Banks in sub-Saharan Africa are enjoying high levels of net interest income, but this can be a sign of elevated inflation or credit risk.

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Markets in sub-Saharan Africa offer banks the highest net interest rates for lending, while EU banks dominate the list for weakest interest earnings, according to figures from www.thebankerdatabase.com. Taking countries for which The Banker has data on at least four banks, Africa accounts for six of the top 10 countries for interest income as a percentage of total assets.

The other countries that feature prominently on this list are offshore banking centres in the Caribbean. Only Albania bucks the trend, reaching sixth place with net interest income at 6.68% of total assets. Banks in the Caribbean markets are most likely invested in high-yielding international assets on behalf of overseas clients, rather than lending to the local economy. By contrast, African banks are mostly holding portfolios of domestic loans and government bonds.

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Of course, high interest rates are not necessarily a positive sign. They can reflect elevated levels of credit risk and inflation, and they potentially stifle bank lending and hence economic development. It is therefore unsurprising that several of the top 10 countries – Kenya, Angola, Botswana and Ghana – all have relatively high inflation rates, ranging from 8.6% in Ghana to 15.6% in Kenya.

At the other end of the scale, countries with ultra-low inflation such as Sweden, Taiwan, Japan and Switzerland, which is currently experiencing deflation, all show very low net interest income. However, this can also be the sign of a banking sector where intense competition has squeezed interest margins extremely thin. They can also signify as is the case with Ireland, a banking sector where interest earnings have been impaired by high levels of non-performing loans.

Equally, sharp changes in interest income are good indicators of markets where competition is intensifying as inflation and interest rates normalise. Interest earnings as a proportion of assets eased slightly in most African countries in 2010, suggesting that credit is gradually becoming more accessible, but Angola was a notable exception with a 4.28 percentage point jump.

At the other end of the scale, the ratio in Azerbaijan collapsed by almost four percentage points as non-performing loans soared, tipping many banks into loss. And the long cycle of interest rate cuts in Turkey is tightening margins, with the net interest income ratio declining by 2.86 percentage points in 2010.

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