Lower interest rates drive credit growth

Credit extension to the private sector, although not at previous record levels, have recently shown a noticeable move higher. Economists say the lower interest rate regime is pushing credit growth.
Latest statistics from the Bank of Namibia show that private sector credit extension (PSCE) grew to 14.2% in August from 13.7% in July spurred by increases in lending to both households and businesses.
Credit growth to individuals increased from 13.7% in July to 14.2% year on year in August while credit extension growth to businesses increased from 12.7% to 14.3%.
The main contributors to credit growth to individuals came from mortgage lending, which increased by approximately N$2.12 billion for the year and N$256.3 million in nominal terms from July to August, while overdrafts to corporates were also a significant contributor to the overall credit growth. Patrick Britz, an Assistant Portfolio Manager at Capricorn Investment Holdings says a lower repo rate, which has translated into lower prime lending rates from commercial banks, will undoubtedly encourage greater credit uptake in the economy and should further spur the demand side of the domestic economy.
Shihepo Kavambi, a researcher with Simonis Storm Securities says with the festive season approaching and interest rates low, “we expect the trend of rising credit extensions to continue at a broader level.” She added: “Although, we anticipate total credit extension to continue gathering pace, we foresee overdrafts for corporates and households to lead. Amongst the two classes of consumers, overdrafts to individuals could start becoming more pronounced.”The August figure marks the highest year on year growth figure of private sector credit extension since April 2007.
However, installment sales growth, which has been on an upward trend since September 2011, moderated at the end of August 2012. The annual growth rate in installment credit slowed slightly to 18.1% from 18.2% at the end of July. But despite the deceleration in growth, the figure is still significantly higher than the 13.2% growth seen in August 2011. Installment credit growth to businesses in August was 13.9% while installment credit growth to individuals stood at 20.7% down from July’s figure of 21.5%.
Britz says annual growth in installment sales has averaged 18.1% in the first eight months of 2012 which is significantly higher than the 12.4% seen over the corresponding period last year and marks the highest levels of (year on year) growth in installment sales in the last six years.
Contrary to the Bank of Namibia’s concern on the rapid expansion of consumer loans which might have the effect of crowding out funding for more productive activities and put pressure on international reserves, Britz describes the current growth in credit extension as healthy.