Now’s the best time to take a bank loan
Saturday October 19 2013
The cost of borrowing in Kenya has hit a two-year low as lenders continue to cut their rates, urged on by improving economic indicators, easing the pain of high interest charges for businesses and households.
With average lending rates falling to 16.96 per cent in August — a level last seen in October 2011 — Kenya is now the cheapest country in the East African region to take up a bank loan.
Kenya’s banks have opened a four per cent gap over their peers, data from the Kenya National Bureau of Statistics (KNBS) and central banks from Uganda, Rwanda, Burundi and Tanzania shows.
The drop in lending rates was occasioned by banks adjusting their rates to reflect the drop in the benchmark Central Bank Rate (CBR), falling inflation figures and improved economic forecasts. The CBR is the interest the central bank charges commercial banks for loans.
The CBK, in its latest assessment on the economy, said demand and supply of credit is expected to increase in the remainder of 2013, with expected increase in trade and investment opportunities in counties, pick-up in economic activity, declining lending rates, lower inflation, and demand from expansion activities by firms.
On average, banks expect to increase credit by about 15.7 per cent while demand from the private sector is expected to rise by over 14 per cent.
Small banks, the CBK said, expect higher credit growth with some of them having issued corporate bonds to increase their the level of loanable funds.
Data shows average interest rates in Kenya have been dropping over the four months to August, from 17.87 per cent in April.
Borrowers in Uganda are currently paying at least 24 per cent interest on loans while in Rwanda and Burundi, they are being asked for an average of 20 per cent. Banks in Tanzania are charging at least 21 per cent interest on loans.
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The lenders across the region have been reluctant to lower their rates despite central banks easing their monetary policy.
In Rwanda, for example, although the benchmark Treasury bill rates have dropped from a high of 12 per cent in April to 10.8 per cent currently, while the repo rate has fallen from 7.5 to 7 per cent, commercial banks have been slow to lower lending rates.
Analysts said that the demand for loans in Rwanda far outpaces the supply, a factor that has seen lenders unwilling to cut the cost of borrowing.
In Kenya, analysts say banks were cautious to cut rates due to risks associated with the general election in March.
“Although the CBR had come down, banks had adopted a cautious approach due to the risks associated with the elections...but since April, banks have slashed lending rates,” said Erick Munyowki, a research analyst at Old Mutual Securities in Nairobi.
An August 2013 survey by the CBK on business executives shows that commercials banks expect average lending rates to remain stable or decline slightly in the remainder of 2013 due to improved liquidity conditions.
Large banks, the survey says, expect lower average lending rates in the remainder of the year due to comparatively higher liquidity levels and lower cost of funds.
“But expected inflationary pressures due to new VAT measures and increase in oil prices, rising yields on Treasury securities, and expected pick-up in economic activity with the rising demand for loans to finance investment, could exert pressure on interest rates to rise,” said CBK in the survey seen by The EastAfrican.
In Uganda, the country’s central bank is counting on growing private sector lending to sustain the revised economic growth forecast of 5.8 per cent — from the initial 5.1 per cent.
“Commercial lending to the private sector is beginning to recover. Annual growth in bank credit stood at 9.1 per cent in June 2013, compared with 6.4 per cent in June 2012,” said the Bank of Uganda (BoU) in its October monetary policy report.
Generally, the Kenyan economy has depended on the stimuli provided by increased private sector borrowing, which analysts see as key to reversing the weak growth posted in the second quarter of the year.
KNBS data shows Kenya’s economic growth slowed by nearly one per cent to 4.3 per cent in the second quarter of 2013 ending June, compared with the previous quarter over election jitters, hurting key sectors like hospitality as well as wholesale and retail trade. The expansion was, however, slower than the 4.4 per cent reported in the second quarter of 2012.
According to the CBK, credit to the private sector expanded by Ksh 52 billion ($611.7 million) between March and June 2013, compared with Ksh 31 billion ($364.7 million) over a similar period in 2012. The banking sector’s gross loans and advances increased from Ksh1.28 trillion ($14.71 billion) in June 2012, to Ksh1.45 trillion ($16.8 billion) in June 2013.
“We expect the drop in commercial rates to spur better growth numbers in the second half of this year,” said Peter Anderson, the chief investment officer at Old Mutual Asset management.
Since hitting a peak of 20.3 per cent in June 2012, the average lending rate has been trending downward, pulled down by a steep drop in the inflation rate.
The inflation rate, which had risen to over 20 per cent in 2011, forced the CBK to adopt a tight monetary policy that helped rein in the rising cost of goods and services, and in effect triggered the drop in lending rates.
At the height of the inflation, the CBK raised the CBR to 18 per cent, a figure that has fallen to 8.5 per cent, while inflation has dropped to 8.7 per cent.
The drop in interest rates and the subsequent rise in private sector lending is expected to add growth momentum to the Kenyan economy, which is also under pressure from the negative effects posed by the VAT Act imposed last month, as well as the effects of the terrorist attack on Westgate Mall in Nairobi last month that claimed over 60 lives.
Analysts at Moody’s, the global ratings firm, project the attack could slash up to half a percentage point in potential economic growth.
Old Mutual also reversed its growth forecast from the initial 5.5 per cent to 5.25 per cent. The government projects the economy will expand by about six per cent, while the World Bank sees the local economy growing by 5.7 per cent.
READ: Westgate attack slashes 0.5pc off 2013 growth
Though the rates have fallen, analysts said the recent rise in inflation is likely to put the brakes on further reductions. The interbank rate is currently at a 14-month high of 9.72 per cent.
“I think the lending rates have hit the floor for now…the jump in inflation will see banks wary of a further rate cut since given the spread of 10-13 per cent and the inflation rate of around 8 per cent, their real return is under pressure,” said Mr Munyowki.
Analysts at Kestrel Capital said banks were unlikely to cut rates significantly this year due to a delay by the government in issuing the Eurobond.
“The Eurobond would have reduced government borrowing and thus pulled Treasury rates downwards…this would have led to increased appetite for private sector lending,” said Kuria Kamau, an analyst at Kestrel capital in Nairobi.
Last week, Kenya pushed the issuance of its $1.5 billion Eurobond to the first quarter of next year, with government officials saying the new timeline was the result of a delay in selecting the transaction advisor.