The growth of banks’ credit to the private sector and public institutions over the twelve-month period to May 2010 slowed to 3.2%, the lowest since May 2003, compared with an increase of 43.8% recorded for the same period in 2009. In actual terms, the banking sectors’ total credit went up by GH¢214.4 million between May 2009 to May 2010, as against GH¢2,025.7 million between May 2008 to May 2009. Total credit to the private sector, which expanded by 43% between May 2008 to May 2009, rose more slowly by 6.9% to GH¢5,873 million between May 2009 to May 2010, and accounted for 85.5% of gross loans and advances – which stood at GH¢6,869.4 million at end-May 2010. Credit to public institutions in the latter period also contracted by GH¢166.6 million, a decline of 14.3%. This trend is one of the main highlights in the Bank of Ghana’s latest report on monetary and financial developments in the economy, with the Central Bank describing the credit environment as “generally weak.” In real terms, the report disclosed, credit to the private sector shrunk by 3.4% in the reviewed period compared with a real growth of 19.1% in the twelve months to May 2009, while total loans and advances dipped by 6.7% after rising by almost one-fifth at end-May 2009. The composition of banks’ credit portfolio by economic sectors shows that private enterprises received 71.3% of gross loans in May 2010, households 15.5%, and the public sector 13.2%. Credit distribution to the various economic sectors for the period under review was “fairly broad-based”. While Commerce & Finance, Services and Mining & Quarrying saw declining shares, Manufacturing, Construction and Agriculture, Forestry & Fishing increased their shares. Commerce & Finance accounted for 28.9% of total credit in May 2010; Services 21.4%; Manufacturing 12.4%; Construction 8.6%; Electricity, Gas & Water 6%; Agriculture, Forestry & Fishing 5.2%; Transport, Storage and Communications 4.4%; Mining & Quarrying 3%; and miscellaneous sectors 10.1%. In an associated release – the Financial Stability Report – the Central Bank stated that “high levels of non-performing loan (NFL) ratios continue to be a source of risk to the banking system, partly slowing down the transmission of successive policy-rate cuts to lower lending rates to stimulate economic activity.” The quality of the loan portfolio of the banking industry as measured by the NFL ratio deteriorated to 18.7% by the end of May 2010 from 11% by the end of May 2009, though better than the 20% recorded by the end of February 2010. Default rates, as measured by sectoral shares of NPL ratios, were more pronounced in the Commerce & Finance, Services, Manufacturing, and Construction sectors. The Commerce & Finance and Services sectors were responsible for 27.2% and 15.7% respectively of the total non-performing loans. Manufacturing and Construction sectors’ shares were 15.7% and 12.6% respectively, with Electricity, Gas & Water accounting for the lowest share of 1.7%. In the Central Bank’s estimation, the deterioration in the loan books of the banking sector for the period ending May 2010 could partly account for the credit slowdown. “The Bank of Ghana credit conditions survey also generally portrays tightened credit conditions,” it added. In spite of the weak credit environment and the burden of bad loans on banks’ balance sheets, the regulator intimated that “banks continue to be reasonably profitable.” The banking sector’s profit-before-tax improved by 51.2% to GH¢228.2 million as of May 2010, compared with a growth of 54.3% for the twelve months to May 2009. Net profit-after-tax for the industry measured GH¢176 million, representing an annual growth of 51.1% by end-May 2010, as against a growth of 67.6% in the same period last year. The Central Bank notes that “the economy continues to enjoy some tranquillity, with developments in the currency market as well as the general price level suggesting that macro-stability is increasingly taking root. “These conditions, together with improved health of the domestic financial system, are yet to stimulate activity in the real sector,” it concluded. Source: B&FT