro downturns.
Resultantly, this elevation in credit risks has taken a bite out of credit growth in the region. Indeed, latest data from the International Monetary Fund (IMF) shows that annual private sector credit growth in SSA plunged to 3.3 per cent in 2017, from 12.5 per cent in 2016.
It was a synchronised plunge which could be felt both at home and within the vicinity. In Kenya, annual loan book growth came in at just four per cent. However, Kenya’s case remains unique due to its interest rate control law. In Tanzania, annual private sector credit growth plunged to its lowest of just under two per cent in 2017 despite the country’s regulator Bank of Tanzania amplifying liquidity in the system. In Uganda, 2017 annual private sector credit growth came in at just six per cent. The outlook for credit growth in 2018 isn’t rosy either.
However, not all countries in SSA recorded sustained deterioration in loan performance. There are a group of nations, which recorded a decline or stability, and they include such notable names as South Africa, Ethiopia, Uganda, Zimbabwe and the eight-member West African monetary and economic union, often referred to by its French acronym of UEMOA (Union Economique et Monétaire Ouest Africaine).
Some of them have incredible success stories. For Uganda, the stability has been brought by the regulatory seizure of Crane Bank back in October 2016, as the bank accounted for half of the sector’s non-performing loans.
In Zimbabwe, authorities had to set up a bad-bank vehicle to purchase eligible bad loans from financial institutions on commercial terms. That move narrowed non-performance to just seven per cent at the close of 2017. However, this basket of countries notwithstanding, the pendulum of risks, in as far as credit risks are concerned, still swings on the upside.