Need a bank loan that won't kill you? This surprise African country will offer you an unbelievable rate

American policy makers are making African central banks--and loan applicants-- unhappy. But these countries are borrowers paradise.

YOU can borrow money for an interest rate of far less than 2% in Africa, or settle for 30%. Question is where?

The story begins, perhaps not surprisingly, in the US.

In September, the US Federal Reserve stayed its hand in raising a key interest rate, leaving African central banks breathing a huge sigh of relief following market uncertainty that had driven many of them to distraction. 

An increase in the federal funds rate would have had the wider effect of encouraging the flight of investor money from African markets, which are generally perceived as riskier, and would have spelt more pain for battered local currencies, in addition to the risk of imported inflation. It would have been somewhat of a double whammy given the economic slowdown in China, which has in turn stalled its consumption of commodities, many of which constitute the main exports of African countries.

Indeed in keeping rates constant—a level at which they have been since 2006—the US regulator acknowledged the prevailing global turmoil. But it is now déjà vu all over again, with the US Fed Reserve again expected to make a decision on the much-watched rate next month.

The riddle for many African central banks has been whether to keep their own interest rates constant and await the Fed’s decision, and risk being seen as reactionary, or to continue tightening monetary policy and create some breathing room for themselves in advance.

Over the next week the continent will have a clearer answer to this, as the central banks of South Africa, Kenya, Nigeria—three of sub-Saharan Africa’s largest economies—and meet to review their existing policy measures. On Monday Ghana’s central bank unexpectedly raised its benchmark interest for a third time this year by 1 percentage point  to 26% to help rein in inflation sparked by the currency’s slump.

Watching central banks

A much-watched outcome of such meetings is if there are adjustments to the central bank rate, which is effectively the rate at which a regulator lends to domestic banks. Referred to by various names in many countries—discount rate, re-discount rate, the policy rate, key rate and benchmark rates are just some of them—it is widely recognised as a handy tool for regulating economic activity.

Domestic banks tend to take this rate as a reference as it guarantees a certain return for them, and then add some “mark-up”; the resulting figure being what they offer to retail borrowers. The difference between the rate offered by central banks to domestic lenders, and what the latter charges retail borrowers is referred to as the spread—and is often a source of much angst by borrowers who often feel it is too high.

Among other factors, a lower central bank rate signals to local banks and other money people that the regulator wants them to  lower the cost of borrowing, making loans cheaper for consumers.

If then too much money begins to circulate in the economy the central bank will often jack up the rate—what is called tightening monetary policy—making it costlier to borrow and “mopping” up some of the funds in the economy.

A low rate can however also hurt the interest rates paid on savings, making it unattractive for consumers to stow away some money. 

In October, M&G Africa highlighted the sharp spikes in borrowing costs at retail level, as banks reacted to central bank decisions to tighten policy in recognition of the expected effect of the US raising its interest rates.

Borrowers were staring at repayment costs of nearly 30% everywhere from Kenya to Uganda, and even much higher in some countries such as long-suffering Malawi. But there are some African countries that have been sitting rather pretty with low central bank rates. Ideally, these would be the best countries in which to lodge a loan application.

We looked at the central bank rates of African countries to identify the ones with the best rates. Because these rates change regularly, we pegged our cut-off point at either the last sitting of the Monetary Policy Committee—a standing “panel of the wise” that makes these decisions, or at when they were last accurately recorded. 

The best deals

For a clutch of countries in West and Central Africa, 15 in total, the key rate has been constant—at 3.5% in the former region and 2.45% in the latter—they being members of two “managed” economic unions that use the CFA Franc. These are Benin, Burkina Faso, Cape Verde, Ivory Coast, Guinea Bissau, Mali, Niger, Senegal, Togo in West Africa, and Cameroon, Central African Republic, Chad, the Republic of Congo, Equatorial Guinea and Gabon in Central Africa.

After accounting for these two groups, the island nation of Comoros comes in as the country with the lowest reference rate, at just 1.38%—making it, at least on paper, most attractive to borrow in. But as this IMF review (pdf) shows, despite banks having lots of money in their vaults they just don’t lend—poverty rates are high hence high risk of defaults, and less than a fifth of adults are banked.

Comoros is ahead of, surprisingly, the Democratic Republic of Congo which has pegged its rate at 2%. Showing how this rate varies, in 2010 the DRC central bank rate was charging borrowers a rate of 70%.

North African countries have also kept rates low—including conflict battered Libya at 3%, while Tunisia in October cuts its benchmark interest rate for the first time since 2011 to 4.25% in an attempt to revive economic growth following militant attacks that have hurt tourism.

At the other end are Malawi, Ghana and The Gambia, which have the only three African central banks currently charging borrowers more than 20%—well behind even Zimbabwe which has pegged its reference rate at 11.38%

Defending currencies

Many Africa central banks have been using their foreign reserves to defend their currencies, but in  a highly informative piece for this publication, the executive secretary of the UN Economic Commission for Africa, Carlos Lopes, said the regulators were also at fault for the perception of risk.

“Our central banks have between $500-$600 billion in reserves, of which the bulk is not invested in Africa because they say it is too risky. This means our savings are being used elsewhere for others’ benefit,” he wrote.

“The Economic Commission for Africa has been engaging central bank governors to be more holistic of the appreciation of their role and to be less risk averse in relation to African investment. It has the best return on investment anyway, despite the risk.”

Essentially if central banks kept their money in Africa, they would not be losing as much sleep over the bank policy directions of the US and China.

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