BANKS in AFRICA

Subprime savannah – Trouble is stalking many of Africa’s banks
Jul 23rd 2016 Economist

Africa’s financial firms can claim many innovations, from M-Pesa, a pioneering Kenyan mobile-money service, to the life insurance for people with HIV offered by All Life, a South African firm. To these can be added the first social-media bank run. Chase Bank Kenya, the country’s 11th-largest (unrelated to America’s JPMorgan Chase), was taken over by regulators in April after word of its impending collapse spread on Twitter and WhatsApp, spurring panicked withdrawals.

The run highlighted the risks facing banks in a region that is seen by many investors as one of the industry’s final frontiers. Whereas banks in many rich countries have produced disappointing profits since the financial crisis of 2008, African ones had until recently been reporting stellar growth and juicy returns. Those in Ghana were expanding their loan books at a breathtaking pace of more than 30% a year. Banks in Mozambique, Zambia and Malawi were not too far behind. And most were making good money, too.

Moody’s, a rating agency, reckons that average return on equity (a standard measure of profitability) ranged from 20-25% in many African countries, making their banks well over twice as profitable as American ones and four or five times more profitable than Europe’s limping lenders. Yet in many parts of sub-Saharan Africa these mouthwatering profits are turning into losses as a result of falling commodity prices, slowing economies and, in some cases, weak regulation.

Nigeria, Africa’s biggest economy, seems on the brink of its second banking crisis in less than a decade. On July 4th the central bank dismissed the management of Skye Bank, the country’s eighth-biggest lender by assets, amid concerns that it had failed to keep thick enough buffers of capital to absorb losses on its bad debts. Its share price has plunged by about a quarter since the move. The shares of other Nigerian banks are also sinking.

The central bank insists that “there is… no need for panic withdrawals from any bank.” Yet Skye’s managerial maelstrom harks back ominously to 2009, when the global financial crisis caused several of Nigeria’s bigger banks to collapse. Back then the central bank replaced the bosses of eight institutions. A state-backed agency known as Amcon was established to swallow up bad loans; the sickliest outfits were either nationalised or sold to other banks.

Today’s sticky issue is oil. During the financial crisis the price of oil slumped only briefly before recovering strongly. Nigerian banks subsequently lent billions to local businessmen to help them buy oil and gas wells. These loans, about 25% of the country’s total, seemed quite safe until the oil price began dropping in mid-2014; it is now less than half what it was then. Militancy in the oil-pumping Niger Delta has only made matters worse.

Afren, an exploration company, went bust last year. Oando, a leading local oil producer, admits “significant doubt” about its ability to repay loans. “The interest is racking up,” says Kola Karim of Shoreline Energy, another local producer, which had to turn off its taps after bandits bombed a pipeline in February. And even firms that are not in the oil business may struggle to service their debts thanks to the economy’s broader malaise: the IMF reckons it will shrink by 1.8% this year.

First Bank, Nigeria’s second-largest by assets, says that 18% of its loans are non-performing. It may be suffering more than most, since more than 40% of its loans went to oil and gas producers. The central bank says that bad debts in the banking system as a whole have doubled in the past six months, to 10%. Emmanuel Assiak of Africa Capital Alliance, a private-equity firm, thinks the figure is really in the low teens. “A lot of people are saying this is not 2009. Well it’s worse,” says Ronak Gadhia of Exotix, an investment bank. “Back then, they didn’t have the exposure to oil.”
Banks are also under pressure elsewhere in the region, often for similar reasons. In Ghana non-performing loans have jumped to more than 16% of the total after slumping commodity prices and a plunging currency forced the central bank to ramp up interest rates. It raised them by five percentage points, to 26%, a level at which almost all borrowers will struggle. Zimbabwean banks hold lots of government bonds that will probably never be repaid. They have only staved off runs by limiting withdrawals.

In Kenya, however, banks face a different set of stresses. Weak regulation, exacerbated by the proliferation of small banks, is taking a toll. Three banks have been placed into receivership in less than a year by Patrick Njoroge, the respected governor of the Central Bank of Kenya, as a series of ruinous insider-lending scams have come to light. Mr Njoroge alleges that the managing director of one bank siphoned off 38 billion Kenya shillings ($335m) via 20 shell companies over 13 years . The full scale of the heist was discovered a few days after his funeral. At Chase Bank, the victim of the social-media run, directors had signed off on some 8 billion shillings in loans to themselves.

Mr Njoroge seems determined to clean up Kenya’s banking system. But elsewhere in Africa regulators still seem willing to turn a blind eye to problems. Forcing banks to admit to rising bad debts could lead to painful collapses and to strained public finances if governments have to step in with bail-outs. But ignoring them might be even worse in the long run. As it is, businesses in Africa struggle to obtain enough capital to grow: despite rapid loan growth, most African countries still have low banking penetration. Allowing zombie banks to limp on, too weakened by bad loans to make any new ones, would only worsen Africa’s desperate shortage of credit.

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I would like to think of myself as a full time traveler. I have been retired since 2006 and in that time have traveled every winter for four to seven months. The months that I am “home”, are often also spent on the road, hiking or kayaking.
I hope to present a website that describes my travel along with my hiking and sea kayaking experiences.

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