Moroccan banks face a dual challenge of an unprecedented wave of inflation in the country that will affect the level of borrowing and the ratio of distressed debt, in addition to the recent rate hike by the Central Bank of Morocco to 2%. What does Bank-Al-Maghrib want from this move, and what impact will it have on the national economy and citizens?
According to Moody’s Credit Ratings, Morocco’s interest rate hike “will increase the net bank interest income, but overall profitability will decrease as inflation rises.”
At the end of September, Bank Al-Maghrib decided to raise the main interest rate by 50 basis points to 2%, making it the first interest hike to occur in 14 years, this decision has come to counter the inflation rate that reached 8% at the end of August 2022.
“The average citizen was affected by the higher interest rate of increasing the costs of his new loans, paying more money for investment loans, cars, real estate, etc, in exchange for higher interest on funds deposited with banks.” says an insider to Barlaman Today, adding “there are risks in raising the interest rate, especially declining investment, slowing the rate of economic growth, and hence reducing the number of job positions, which means lower economic growth and greater unemployment.”
Meanwhile, the government tends to set the price of tax on companies by proposing new tax ratios, especially for banks, credit, finance, and insurance institutions.
In the 2023 Draft Financial Bill, the Government set out three tax ratios of 20 percent, 35 percent, and 40 percent, a procedure that will be ongoing for four years (2026), with aim of achieving fiscal justice and ensuring everyone’s tax equality.
20% for all companies with a net profit that is less than 100 million dirhams, companies based in the financial pole of Casablanca, and industrial acceleration zones.
35% for companies with a net profit equal to or greater than 100 million dirhams.
40% for credit institutions and agencies, Bank Al-Maghrib, as well as Deposit Fund, Management, Insurance Contracting, and Reinsurance.
The Government seeks to extract approximately 48 billion dirhams. Through these measures proposed in next year’s Draft Financial Bill, the amount will be extracted from corporate tax compared to 43 billion dirhams in 2022. However, looking back at the ratios set for credit institutions, wouldn’t this push credit institutions put more pressure on consumers, in a domino effect?
Regarding the borrower’s default, the average interest rate on bank loans hovered around 4.29% in the second quarter of this year, and the question remains whether banks will resort to raising interest rates on loans, the thing that could increase the ratio of distressed debt, both for companies and individuals?
According to Bank Al-Maghreb, the distressed debt ratio represents 8.4% of the total 1011 billion dirhams in current loans. As of the end of July, these debts include those for the family, public and private sectors, while the proportion of non-performing loans prevails mainly among households and private companies.
In their report on the Moroccan banking sector, Moody’s analysts noted that the overall profitability of banks will decrease slightly within the next 12 to 18 months, as a result of higher operating costs, and the impact of inflationary pressures on borrowers’ capacity, which could lead to higher deficits.”
Household loans represent 31% of total loans in 2021, and small businesses are about 25% more vulnerable to higher inflation and slower economic growth than large companies, according to Moody’s.
Let’s take a closer look at the breakdown of consumer and equipment loans.
Fitch Ratings said that interest rates on Moroccan banks’ profits would be slow, adding that several further price increases are to be expected due to continued high inflation and monetary tightening in the eurozone and the United States, given the Moroccan dirham.”
“These interest rate increases will take time to feed high loan rates, more than 90% of loans have a fixed interest rate and about 70% are medium to long-term, unlike most Middle Eastern and African countries.” According to Fitch Ratings.
Meanwhile, regarding loans, banks maintained the pace of extending them to households and non-financial contractors during March 2022, despite the rise in distressed debt.
According to monetary statistics circulated by the Central Bank of Morocco, bank loans to the non-financial sector recorded an annual growth rate of 2.9 percent in March 2022, after 3.3 percent months earlier.
This development reflects a 3.5% rise in household loans, after 3.7%, and a rise of 4.7% in loans for private non-financial contractors after it was 3.8%.
The distribution of loans to the non-financial sector indicates a 7.4 percent increase in Treasury facilities, after 7.6 percent, a 2.7 percent reduction in processing loans after 3.6 percent, and a 2.4 percent increase in consumer and mortgage loans respectively after 2.7 percent.
It also comes as the pace of troubled debt rose from 5.4 percent last February, to 6.1 percent last March, adding that under these circumstances, the proportion of unsuccessful debt stabilized at 8.7 percent.
Bank Al-Maghrib’s dashboard on “Loans and Bank Deposits” reported that the number of bank loans in August amounted to 1.027.8 billion dirhams during the H1-2022, an annual rise of 4 percent.
Central Bank of Morocco said bank loans to non-financial agents rose to 876.7 billion dirhams and those to financial agents to 151.1 billion dirhams.
The annual increase of 6 percent in loans to non-private contractors reflects mainly 11 percent increases in treasury facilities and, to a lesser extent, 1.4 percent of equipment loans; while mortgages decreased by 2 percent.
Indeed, the results of the Bank of Morocco’s circumstantial research on the terms of granting loans in the first semester of 2022, the criteria for treasury loans have been flexible, while kept unchanged for equipment loans and tightened for real estate resuscitation loans.
Meanwhile, the entitled study conducted by HCP “Social Disparities Evolve in the Context of the Effects of Covid-19 and high prices” revealed that on the one hand, 45% of the total rise number was attributable to the consequences of the pandemic, while on the other hand, 55% is attributed to the rise in consumption, which has resulted in the loss of nearly seven years of progress in eradicating poverty, a situation that reminds us of the poverty and vulnerability of 2014.
How will the government, banks, and consumer credit agencies provide the appropriate assistance to vulnerable credit consumers to avoid a spiral of problems with financial and non-financial costs? the question remains in the context of the rising cost of living and increasing risk of financial hardship for consumers.