- African Banks Jump on Bonds as Risk Associated With Real Economy Surges
Despite measures put in place by Central Banks in some African countries to increase credit facility to the private sector and stimulate growth in the real economy, lenders continue to dump more money on government bonds.
Lockdowns, rising risk and low economic activities are some of the factors identified by analysts as responsible for the recent attitude of banks on the continent. Non-performing loans are expected to jump this year while the African economy is expected to contract by 1.6 percent, a situation that many banks are trying to avoid or reduce their risk exposure as much as possible.
“In this kind of environment, where you have weak economic activity and high risk profile, it is very difficult to grow your loan book,” said Omotola Abimbola, an analyst at Chapel Hill Denham in Lagos. “Many banks will want to preserve their capital by taking as little risk as possible and then invest in government securities.”
Central banks in South Africa, Kenya, Ghana have released billions of dollars from lenders’ balance sheets by easing measures on how much capital lenders need to set aside just to encourage more facility to the real economy.
In Nigeria, the central bank increased loan to deposit ratio to 65 percent to compel deposit money banks to loan more money to the private sector in accordance with the government’s plans to diversify the economy.
Also, the apex bank restricted individuals and non-banking firms from participating in Open Market Operations to stimulate lending for other purposes.
Still, banks are holding on to cash as they continue to assess the current situation in anticipation for less risky opportunities that are likely to open up when the economies fully reopened.
“If the potential sanctions or punishments are not likely to wipe out the potential benefits of holding risk-free Treasury debts, then the banks would most likely prefer to absorb the punishment in the hunt for high-yielding and safer treasuries than aggressive loan-book expansion.”