In 2024, banks worldwide, including those in Africa, are facing a significant challenge: the rising costs of deposits. This shift, driven by higher interest rates, is placing immense pressure on profitability, squeezing lending margins, and limiting credit growth. With customers increasingly flocking to government securities, banks are struggling to retain deposits and continue supporting economic growth.
Globally, banks have been forced to raise deposit rates in response to central banks’ aggressive interest rate hikes. In the U.S., for example, deposit costs for the largest banks reached 2.2% in Q2 2023, while smaller banks faced even higher rates. Similarly, in the UK, banks such as NatWest and Barclays saw substantial returns from improved net interest margins due to elevated rates. However, the rise in deposit rates has created a delicate balance for banks: while it boosts profitability from deposits, it also raises their cost of funding, leaving them with less room to maneuver on lending rates. This squeeze on profitability has been particularly hard on smaller banks, which struggle to compete with larger institutions that are better equipped to handle the higher costs of funding.
The banking sector is also facing increased loan defaults globally. As borrowing costs rise, lending activity has slowed, and economic uncertainty has exacerbated this problem. Banks, once the main providers of credit, are now leaning more heavily on government securities and other safer investments, as these instruments offer more predictable returns in an environment of higher rates. This shift, however, leaves banks with fewer opportunities to lend to the private sector and support broader economic growth.
In Africa, the situation mirrors global trends but is also influenced by local factors. In Kenya, for example, deposit interest rates surged to 11.59% in September 2024, the highest in 26 years. This spike is largely due to the increasing popularity of government securities, particularly Treasury Bills and Bonds, which have become more accessible through the Dhow Central Securities Depository (DhowCSD) platform, allowing individuals to buy government paper directly from their smartphones. As a result, Kenyan banks were forced to increase deposit rates, leading to a 26.1% increase in interest expenses for the top nine banks in the first nine months of the year. Despite these efforts, banks have seen a decline in overall deposit volumes, exacerbating the challenges posed by the rising cost of deposits.
Similarly, in Tanzania, the Bank of Tanzania reported a rise in deposit rates to 9.87% in August 2024, up from 8.74% the previous year. The trend of increasing deposit rates across the continent reflects a broader challenge for African banks: as competition from government securities grows, they are forced to offer more attractive returns to retain customers, driving up funding costs and squeezing their margins. These higher costs, combined with a slowdown in private sector credit growth, have put African banks in a difficult position, as they must balance the need to attract deposits with the imperative to lend to businesses and individuals in an already challenging economic environment.
The challenge of managing rising deposit rates is compounded by increasing loan defaults, which have surged in many African countries. In Kenya, for example, non-performing loans hit Ksh669.5 billion ($5.19 billion) in September 2024, a sign of the mounting pressure on the banking sector. In response, banks have become more conservative in their lending practices, focusing on safer, more stable investments, and limiting credit to higher-risk borrowers. The result is a significant slowdown in private sector credit growth, which reached a 22-year low in Kenya, as businesses and consumers struggle to access affordable financing.
To navigate this challenging environment, banks must adapt by diversifying their funding sources and embracing digital innovation. Exploring alternative funding options, such as development finance institutions or international capital markets, can help banks reduce their reliance on high-cost deposits. Additionally, leveraging digital platforms can streamline operations, reduce overhead costs, and provide banks with the opportunity to engage a broader customer base, offering more attractive savings and investment products while mitigating the impact of rising deposit rates.
At the same time, banks must focus on strengthening their relationships with existing customers. Offering personalized services and tailored financial products will help banks retain customers, even in a highly competitive environment. A strong customer relationship can provide stability and help banks weather economic uncertainties.
Furthermore, effective credit risk management is essential. As loan defaults continue to rise, banks must invest in better risk assessment tools and improve their understanding of borrower behavior. By focusing on higher-quality borrowers and less volatile sectors, banks can reduce their exposure to non-performing loans and maintain healthier balance sheets.
Despite the challenges, there are opportunities for banks to thrive by embracing new strategies and responding to the changing dynamics of the financial sector. The rise of government securities and digital platforms presents both challenges and opportunities, forcing banks to rethink their traditional business models. By adapting to these changes, banks can position themselves to maintain profitability, continue supporting economic growth, and stay competitive in an increasingly digital and interconnected global economy.
In conclusion, the global and African banking sectors are facing a difficult year, with rising deposit rates, loan defaults, and economic uncertainty reshaping the industry. However, by diversifying funding sources, embracing digital innovation, and focusing on customer relationships and credit risk management, banks can navigate these challenges. As the financial ecosystem continues to evolve, banks that can adapt to the shifting landscape will be best positioned for long-term success.
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