The United Nations on Friday decried the prevailing high bank interest rates in the continent which has discouraged many investors to take credits from banks.
The United Nations Economic Commission for Africa (UNECA) Senior Economic Affairs Officer Andrew Mold told Xinhua that the situation is partly caused by the big spread in interests maintained by the banks.
"This situation is unjustified because it limits the amount of credit that is lent to the private sector," Mold said during the launch of the African Development Bank on Eastern Africa's manufacturing sector.
He said the difference between deposit interest and loan interest in the continent is around ten percent.
This compares unfavorably with the developed economies where the spread is approximately five percent. "This situation makes it very difficult for the private sector to access finance," he said.
"On average less than 20 percent of the working capital of Africa's private sector is derived from commercial banks," he said. The rest of the funds is sourced from reinvested profits, or the capital markets.
On July 9, the Central Bank of Kenya (CBK) and Treasury implemented a new loan-pricing rule to determine borrowing rates charged by commercial banks.
The CBK is now implementing the Kenya Banks Reference Rate (KBRR), a loan-pricing formula that is based on averages of the CBK indicative rate and the 91-day Treasury bill yield over six months.
The KBRR will be the base rate for all commercial banks' lending and will be reviewed every six months, hence the interest rate on a borrower's loan will keep changing after every six months.
With the indicative rate standing at about 9 percent in over one year, most banks have been charging more than double the amount, raking in huge profits.
The rate has been maintained at the level since April 2013, with CBK noting that inflation is under control and the shilling has stabilised.
According to the UNECA, the high cost of credit reduces the amount of investments in the region. Mold urged African governments to put in place policies that will reduce the cost of credit.
"One way is to encourage competition in the banking sector," he said. The financial sector suffers from high levels of inefficiencies.
"This means that the high operational costs are passed on to consumers through high loan interest rates," Modi, who is also the UNECA Chief of Sub-Regional Data Centre, said.
The banking sector is one of the most profitable businesses in Africa. "In Kenya, for example the top corporations are usually banks," he said.
Modi added that most of the industry's revenue is derived from trading in government securities rather than from lending to the private sector. "The private sector is perceived to have higher risk of default," he said.