Banks shy away from lending to local private enterprises …regard foreign private enterprises as safer debtors

While total credit to the private sector increased in the first two months of 2019, the banks are however shying away from lending to indigenous private enterprises as foreign enterprises are deemed much less risky debtors.

Data made available in the Bank of Ghana’s latest Banking Sector Report, released in late April 2019, indicates that the share of credit held by foreign private enterprises increased from 8.0 percent to 10.9 percent, while that of indigenous private enterprises declined from 60.0 percent to 56.7 percent during the period under review. The rest went to public institutions/enterprises and private households.

The share of total credit held by the private sector increased from 88.7 percent in February 2018 to 90.7 percent in February 2019. Private enterprises held 67.7 percent of the total credit as at February 2019 compared with 68.0 percent a year earlier.

The development is observed by some industry watchers as a result of the relatively high incidence of loan repayment default by local companies compared to their foreign counterparts.

Most of the bad loans on the books of the nine indigenous banks liquidated between August 2017 and January 2019 have largely been attributed to local companies. Due to this, most banks have decided that local private enterprises are inordinately risky compared with the foreign companies, for which reason they prefer to lend to the foreign private enterprises.

Indeed as at February 2019, indigenous private enterprises accounted for 75.4 percent of total non-performing loans , while the contribution of foreign enterprises was just about 10.2 percent. To be sure, the contribution of private indigenous enterprises to the banking industry’s stock of NPLs rose slightly relative to that of private foreign owned enterprises during the 12 month period up to February 2019 but this was mainly because the banks completely wrote off more of the former from their loan books – deeming them un-recoverable – than the latter.

The current trend lends credence to critics of the recently (nearly) completed recapitalization and consolidation exercises who have fretted that by reducing the market share of indigenously owned banks, they would tighten access to credit by indigenous enterprises, many of whom have had to rely heavily on deliberate affirmative action by indigenous banks to access credit.

Further to this, the increase in the share of the banking industry credit to the private sector in February 2019 was associated with a decline in the share to the public sector comprising Government, public institutions and public enterprises, pointing to crowding in of the private sector.

The share of credit to the public sector declined from 11.3 percent in February 2018 to 9.3 percent in February 2019, largely from the decline in the share of industry’s credit to public institutions and public enterprises. Here, the BoG’s insistence that banks provide for NPLs of public institutions in the same way as they do for private enterprises has made lending tom public enterprises less attractive, especially at a time when fiscal discipline by the Ministry of Finance means that sub-vented institutions are likely to get significantly less allocations than the budget itself has indicated, meaning less resources available for debt servicing.

Credit Allocation

In terms of credit allocation to economic sectors in February 2019, commerce and finance continued to hold the largest share accounting for 23.2 percent compared with 24.4 percent in the same period last year, while the services sector followed with 22.3 percent compared with 21.7 percent a year ago.

The manufacturing sector was the third largest holder of the industry’s credit as at February 2019, with a share of 11.9 percent, higher than the 8.2 percent in the same period last year. The lowest share of the industry’s credit was held by  the mining and quarrying sector with 3.5 percent share, although this had inched up from the 3.0 percent as at February 2018.

Agriculture, forestry and fishing sector also held 4.8 percent of the industry’s loans up from 4.5 percent a year earlier.

While the three highest sectoral recipients (commerce and finance, services and manufacturing) accounted for 57.3 percent of the industry’s outstanding credit balances, the lowest three recipients (mining and quarrying, agriculture, forestry and fishing, and construction) accounted for 16.3 percent of the industry’s credit.

By Joshua W. Amlanu