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By Dipo Olowookere
A global finance and investment analysis firm, Moody’s Investor Service, has predicted that bank customers, particularly in Nigeria, South Africa and Kenya, will find it difficult to meet their loan obligations due to rising inflation in these three largest African economies.
In a report released Wednesday titled Banks–Africa: Rising inflation will weigh on the profitability of African banks, the rating agency postulated that customers who took out loans from banks will first consider survival before thinking about repayment, which, in turn, will affect lenders’ profitability.
He expressed concern about the impact that the rising cost of living and inflation will have on the economies of the three countries under consideration.
“We expect banks’ exposure to sectors most vulnerable to inflation, such as households, to be a key factor impacting their provisioning costs.
“Higher inflation will decrease borrowers’ ability to repay as income will be needed to meet other competing and rising costs,” part of the report said.
“Higher interest rates will also increase the debt burden of borrowers by increasing nominal repayments. We expect inflation and high interest rates to increase provisioning needs across all systems,” he added.
In addition, Moody’s noted that “in general, we expect banks with the most exposure to domestic borrowers to face the highest loan loss provisioning charges.
“While inflation will reduce the real value of outstanding debt, household incomes may not rise fast enough to meet rising repayment costs.”
However, the company expects Nigeria’s gross domestic product (GDP) to grow by 4.0% next year, while South Africa is expected to grow by 1.5%, with Kenya expected to reach 5.3%.
To deal with high inflation, Moody’s said central banks would continue to raise interest rates, just as the Central Bank of Nigeria (CBN) did at the last two Monetary Policy Committee meetings. (MPC), where it first increased it from 11.5% to 13.0% and then to 14.0%.
“Some central banks could tighten monetary policy further to control inflation and prevent local currency depreciation, especially as interest rates in the United States rise, drawing capital away from riskier African economies.
“In Nigeria, competition for longer-maturity deposits to meet Basel III2 liquidity requirements has led to the growth of price-sensitive term deposit products, which will gradually increase funding costs and moderate the expansion of margins as these deposits are rolled over at higher rates,” the company said.