Accessing Credit Remains a Challenge for African Countries

Formal financial inclusion remains at very low levels in Africa, which represents a key hurdle to development on the continent. According to a report titled, “Economic Insight: Africa Quarterly Briefing Quarter 3 2016,” Rwanda is the only African country that can easily access credit this year based on the World Bank’s Doing Business rankings.

“Rwanda has made six reforms to facilitate getting credit during the 2010-16 period, through strengthening borrowers’ and lenders’ collateral laws,” reads the report, which was jointly authored by the Institute of Chartered Accountants in England and Wales  (ICAEW) and NKC African Economics.

Other countries that can access credit in sub-Saharan Africa include Zambia, Kenya, Ghana, Mauritius, and Uganda.

On average, accessing credit in Angola is more difficult than in the rest of the sub-Saharan countries, because the country only made one reform to facilitate access of credit since 2010. Despite this, Angola has the third largest banking system on the continent, only behind Nigeria and South Africa.

The report notes that most countries in sub-Saharan Africa have limited access to credit due to the underdeveloped nature of their banking sectors, which are reluctant to provide capital to businesses, reflected by the low Private Sector Credit Extension (PSCE) to Growth Domestic Product (GDP) ratio. Due to the limited availability of private credit, only 23 percent of African households have access to formal or semi-formal financial services.

South Africa and Mauritius have the highest indicators for providing private credit. For instance, last year, South Africa had a 150 percent PSCE to GDP ratio, followed by Mauritius at around 104 percent. This makes South Africa’s ratio higher than that of the United Kingdom, which stands at 134 percent.

Monetary Policy

Countries in the East African region have eased their monetary policy, while those in West Africa have tightened it in order to slow inflation. In Kenya, lower inflation has allowed the Central Bank of Kenya’s Monetary Policy Committee to cut rates by one percent to 10.5 percent.

The Ugandan monetary policy authorities eased policy on two occasions during the first six months of 2016, after raising the benchmark rate by a cumulative 6 percent in the previous year.

The report notes that in August, Kenya enacted the Banking Act, a law prohibiting banks from lending at rates of more than 4 percent over the Central Bank Rate (CBR). The weighted average lending rates of commercial banks was 18.2 percent in June, but it was adjusted to 14.5 percent based on the new law.

“The effect was that it could distort credit markets, but could also spur greater competition and encourage more accurate credit scoring. Given that banks will require sometime to adjust to the new law regulation, and considering uncertainty related to global financial conditions, Kenyan authorities are expected to adopt a more cautious approach towards monetary easing, ” reads the Economic Insight report.

Uganda is yet to reverse its monetary tightening, which has had an adverse effect on its economic growth.

East Africa’s Monetary Environment

In West Africa,  the inflationary impact of a severe dollar liquidity drought forced vendors to turn to the black market due to high price hikes. It also caused the Angolan and Nigerian monetary authorities to tighten their policies this year.

“Monetary policy in East Africa is broadly supportive of cheaper finance in East Africa, but pushing borrowing costs up in the Western half of the continent, ” reads the report.

Future economic outlooks for East and Southern Africa remain generally positive due to diversified economies. These economies are unlike those of oil or commodity-dependent countries in the rest of sub-Saharan Africa.

“For instance, Rwanda and Kenya maintained growth momentum into 2016, recording real GDP growth of 7.3 percent year on year and 5.9 percent in the first quarter of the year, respectively. Uganda recorded a disappointing 3.4 percent year on year in the same quarter. Tanzania and Ethiopia have not yet released any GDP growths for this year,” notes the report.

On the other hand, the economic outlook in Ethiopia has worsened due to drought that has had a spill-over effect in the agricultural, service, and manufacturing sectors. However, the drivers that support Ethiopia’s growth over the recent years remain in place.

The GDP forecast for Africa’s southern countries was revised to 0.9 percent in 2016. According to the report, this is due to drought in the region, which has resulted in high food prices, a public debt crisis in Mozambique, as well as last year’s tense election in Zambia.

In West Africa, low trending crude prices have pressurized the economies of Angola and Nigeria, the two largest oil producers.

Ghana, however, has continued to make good progress due to fiscal consolidation under a program by the International Monetary Fund (IMF). The 2016 forecast for Ghana is 4.3 percent and 4.7 percent in 2017.