With the central bank's interest rate at a historic 1.5%, small businesses need access to cheap credit to survive the pandemic.
Rabat – Morocco’s small businesses need urgent access to the cheap credit the central bank offers to banks. As the economic consequences of the pandemic became clear in the spring, Morocco’s central bank, Bank Al Maghrib (BAM) provided the banking sector with ever cheaper loans. These loans were meant to allow banks to provide small businesses in Morocco with affordable loans to weather the crisis.
Months later many small and medium-sized businesses (SME) are struggling to survive or have shut their doors. While government-guaranteed loans have increased, private loans have seen only marginal improvement. It appears the banking sector has used the cheap credit available for private loans to make larger profits instead of supporting SMEs.
What do central banks do?
Morocco’s central bank controls the national money supply as the only bank permitted to print or destroy bank notes. In turn, commercial banks rely on the central bank to borrow money that they can then loan out to customers.
Central banks steer monetary policy by setting the interest rates that commercial banks pay to loan money from the central bank. Furthermore the central bank sets the minimum deposit banks must pay in order to get new loans. In order to borrow a certain amount from the central bank, a commercial bank agrees to pay interest and shows it has capital to back up the loan.
Bank Al Maghrib loans money to commercial banks at lower rates in order to incentivize them to loan to customers, which are both large and small businesses as well as households across Morocco. Since the crisis started Morocco’s central bank has twice cut interest rates for commercial banks, providing them with cheaper money and requiring less capital as deposits for them to loan the money from BAM.
These central bank interest rate cuts are different from the successful state-guaranteed loans in that they aim to stimulate regular private loans to bring more money into circulation.
Pre-crisis ambitions
On January 27, King Mohammed VI oversaw a ceremony at the Royal Palace in Rabat. The ceremony celebrated the signing of three agreements as part of the “Integrated Program to Support and Finance Enterprises.” The program required the Ministries of the Economy and Finance to work with BAM for periodic monitoring reviews.
The ambitious new program aimed to make it easier for Morocco’s banking sector to get access to cheap loans through a special fund which they in turn could loan to very small, small, and medium-sized businesses.
At the launch of the program BAM’s veteran Governor Abdelatif Jouahri noted that the program’s success required “the responsibility” of the banking sector, the public sector, and bank customers who would benefit from the available loans.
The Professional Group of Moroccan Banks (GPBM), which represents Morocco’s commercial banks, committed to supporting young entrepreneurs and small businesses.
Billionaire Othman Benjelloun, president of GPBM, attended the ceremony at the Royal Palace and said, “each of the banks commits to provide young project holders and small and medium enterprises with all the support and time they need.”
Crisis response
A few months after the ceremony, the pandemic was wreaking havoc on Morocco’s economy and urgent measures were required. Morocco created successful state-backed funds to support struggling businesses while the central bank looked to stimulate private lending.
Jouahri, an 81-year-old former finance minister, leads Bank Al Maghrib. From July 2019 BAM’s governor has had complete financial and administrative independence from the national government. Jouhari has used this power to lower interest rates to provide liquidity and capital for banks and support Morocco’s smaller businesses through available credit.
On March 17, BAM cut its benchmark interest rate to 2%, providing banks with the necessary liquidity and credit needed to weather the storm. Meanwhile the rate cut intended to stabilize inflation at around 2% and provide citizens with cheaper credit in hopes to stimulate demand for products and services.
On March 30, BAM adopted a new monetary policy and created mechanisms to provide Morocco’s banks with more refinancing capacity and longer loans. BAM stated it was doing so to “support households and businesses in these exceptional circumstances.”
On June 16 the interest rate again lowered, this time to 1.5%. This meant that from June 16 onward Moroccan banks would need to pay only 1.5% on any loans from the central bank, and no longer had to provide a deposit in exchange. This cheap and easily available credit was meant to stimulate the banking sector into providing cheaper loans to struggling businesses and households outside special state-backed loans.
Selective treatment
Cheap loans started to flow from the central bank to Morocco’s commercial banks. Together with the Special Fund for the Management and Response to COVID-19, the measures aimed at reducing the economic pain of the crisis.
But as banks in Morocco received more cash to loan out at ever lower interest rates, despite a small decrease in lending rates, they failed to make loans sufficiently cheaper for their customers.
On March 26, President of the General Confederation of Moroccan Enterprises (CGEM) Chakib Alj accused Benjelloun’s organization of banks of selective treatment of companies. He said banks treated loans on a case-by-case basis instead of adhering to a universal policy. CGEM wrote a letter stating the banking group’s dealings were “out of step” with the needs of bank customers.
The letter accused Morocco’s banks of reducing loans to SMEs, calling the situation “worrying.” The CGEM at the time called for exceptional cash loans for small businesses, similar to those seen in Europe, where small enterprises can get a five-year zero-interest loan to provide liquidity.
CGEM lamented banks for increasing their profit margins amid a global pandemic. While Morocco’s central bank has cut its interest rate to historic lows, some commercial banks have actually increased their interest rates for customers.
Small business in need
Morocco’s ambitions, expressed in its “Integrated Program to Support and Finance Enterprises,” are in danger as more and more small businesses collapse without available liquidity through regular private loans, even as state-backed funds provide an alternate source for financing.
On March 19, Moroccan banks expressed their “desire to support the Moroccan economy in all its components, to manage and overcome this global crisis in the best conditions possible.”
They had stated that if the central bank could provide them with cheap credit, they were committed to “support companies to bring them appropriate responses to meet their cash flow needs.” Back in March banks recognized that this credit was essential to “allow them to preserve their production tools” including the payment of salaries and the payment of suppliers.
It appears that banks have failed to live up to this promise, as well as their promise in January to support Morocco’s young entrepreneurs and small businesses through regular private loans.
Time for action?
Bank Al Maghrib is set to meet for its quarterly policy meeting in Rabat on Tuesday. Bloomberg predicts it is likely the central bank could offer “guidance” to banks to address “grievances by a majority of the country’s four million small-sized enterprises.” The American business outlet highlighted that small business has been “excluded from a state-sponsored financial aid program” amid the pandemic.
The central bank has a mandate to maintain price stability but not to assist in realizing employment or economic growth, even though it could. In the midst of an unprecedented economic crisis, the government and BAM Governor Jouahri could now see an expanded role for the central bank in the face of the sector’s unwillingness to provide loans for small business and households.
The central bank has leverage that it so far has not used to its full extent. On March 30, BAM Governor Jouahri recommended that Morocco’s commercial banks voluntarily suspend their dividend payments to their shareholders. This recommendation could become a directive, mandating the banks to comply if they fail to provide adequate and affordable loans to small businesses and households.
