Kenya’s Central Bank last week cut its policy rate for the first time in nine  months, in a bid to revitalise an economy weighed down by mounting bad debts.

The regulator reduced its benchmark lending rate to commercial banks — the  Central Bank Rate (CBR) —  from 11.5 per cent to 10.5 per cent to encourage spending by households and businesses, even as analysts projected a sustained high interest rate due to the coming elections.

The CBR was last reviewed in July 2015, from 10 per cent to 11.5 per cent.

High interest rates have choked economic activities and left commercial banks reeling under the burden of non-performing loans (NPLs).

CBK Governor Patrick Njoroge said the ratio of gross NPLs to total loans had increased to  8.2 per cent by  April 2016, up from 4.6 per cent in June 2015.

Analysts attribute the rising bad debts to high interest rates, the government’s delayed payments to contractors and  suppliers, a weaker currency that has led to underperformance by companies, and increased surveillance  by the Central Bank  on how banks report their financial statements.

“What we are seeing this year is that some of the banks had under-provisioned their bad loans, and the increased scrutiny by the Central Bank is going to affect their performance,” said Erick Munywoki, head of research and business development at Sterling Capital.

According to Daniel Kuyoh, a  senior investment analyst at Alpha Africa asset managers, a slowdown in economic activities, the high interest rates, and the government’s cash constraints have left borrowers unable to repay their loans.

“Many companies that conduct business with the government are struggling to pay their loans. Since the third quarter of last year, the government is struggling to pay contractors and suppliers,” said Mr Kuyoh.

“We expect this trend to continue because the economy has slowed and people are doing less business. We  are even having a slowdown on projects being implemented by the government; Konza City and the Lapsset project are on hold,” he added.

Last year, the International Monetary Fund raised the alarm about the deteriorating asset quality of Kenyan banks leading to rising NPLs and the lenders’ failure to maintain sufficient loan reserves.

READ: Kenyan banks exposed to bad loans danger: IMF

The Kenya Bankers Association (KBA), the industry lobby group, said cushioning borrowers from high interest rates is necessary to avert mass default in the banking system.

In October 2011, following a series of increases in the Central Bank’s benchmark lending rate to a high of 18 per cent, and as the shilling slipped to a low of 107 against the dollar, Kenyan banks capped additional rises on monthly loan instalments to 20 per cent of the existing instalments, and waived penalties on early loan retirement.

Some Kenyan banks  reported high levels of NPLs on their books during  the first quarter (January-March) of this year,  impacting on their profitability.

These included state-owned National Bank, Equity Bank, KCB, Co-operative Bank, I&M Bank, Standard Chartered Bank and mortgage lender Housing Finance.

Analysts said that with Kenya preparing for a general election next year, high interest rates are likely to persist.

“We expect this situation to persist until 2018, because next year is an election year, and during this period our gross domestic product usually declines by between 1 and 1.5 per cent,” said Mr Kuyoh.

Last year, commercial banks warned of an increase in the level of NPLs during the first quarter of 2016.

According to a market survey by Central Bank, the perceived poor business environment, low liquidity, high interest rates and the government’s cashflow problems inhibit borrowers from repaying their loans.