Slowdown in lending to private sector to impact Kenya’s economic growth

Tuesday February 07 2017

Data shows Kenyan banks are scaling back from lending to riskier borrowers. TEA GRAPHIC | NATION MEDIA GROUP

Lending to the private sector has stagnated in Kenya following the introduction of interest rate caps four months ago, latest data from the regulator shows, explaining the call by the International Monetary Fund for the country to rescind the regulation.

A survey by the Central Bank of Kenya shows lending to the private sector remained relatively flat at Ksh2.2 trillion ($20.82 billion) in the 12-month period to October 2016 as debate and eventual enactment of the Banking (Amendment) Bill 2016 took centre-stage.

Compared with the previous year, credit to the private sector grew by 24 per cent (Ksh348.92 billion or $3.3 billion) from Ksh1.48 trillion ($14 billion) in October 2013 to Ksh1.82 trillion ($17.23 billion) in October 2014.

The data reflects the scaling back by lenders of loan disbursements to riskier borrowers while large borrowers suspended their debt programmes to see which direction interest rates would take, stifling credit.

“From the demand side, customers have more or less taken a wait-and-see approach due to the uncertainties surrounding the cost of credit after the enforcement of the interest rate law, while from the supply side, financial institutions are hesitant to lend to first-time borrowers whose risk profiles cannot be covered by the prevailing statutory rate of interest,” said Kenya Bankers Association chief executive officer Habil Olaka.

Data from CBK shows a shaky performance by the credit market, negating claims by some banks that they were doing more business through refinancing of facilities at lower rates and giving micro loans through mobile phones.


“If you look at the January statistics, August statistics and December statistics you can clearly see that the growth of credit is slowing down,” said Mr Olaka.

Economy slowdown

According to the CBK, the ratio of total loans to total assets in the banking industry fell to 59.17 per cent in the third quarter (July-September) 2016 from 61.16 per cent in the second quarter (April-June) 2016.

CBK Governor Patrick Njoroge said the slowdown in credit to the private sector would impact on the country’s economy this year.

“We have witnessed a decline in private sector credit growth since December 2015 and we have incorporated this decline in our economic growth forecast for this year,” Dr Njoroge told reporters in Nairobi.

He said Kenya’s economic growth would slow to 5.7 per cent from 5.9 per cent in 2016 as a result of drought, US President Donald Trump’s policies and Brexit.

READ: Kenya's economic growth to slowdown in 2017

The International Monetary Fund’s managing director, Christine Lagarde, said Britain’s exit from the European Union would have dire consequences for its economy.

Ms Lagarde said the UK must prepare for “pain” as the extremely complicated process of leaving the 28-member bloc begins.

The IMF has so far downgraded its economic growth forecast for the UK in 2018 to 1.4 per cent from the previous 1.7 per cent, arguing that Brexit would have a negative material effect on the economy.

The rate of inflation in Kenya rose to 6.99 per cent last month (January) from 6.35 per cent in December 2016, the highest in 12 months, pushed up by food and fuel prices, according to data from the Kenya National Bureau of Statistics.

“Combining high prices and low credit availability, private household consumption in 2017 will be impaired resulting in weaker corporate top line growth,” according to analysts at Standard Investment Bank.

READ: IMF, World Bank cautious about Kenya’s economic growth

President Uhuru Kenyatta’s government last year enacted a law to control the high interest rates charged by commercial banks in an attempt to stimulate private investment and push the economy onto a higher growth path.

But the law, which has been heavily criticised by the IMF, appears to be working against the government’s intentions as banks avoid lending to businesses and households they now perceive to be high risk while opting to channel funds to risk-free government securities such as Treasury bills and bonds.

The law, which was enforced on September 14, 2016, caps lending rates at four percentage points above the Central Bank Rate (CBR), which currently stands at 10 per cent, and minimum deposit rates that banks give customers to 70 per cent of the policy rate.

This has reduced the spread between deposit rates and lending rates, hurting the banks’ profits.

Data from CBK shows a drop in the volume of credit to the private sector after the enforcement of the interest rate law. The data shows that growth in credit to the private sector fell from 19.5 per cent in October 2015 to 4.5 per cent in October 2016, with all sectors, except for real estate, finance and insurance, posting declines in credit growth.

According to the CBK, credit to key sectors such as agriculture, manufacturing, trade and households declined immediately after the enforcement of the law capping interest rates in September 2016.

However, credit to the building and construction sector, transport, communications and real estate, recorded marginal increases.


According to the latest research by the Kenya Banker’s Association (KBA) on the performance of the real estate sector, there was a slowdown in mortgage approval by financial institutions in the fourth quarter (October-December) of 2016 as a result of interest rate capping — a factor that constrained demand.

According to the study, apartments accounted for the largest share of the total sale transaction at 60 per cent with maisonettes and bungalows accounting for 23 per cent and 17 per cent respectively.

As a result, the sale of the apartments drove price movements as the other types of houses were characterised by relative price stability.

The average house price in Kenya increased by 1.58 per cent in quarter four 2016, compared with the 2.2 per cent rise recorded in the previous quarter.

“The middle and upper end dominated the market as supply remained aligned to that segment and the severity of the demand constraints arising from the financial sector realignment to the new banking law,” said Jared Osoro, KBA’s director of research and policy.

“For the given housing units, supply conditions in the market and the adjustment showed on the demand side as lenders commenced revising the credit standards prior to approving mortgage lending. In essence, there was a slowdown in mortgage approvals during the quarter hence constrained demand,” he added.

Last week, the CBK retained its policy rate at 10 per cent citing moderate inflationary pressures, relatively stable foreign exchange markets, adequate reserves and a strong economic performance but raised concerns over the heightened uncertainties over drought and risks in the global markets.

The regulator suspended the operations of the Kenya Bank Reference Rate framework, following the adoption of the new law capping interest rate.

According to analysts at AIB Capital, the persisting slowdown in credit growth to the private sector points to the ineffectiveness of the Central Bank Rate in controlling credit growth.