Credit access is critical for economic recovery

Mid this year, the National Bank of Rwanda set up a fund to facilitate commercial banks, extend financing to businesses that deal in mortgages, lease of machinery, commercial trucks and general investments. The Central Bank went ahead to slash commercial banks’ reserve requirement ratio from eight percent to five percent. They also decided not to rollover short-term treasury bills expiring in 2009 as measures to building confidence within the banking sector. Surprisingly, despite government’s efforts to boost liquidity levels in the local banking system, we are yet to see a significant increase in credit to the private sector. As a result, there is a continuing trend of slowdown in economic activity in some sectors of the economy. Due to funding constraints, most businesses especially Small and Medium Enterprises have faced a perfect storm that has forced many out of business as they are unable to obtain working capital. For large businesses, most projects have stalled; others have cancelled investment plans due to limited access to funds. With the ongoing financial crisis, credit is hard to come across the world given that private firms are still downsizing by laying off workers. For most banks, the rationale for tightening access to credit is the accumulation of loans from the previous year. As a result they are now in the process of “cleaning” their balance sheets. Most commercial banks have scaled back their lending to “risky” private sector players, preferring to instead ‘sit’ on the cash or increase their uptake of government debt. However this persistent drought and tightening of the credit market is eroding the country’s chances of speeding up economic growth. This is critical because improving access to credit is a crucial step to supporting economic recovery and job creation. The solution is for banks to unfreeze cash to the private sector; this allows them to resume or start businesses. The private sector drives job creation and leads to improved productivity. Revenues from private sector transactions and incomes also pay for many of the public goods provided by government. This in turn has an impact on reviving economic activity that is needed to fuel economic growth. Improving access to credit has a major role to play in development, specifically in poverty reduction. When financial markets work well, they boost growth, improve income distribution and reduce poverty. According to World Bank, on average when average household incomes rise by two percent, poverty rates fall by about twice as much. This year’s Global Monitoring Report by the World Bank shows that a 10 percentage point increase in the private-credit-to-Gross Domestic Product ratio reduces poverty ratios by 2.5 to 3 percentage points. Therefore it is critical for banks to take bold steps and increase lending sufficiently in order to underpin strong recovery that will facilitate economic growth. While progress has been made in the first semester with the economy registering an impressive nine percent growth, overall economic growth will be stronger and better if the credit market fully recovers. On the other hand, firm recovery of the economy from external shocks of the global crisis will require a constant flow of credit into and within the economy. Berna Namata is a journalist with The New Timesbernanamata@gmail.com