Credit from commercial banks to the private sector have decreased to record lows in August to stand at 1.3% from 3.7% in July.
- The 240 basis points declaration is attributed to the lingering high interest rates regime that made borrowing expensive.
- Central Bank of Kenya (CBK) attributes the decline to the “exchange rate valuation effects on foreign currency denominated loans following the appreciation of the Shilling, and the lagged effects of monetary policy tightening.”
Commercial banks in turn resorted to government securities, holding the highest proportions of government domestic debt (44.4% by October 2nd 2024) which is less risky than lending to the private sector.
The ratio of gross non-performing loans (NPLs) to gross loans edged higher to 16.7% in August 2024 compared to 16.3% in June. Notable increases in the transport and communication, personal and household, trade, real estate and manufacturing sectors with banks anchoring their provisions.
“The banking sector remains stable and resilient, with strong liquidity and capital adequacy ratios,” CBK noted in the Monetary Policy statement on Tuesday.
In 2019, Kenyan lawmakers scrapped the interest capping law which was put in place in 2016. The capping on interest rates chargeable by banks at 4 percentage points adobe CBK’s benchmark weakened lending to businesses.
Growth in local currency-denominated loans stood at 5.2% in August, with the foreign currency-denominated loans – which account for about 26% of total loans – contracting by 10.6%.
The CBK on Tuesday delivered a 0.75% rate cut, partly pointing to the “sharp deceleration in credit to the private sector” coupled with the slower economy in the second half of 2024. Further, inflation has been contained to the lower bound target of 2.5%-7.5% and the shilling stabilized.
The rate cut is expected to boost economic activity and buoy the shilling’s stability, making credit less expensive for businesses and individuals.
