Uganda now ranks in the top six nations in Sub Saharan Africa for access to credit, according to ICAEW (the Institute of Chartered Accountants in England and Wales). In their latest Economic Insight: Africa Q3 2016 report launched yesterday, the accountancy and finance body points out that Rwanda tops in Sub-Saharan Africa when it comes to ease of credit financing.
The ICAEW report produced by partner and forecaster Oxford Economics provides a snapshot of the Sub-Saharan Africa’s economic performance focusing specifically on Uganda, Kenya, Tanzania, Ethiopia, Nigeria, Ghana, Ivory Coast, South Africa and Angola.
Michael Armstrong, Regional Director, ICAEW Middle East, Africa and South Asia said: “Access to finance is a vital driver of economic growth, so this is great news for Uganda. The interest cap enacted in Uganda benefits customers by both keeping the rates regulated, as well as spurring greater competition amongst banks. It could also further incentivise more accurate credit scoring. All of these measures should help Ugandan businesses in the longer term.”
In line with this, Uganda’s central bank recently reduced its benchmark interest rate by 100 basis points for a third consecutive time, to 14 percent, citing an unfavourable growth outlook due to global economic uncertainty. Given that inflation is forecast to stabilize around the policy target of 5 percent over the next six months, the Bank of Uganda believes that a continued easing of monetary policy is necessary. According to Bank of Uganda, the reduction will support economic growth in Uganda through a recovery of private sector credit. Uganda’s economy will in turn expand by a projected 5.5 percent in the financial year through June 2017, compared with an estimate of 4.6 percent in 2015-16.
According to the ICAEW report, and drawing on insights from World Bank’s Doing Business Rankings, Rwanda performed the best in Sub Saharan Africa in terms of access to credit. In second place was Zambia followed by Kenya, Ghana, Mauritius, Uganda, Namibia, Nigeria, South Africa, Botswana, Zimbabwe, Ivory Coast, Tanzania, Ethiopia and Angola.
Rwanda has made several reforms to facilitate access to credit in the past 6 years thus pushing up its rank. Kenya too has made gains in access to credit by enacting a law prohibiting banks from lending at rates higher than 4% over the Central Bank rate.
Angola, which came in the bottom of the rankings, has only seen one reform made in the past 6 years regarding access to credit. Furthermore, despite the country having the third largest banking system in Sub Saharan Africa after Nigeria and South Africa, only a small portion of the population is banked and few business apply for loans.
As a whole, Sub Saharan Africa performed relatively poorly compared to other regions in terms of access to credit with a regional average Distance to Frontier (DTF) score of 35.9. The DTF score captures the gap between an economy’s performance and a measure of the best practice across the entire sample – with 100 being the frontier. The lower the DTF score achieved, the worse the access to credit.
The ICAEW Report also states that there is a large variation in borrowing costs across the continent. Broadly, West African economies face more expensive borrowing costs than East Africa, as authorities try to curtail serious inflation.
This divergence continues when looking at GDP growth in the region. Greater diversification in East Africa should allow stronger economic growth in 2017 and beyond, while the major West African economies continue to suffer the fiscal and monetary consequences of lower oil prices.
The ICAEW report also states that economic risk remains much higher in Africa as a whole compared to other major emerging market regions, but there are a number of bright spots. Botswana, Namibia and Mauritius all fare well by global emerging market risk standards.
The report also shows that East African countries have eased monetary policy over the past year while their West African counterparts tightened it in an effort to slow inflation. The report also shows that Kenya enjoys lower borrowing costs compared to Uganda
Lastly, the ICAEW Report states that Rwanda and Kenya have maintained strong growth momentum into 2016, recording real GDP growth of 7.3% year-on-year (y-o-y) and 5.9% y-o-y in the first quarter of the year respectively; Uganda recorded a relatively disappointing 3.4% y-o-y rate in the same quarter.