Tuesday, May 31, 2011

Companies fault banks for tough lending terms

By GEOFFREY IRUNGU 
Posted  Wednesday, May 25 2011  Businessdaily
 
 
East African companies feel that banks are not delivering to them acceptable lending terms and are unable to correctly evaluate their financial needs.
A survey of regional executives by EuroFinance shows companies see banks as more inclined to using the uncertainty generated by the global economic crisis to make higher profit margins rather than giving them affordable credit.
Fifty-eight per cent of East African firms surveyed said banks were not delivering acceptable lending terms to financially strong companies, a situation that was blamed on failure by clients to shop and negotiate good rates after having established long-term credit relationships with their bankers.
Kenya’s lending rates have ranged between 14 to 17 per cent average for the last two years even when interest rates for Treasury bills and bonds were in the lower single digit levels.
The divergence of views on funding terms between banks and corporate borrowers was also blamed on the lack of dialogue between firms and lenders.
Most bankers however (90 per cent) believed that they were giving acceptable terms to their clients.
“It seems we don’t have healthy dialogue between corporate firms and their bankers in this case. There are valid reasons for banks to give the terms they give, but there does not appear to be dialogue on this,” said Peter Green, an expert who was chairing an East African conference organised by EuroFinance, a UK-based global provider of conferences, training and research on cash management, treasury and risk.
The East African situation was at odds with global trends where 67 per cent of the companies felt that bankers were currently offering acceptable terms to healthy companies, indicating that Kenyan lenders and other bankers in East Africa view even financially strong companies with suspicion.
The Ministry of Planning projected that economic growth is likely to slow down to 4.5 per cent in 2011 from 5.6 per cent last year due to a combination of lower than normal rainfall and high global commodity prices.
“Bankers can be quite inconsistent. When the Treasury bill rate is going up, they are consistent, but when it is going down they are not consistent. They will ask you to pay a higher rate when it is going up, but they won’t bring this rate down when the T-bill is coming down,” said Francis Kinuthia, treasury manager at Total Kenya.
Jim McFie, director of academics and research at Strathmore Business School, said that banks’ higher interest rates bordered on profiteering and was a major cause for the high cost of doing business in the East African region.
“One major problem in Kenya is that the cost of doing business is so high that we cannot compete globally. How can you compete when interest rates are so ridiculously high? Maybe we should even reconsider the Donde Act,” said Mr McFie. The Donde Act 2001 sought to limit maximum interest payments on loans and provide for minimum returns on deposits, but was repealed a few years ago after having been in limbo – due to court injunctions – since it was passed by Parliament.
Mr Green believes that there are valid reasons for the banks to regard corporate entities with some amount of scepticism given that most people believe the global crisis is not over. The crisis cut GDP growth in Kenya to 2.6 per cent in 2009 after an even lower 1.6 per cent in 2008 when post-election violence impacted the economy adversely.
Economic crisis
The EuroFinance survey showed that 55 per cent of treasury professionals in banks and other companies in East Africa believed that there was still more bad news relating to the global economic crisis to come.
The treasurers were asked whether they thought banks had unfairly used the economic crisis to get higher margins and 69 per cent of the respondents said that was the case.
A survey on market perceptions done by the Central Bank of Kenya last year showed that banks considered the top drivers of lending rate as the cost of funds, risk profile of the customer, profit margin, administrative costs and quality of collateral.

1 comment:

car loans said...

Lending terms are indeed tough. This will ensure that people who lend realize the risks of lending. Lending may be easy to do but paying is not unless you'll use the money to invest in business.