/ 30 November 2011

EU banks refuse loans to firms doing business with Africa

Some European banks are now refusing to lend to firms trading with Africa, threatening growth in the world’s poorest continent, a senior official of the African Development Bank (AfDB) said on Tuesday.

The AfDB is looking into ways of providing trade finance to firms doing business with Europe, where an inter-bank credit squeeze has driven up the cost of funding when it is available at all, chief economist Mthuli Ncube said on Tuesday.

The reluctance of some banks to make Africa-related loans as Europe’s own debt crisis turns them increasingly risk-averse is an ominous sign as it repeats one aspect of the 2008 credit crisis.

“With the crunch in Europe the cost is creeping up and the willingness of the banks to extend the credit in the first place is also an issue,” Ncube told Reuters in an interview.

In 2009, the Tunis-based AfDB clubbed together with the International Monetary Fund and South Africa’s Standard Bank to provide commercial guarantees to keep imports and exports flowing smoothly.

Since then, the AfDB has received a massive $100-billion capital injection, most of which has been earmarked for infrastructure investment rather than trade finance. Ncube said that emphasis was likely to shift.

“With the credit crunch in Europe we maybe need to look at providing credit more directly,” he said. “Trade finance is an area where we will intervene more visibly. It’s something that we have not done a lot in the past but that is going to change.”

Africa’s trade with Europe was the only affected route, Ncube said, with the resource-rich continent’s exports of minerals and hydrocarbons to the likes of China, India and North America flowing as normal.

He was unable to quantify the extent of the impact on European trade, but any sort of financing hiccup is likely to hit countries such as South Africa and Kenya, for whom Europe is the biggest trading partner.

A European economic slowdown is already hitting demand for African exports. South Africa, the continent’s biggest economy, sends a third of its exports to Europe, and Kenya more than 25%.

In 2008, Africa was largely insulated from the first round of the credit crisis triggered by a collapse in the US housing market, but felt the heat subsequently as commodity prices fell, direct investment dried up and Western aid budgets were trimmed.

Ncube said those latter situations were likely to happen again, while remittances from Africans abroad, which totalled $40-billion a year before the crisis, could drop if Europe slid into recession.

“As the economic slowdown continues, Africans working abroad will lose their jobs or become less secure, and so will send less home,” he said. — Reuters