Banks unfairly pricing loans, AfDB president

What you need to know:

  • Quite frankly a number of the banks make a lot of money from it while not lending enough to the private sector,” he said.
  • Mr Adesina said that banks across Africa have been unfairly pricing loans which has slowed down development.

The President of the African Development Bank (AfDB) Mr Akinwumi Adesina has urged banks to improve risk assessment rather than shun Small and Medium Enterprises after President Uhuru Kenyatta signed into law a bill capping interest rates.

Banks are reviewing their options in the wake of the new law and may cut down on fixed deposits accounts, drop risky products such as unsecured loans and invest in government securities which are viewed as safer bets.

This may force high-risk borrowers into unregulated informal financial services that charge exorbitant rates and could damage small business.

Mr Adesina who’s is attending the sixth Tokyo International Conference on African Development (TICAD VI) Summit in Nairobi, said SME risk is more of perceived than real and that banks should do more to determine the real risk.

“I think the risk that the private sector talks about agriculture and SMEs in my view is perceived risk not necessarily real risk so they need to understand private sector better, they need to have their front and back office structure to be able to price loans appropriately given the risk that are involved,” Mr Adesina said.

He said that what is needed is to understand the risk profiles of different types of private sector in order to understand the risk return.

The AfDB President also said there was need to have risk sharing instruments that allows you to reduce the risk of lending by the banks.

“This has been very successful in Nigeria I happened to be at the forefront of that, it has been successful in Tanzania at the \National Microfinance Bank, in Uganda and here with Equity Bank,” He said.

Prominence of CRBs

Analysts say that banks will now be forced to break down their customers into risk categories increasing the prominence of Credit Reference Bureaus.

“I think we will see a reform process of CRBs so they provide both bad and good information,” CfC Stanbic Bank Regional Economist, Jibran Qureishi said.

Mr Adesina said that banks across Africa have been unfairly pricing loans which has slowed down development.

“At the end of the day we have to worry about the developmental impact of expensive credit, in a number of countries you find that the gap between the monetary policy rate and the rate at which they lend to the SMEs is quite wide which makes financing unaffordable for many of the businesses and quite frankly a number of the banks make a lot of money from it while not lending enough to the private sector,” he said.

“I think it is not possible to grow the private sector when you have rates that are going to 28 per cent, 30 per cent, it is just not possible,” he added.

He said SMEs have often lacked access to affordable funds but also financing for sufficient duration, term financing that allows them to fund their businesses.

He said in supporting SMEs Africa needed two types of instruments, private equity funds that allows them to invest, expanding infrastructure in their business while at the same time commercial financing that allows them to get shorter capital to run their businesses.