By Ebrima Sawaneh
The Gambia’s banking industry faces financial risk as the yields on government treasury bills continues to plunge throughout 2017 in addition to the Monetary Policy Committee rate cuts.
The decline of these two important rates could affect the industry’s interest revenue and possibly the operating profit if the banks fail to change their investment portfolio.
MPC rate influences the prime lending rate for loans while the yield on treasury bills relate to the industry concentration risk in this short-term instrument.
According to the country’s Central Bank, the banking sector holds D13 billion in Treasury bill as at December 2016.
Treasury bill investment represents over 40 percent of the total industry assets and now faces reinvestment risk as yield continues to decline for the instrument.
Most banks in the Gambia and if not all use MPC rate as the prime lending rate for the loan and advances.
The referencing of prime lending rate to the MPC rate is usually included in the facility agreement with the borrowers. It implies that most loans in the industry are technically floating rate loans.
Floating rate loans are known to face the risk of reference rate changes. If the reference rate goes down, then the lender losses while borrower benefits.
In May 2017, the Gambia decided to reduce the monetary policy rate from 23 percent to 20 percent, which legally required most banks to repriced loans.
This reduction creates another financial risk called the reference rate or prime lending rate risk.
In Feb 2017, Trust Bank Ltd signal the lead and reduced their prime lending rate by 300 basis points. Similarly, GTBank Gambia also announced a prime rate cut from 23 percent to 18 percent in July.
These reductions will impact the banks’ loan interest income.
Many other banks are expected to follow similar direction as they have little choice due to legal or competitive reasons.
Applying the 3 percent reduction to the industry loan portfolio of D3.9 billion as at December 2016, we can expect another D117 million fall in interest income.
Therefore, overall we can predict about D900 million decline in interest revenue of the Gambia banking industry in 2017.
Culled from SMBC News Gambia