East Africa’s biggest economies are grappling with slackening credit uptake, which now threatens economic growth in what has so far been Africa’s fastest-growing region.

Kenya’s figures for March released last week point to a contraction, for the first time in a decade, forcing the World Bank to revise growth expectations, as it has done in Tanzania.

Uganda has been on an easing path for the past year, with the Central Bank Rate being consistently reviewed from 17 per cent in April last year to 11 per cent at the policy meeting last week.

• READ: Bank of Uganda cuts key policy rate to 11pc

According to the Markit Stanbic Bank Kenya Purchasing Managers’ Index (PMI), last month’s index indicated a contraction of Kenya’s private sector growth for the first time in a decade. It linked the slowdown to weaker demand conditions and consumer unwillingness to spend in the face of tough financial access conditions.

“For the first time since collection of the data began, the seasonally adjusted PMI dropped below the 50.0 threshold, to 48.5. That demarcates expansion from contraction,” said Jibran Qureishi, regional economist at Stanbic Bank.

Kenya: slow down in activity

“Most indicators of activity showed deceleration, pointing to weaker underlying demand conditions, exacerbated by financial constraints faced by customers,” added Mr Qureishi.

Data from the Kenya Bankers Association shows that private sector credit growth slowed down from 17 per cent at the start of last year to 4.3 per cent in December 2016.

The decline started late in 2015 after the Central Bank of Kenya toughened supervision.

On April 12, the World Bank cut its growth forecast for Kenya to 5.5 per cent, from 6 per cent, citing the slowdown in credit to the private sector, drought and uncertainties associated with the August 8 election.

In February, the International Monetary Fund reviewed the growth forecast for Kenya to 5.3 per cent, from 6.1 per cent, citing the credit slump.

“The most affected group in this credit reallocation emerging after the interest rate cap late last year is individual households and small and medium enterprises who are now having a great challenge accessing credit,” Allen Dennis, World Bank’s senior economist on macroeconomics and fiscal management, told The EastAfrican.

Tanzanian banks

In Tanzania, uncertainty over President John Magufuli’s policies and a slowdown in the private sector saw the World Bank review its growth forecast to 6.9 per cent, from 7.2 per cent the previous year.

• READ:Magufuli’s directives hit capital markets

Tanzanian banks have also slowed down their lending as non-performing loans increased to 9.5 per cent last year, from 6.4 per cent in 2015.

As at the end of last year, private sector credit growth dropped to 7.2 per cent from a high of 25 per cent in January 2016.

“Policy adjustments, if they occur frequently, could cause uncertainty for the private sector, and this uncertainty could dampen private sector investment decisions,” the World Bank said in its latest economic update for Tanzania released last week.

In March, BoT began a series of policy easing measures, which were aimed at boosting liquidity in the banking system. It cut its discount rate by 400bps to 12 per cent and cut the statutory minimum reserves for commercial banks by 200bps effective this week.

“Upon implementation, it is likely to free up about $220 million in liquidity to the system. We are seeing huge pile up of non-performing loans in the banking sector, which has created funding constraints and tepid private sector credit growt. BoT is still more likely to continue the easing path,” George Bodo, head of banking research at Ecobank said.

Mark Bohlund, sub-Saharan Africa and Middle East economist for Bloomberg Intelligence said that non-performing loans have weighed on credit growth in Tanzania.

“The rate of credit expansion slowed in the second half of 2016 and this may impair economic growth this year.  To maintain its economic growth rate over the long term, the country will have to become more competitive and open to foreign investment to attract much-needed capital and expertise. If not, low productivity is likely to hold back Tanzania’s economic growth,” Mr Bohlund said.

According to BoT, private sector credit growth has decreased by 5.1 per cent in January from 25.3 per cent a year ago, affectingthe agriculture, manufacturing and tourism sectors, which all recorded a negative development.

In Uganda, the increased provisioning for bad debt has been the main driver of the drop in lending.

The country saw its impairments double to 8.3 per cent in June last year, from 4 per cent a year earlier after the BoU pushed for re-provisioning of debts with the watch list and doubtful all being lumped under NPLs.

Bank of Uganda

Bank of Uganda has also been on an easing exercise that has seen its benchmark interest rate reduced from 17 per cent in April to 12 per cent at the start of this year, yet this hasn’t really been reflected in the credit levels uptake by the private sector.

“We made this reduction to stimulate economic activity that has been sluggish for two years. But we have still seen a drop in credit growth, by 100 basis points in the last two months of last year as banks still consider businesses too risky to lend to,” BoU Governor Emmanuel Tumusiime Mutebile said.

Data from BoU shows that the advances last year remained flat at $3.14 billion while its non-performing loans increased by 10.5 per cent last year to $328.4 million.

“The increase in non-performing loans commercial banks and private sector players becoming more risk averse — something that may have contributed to this performance,” the March State of the Economy Report released by Uganda’s Ministry of Finance reads.