Businesses lose appetite for loans despite sector clean-up

A Bank of Ghana survey has revealed that businesses have slowed their demand for credit from banks, despite posting strong profitability on their balance sheets, after the recent banking sector reforms.

The survey, which was part of the Banking Sector Report (June 2019), showed a decline in the overall demand for enterprise credit between April and June 2019. Meanwhile, the industry recorded an after-tax profit of GH¢1.67billion, representing a year-on-year growth of 36.3 percent compared with 21.7 percent in the same period last year.

What this essentially means is that the banking sector is in a right position to support businesses with loans to grow— one of the reasons for the recapitalisation. However, the records show this has not been the case as businesses have reduced their demand for loans, and banks on the other hand have tightened their credit stance to enterprises.

Commenting on this, Head of Finance Department at the University of Cape Coast, Prof. John Gatsi, said economic conditions are not favourable for businesses, especially SMEs, hence their inability to pay back loans—resulting in the slow demand for credit.

“For a very long time, most of the indigenous SMEs have contributed greatly to the loan default rate of banks. The reason is that these SMEs are operating in a very tight environment— high cost of utility tariffs, high import duties, and effects of cedi depreciation, among others. All these are making it difficult for SMEs to operate effectively.

“Again, the nature of loans to SMEs are short-term in nature; such that when SMEs take loans from banks, they start paying immediately even though they have not started making revenue, and this makes it very difficult for them,” he said in an interview with the B&FT.

Prof. Gatsi further stated: “The point is that if the monies are there, banks will definitely look for SMEs to lend to. The existence of every bank is to mobilise deposits and lend it to business people and individuals to undertake economic activities. So, if the banks cannot do that, then they cannot say they have arrived,” he said.

The report actually affirms the professor’s position on banks’ liquidity, as the ratio of core liquid assets (cash and other assets that can easily be changed to cash and paid out as operational cash flow) to total deposits declined to 35.7 percent in June 2019 from 38.1 percent in June 2018.

The decline in the ratio, BoG said, was due to the fact that total deposits increased while cash holdings of banks declined as banks shifted the asset mix into longer-dated earning assets. Similarly, the ratio of broad liquid assets to total deposits also dipped to 92.7 percent in June 2019 from 95.4 percent in June 2018, also due to growth in total deposits.