Kenyan banks are considering protecting borrowers from high interest rates in a bid to avert mass defaults, with economists warning of a further increase in the cost of borrowing. This is aimed at saving the shilling from depreciating further against the dollar.

The industry lobby group Kenya Bankers Association said cushioning borrowers will be necessary should the current slide in the value of the local currency persist, despite the monetary policy actions by the Central Bank of Kenya.

The Kenya Banks' Reference Rate has gone up by 1.33 percentage points from the 8.54 set in January.

In Uganda, the central bank recently raised its policy rate to 13 per cent, from 12 per cent, in a bid to stop the depreciation of the local currency, which has lost about 27 per cent of its value since January.

Last week, Bank of Uganda Governor Prof Emmanuel Tumusiime-Mutebile said the banking regulator will no longer inject dollars into the currency markets because it is not sustainable.

He said that an attempt to prop up the exchange rate at levels that are not consistent with supply and demand in the foreign exchange market by intervening and selling foreign currency is not sustainable.

Amish Gupta, a director of investment banking at Kenya’s Standard Investment Bank, supports this view.

“Time and time it has been proven that trying to protect the value of the currency is a wrong strategy as the forces of supply and demand should be left to determine this value,” said Gupta.

READ: BoU makes u-turn, sells dollars as Uganda shilling hits all-time low

ALSO READ: Uganda calls policy meeting to save currency

The measures taken so far by Kenya’s Monetary Policy Committee include addressing macroeconomic volatility, according KBA’s chief executive Habil Olaka.

“If this volatility persists despite the CBK’s measures — leading to further increases in interest rates — cushioning borrowers will be hard,” he said.

READ: Kenya borrowers braced for costly loans as CBK raises lending rates

Mr Olaka did not specify what actions are likely to be taken. However, in October 2011, following a series of increases in the central bank’s benchmark lending rate to a high of 18 per cent, as the shilling slipped to a low of 107 against the dollar, Kenyan banks capped additional rises in monthly loan instalments to 20 per cent of the existing ones and waived penalties on early loan repayments.

As a result, gross loans and advances in the banking industry grew 4.2 per cent from Ksh1.19 trillion ($11.65 billion) in December 2011, to Ksh1.24 trillion ($12.14 billion) in March 2012, according to data from CBK.

A huge chunk of the loans — amounting to Ksh321.8 billion ($3.15 billion) — were extended to households and individuals up from Ksh318.8 billion ($3.12 billion) in December 2011. It was followed by the trade segment which procured loans amounting to Ksh242.7 billion ($2.37 billion) compared with Ksh232.7 billion ($2.79 billion) in the period under review.

Manufacturers secured loans totalling Ksh169.1 billion ($1.65 billion) compared with Ksh156.7 billion ($1.53 billion) in December of 2011.

The stock of gross non-performing loans (NPLs) increased by 1.3 per cent from Ksh53 billion ($519.08 million) to Ksh53.7 billion ($525.93 million), but the ratio of gross NPLs to gross loans  improved from 4.4 per cent to 4.3 per cent in the same period.

In the first quarter of this year, tourism, restaurants and hotels as well as personal/household sectors reported the highest levels of non-performing loans at 39 per cent and 33 per cent respectively, according to CBK.

Kenyan lenders expect an increase in the level of NPLs in tourism, personal/household, transport and communication and real estate sectors in the second quarter of this year, due to the existing wave of insecurity in the country, negative travel advisories and heightened political tensions.

In their global focus report dated June 2015, economists at Standard Chartered Bank Plc, said Kenya’s central bank is likely to increase its policy rate further to safeguard the shilling which fell to a three-and-a-half-year low of Ksh100 against the US dollar last week.

READ: Region warned over rising NPLs and low loan loss reserves

They also expect overall month-on-month inflation which rose to 7.03 per cent last month from 6.87 per cent in May, to climb above nine per cent by December this year.

The economists are also concerned about Kenya’s ability to repay loans borrowed offshore as its local currency weakens against the dollar, making it expensive to service external debt obligations denominated in foreign currencies.

They also worry about the country’s attempts at borrowing from foreign lenders in the wake of a depreciating shilling. According to the report, a weaker shilling will undermine Kenya’s external-debt sustainability.

“A significantly weaker shilling would result in a greater threat to external-debt sustainability and perhaps even complicate Kenya’s efforts to increase offshore borrowing,” notes the report.

Foreign lenders

Kenya is looking to borrow a total of Ksh340.5 billion ($3.33 billion) from foreign lenders in the current financial year to finance part of its Ksh2.1 trillion ($20.56 billion) budget.

But a rapidly depreciating shilling is proving to be a headache for technocrats at the National Treasury who are under pressure not to push the country into a debt overhang.

National Treasury Cabinet Secretary Henry Rotich had made it clear during his budget speech in June that Kenya would not shy away from taking up commercial loans to offset a budget deficit estimated at Ksh426.3 billion ($4.17 billion), excluding expenditures related to the standard gauge railway (SGR).

His confidence was based on the success of the country’s debut $2 billion sovereign bond last year which was oversubscribed four-fold.

“….Last year, our debut sovereign Eurobond  was received with a lot of enthusiasm by foreign investors, once again underscoring the confidence foreign investors have in our economy,” he said.

“We intend to continue sourcing these type of funds, including from export credit agencies and syndicated loans.”

Kenya’s overall fiscal balance including grants (amounting to Ksh 73.4 billion, $718.88 million), is projected at Ksh570.2 billion ($5.58 billion) in the 2015/16 financial year.

Excluding expenditures related to the SGR, the overall deficit will decline to Ksh426.3 billion ($4.19 billion) equivalent to 6.5 per cent of GDP. The fiscal deficit will be financed by net external financing of Ksh340.5 billion ($3.33 billion) and Ksh229.7 billion ($2.24 billion) of domestic financing.