Banks Reluctant to Lend to Small Companies

African Business, May 2008 | Go to article overview

Banks Reluctant to Lend to Small Companies


Despite the good health of Cameroonian banks, they are still reluctant to lend to the productive sector. Is this really due to a lack of viable proposals?

Cameroon's banking system is a mirror image of the country's economy. In the first place, there is the paradox of the bank's excess liquidity compared to the lack of loans made available to private companies. Despite public and private debate, as well as the incentives offered by the Central Bank (BEAC) with adequate liquidity injected into the economy, lending by the banks has remained weak, and insufficient to finance economic growth especially compared to the treasury surpluses of the country's 11 banks.

The excess liquidity of Cameroon's banking sector increases from year to year. In 2006, the global treasury surplus reached CFA672.3bn ($1.66bn) an increase of 36.8% over 2005, and the ratio of credit coverage with deposits increased from 157% in 2005 to 173%.

According to the latest available data, provided by the Banque de France, "the accrued total of bank balances has increased by 10.9% in 2006, mainly due to a strong growth in deposits that rose by 12.7%. Gross liabilities have only slightly increased during the period, by 2.7%.

"This is partly due to the decrease of the national debt as a result of the improvement of public finances. But borrowing has stagnated, rising only marginally by 0.8%, with insufficient 'bankable' projects and recurring weaknesses in the business sector. This represents a challenge for the financing of SMEs. In fact, the financing granted by the banking sector to the private sector, particularly to local SMEs, remains weak and loans within the economy are concentrated on a small number of large firms."

[ILLUSTRATION OMITTED]

A DISCONNECT BETWEEN MARKET NEEDS AND SUPPLY

It is notable that banks finance very few industrial projects, with most large loans made to finance business operations conducted by large firms. In the final analysis, banks are more inclined to finance consumption rather than production.

One of the reasons for the banking sector's shortcomings is that banks do not offer long-term lending as long-term deposits are scarce. Nearly 75% of the deposits are on call so banks cannot lend over the long-term as the money they have available is generally only on short-term deposit.

Additionally, the long economic crisis faced by Cameroon has made the banks wary of long-term lending. …

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