Borrowers shun cost of credit, inflation pressure for more debt

Tuesday August 16 2022

Data indicates that more Kenyans may be taking loans to keep up with the rising cost of living. PHOTO | FILE


Several Kenyan banks have recorded an increased demand for personal, household and business loans in the last quarter, defying the rising cost of credit amid the tightening of financial conditions.

The Central Bank of Kenya’s latest credit survey, released last month, shows that 31 percent of banks registered increased demand for credit, and 56 percent said the demand did not change.

This is despite CBK raising its policy rate to 7.5 percent in May, a move aimed at taming soaring inflation rates by reducing the appetite for loans by individuals and institutions.

Read: Kenya raises key interest rate to tame inflation

Analysts say that although the hike in the Central Bank lending rate may not reflect in the cost of credit until the end of this quarter, the appetite for loans will continue to rise because the expense incurred in seeking them has become a secondary consideration.

Samuel Tiriongo, the research and policy director at the Kenya Bankers Association said that banks may also segment their credit, meaning all spheres of the market may still find borrowing amenable to their needs.


“With many banks now being allowed to operationalise risk-based pricing, we are likely to see a net rise in credit supply, and consequently, demand,” he said. “The Central Bank rate hike will have some effect, but not significant enough to counter the effects of the implementation of risk-based pricing.”

The risk-based pricing model allows banks to include all charges on a loan within an interest rate, as opposed to the previous interest rate capping law. The risk-based pricing model enables banks to extend credit to riskier customers who previously could not access credit even at higher costs.

“Over 60 percent of the individuals and entities we have interviewed before say that what matters to them most is not really the price, but the availability of the credit itself,” Mr Tiriongo said. “More people are indicating that they are willing to pay premium prices to access credit.”

Recent data indicates that more Kenyans may be taking loans to keep up with the rising cost of living. In an earlier survey, the World Bank and the Kenya National Bureau of Statistics found that, as of March this year, nearly 97 percent of Kenyans had taken a loan to meet their daily expenses.

Also read: More Kenyans taking loans to survive: report

With the appetite for credit defying the costs incurred, using the Central Bank policy rate as a tool for taming demand for loans, may not be effective.

Kwame Owino, the chief executive of the Institute of Economic Affairs, said although the cost of credit is no longer significant enough to determine demand, that does not by itself make the monetary policy absolutely ineffective.

“The most significant factor for demand or even availability of credit in Kenya is the government’s appetite for debt. The more the government borrows from commercial banks internally, the less they have left available to lend individuals,” he said.

“This ‘crowding out’ effect leaves little room for the risk-based pricing model to solely thwart the impact of central bank rate hikes,” Mr Owino said.