The high lending rates in the Kenyan market are expected to slow credit growth to private sector in the year to December, according to a survey by Central Bank of Kenya (CBK).
This is despite an expected surge in demand for short-term borrowing and requirements for working capital by large firms and small businesses.
In the Central Bank of Kenya’s Market Perceptions Survey for March 2024, on commercial banks’ forecast for year, respondents indicated expectations of lower private sector credit growth compared with 2023, largely due to high lending rates.
About 62 per cent respondents expected private sector credit growth to be largely tempered by the rates and tight credit underwriting, which were dampening demand and uptake of new facilities.
This, as the price of loans increased at a time when banks were implementing risk-based pricing and trying to be “very cautious”, to minimise Non-Performing Loans (NPLs) and the increasing credit risk.
Data from Kenya’s apex bank shows that the banking sector’s gross NPLs increased by 25.7 per cent to Sh635.8 billion in November 2023, from Sh505. 9 billion in the same period in 2022.
The ratio of NPLs to gross loans stood at 15.5 per cent in February 2024 compared to 14.8 per cent in December 2023.
According to a statement from the CBK governor, Kamau Thugge in his post-Monetary Policy Committee briefing earlier this month, he said “increases in NPLs were noted in the real estate, trade, personal and household, energy and water and building and construction sectors,” as the apex bank retained its base lending rate at 13 per cent.
However, commercial banks in Kenya are lending by up to 23 per cent, depending on the risk profiling of the borrower, as they continue to make adequate provisions for the NPLs.
Nevertheless, 70 per cent of the respondents expected support to private sector credit growth from a better economic performance in 2024 relative to 2023, due to favourable weather conditions, favorable foreign exchange environment, positive sentiments in economy and lower inflation, which are likely to boost demand for working capital and term funding.
They also expect credit to be aided by increased demand from short-term borrowing and requirements for working capital and to finance projects due to cash flow challenges and financial constraints for businesses arising from the high interest environment, delays in the government disbursement of funds to its suppliers and increased demand for working capital.
Growth in commercial bank lending to the private sector slowed to 10.3 per cent in February, compared to 13.8 per cent in January 2024.
Credit growth in manufacturing was at 13.6 per cent, transport and communication (7.5 per cent), trade (10.7 per cent), and consumer durables (7.4 per cent).
“The number of loan applications and approvals remained resilient, reflecting sustained demand particularly for working capital requirements,” Thugge said.
However, 82 per cent respondents expected the high cost of credit due to high interest rates and prospects of increased interest rates, relatively high inflation environment, and the high cost of doing business in the country to dampen credit appetite in the next two months.
The survey requested bank respondents for an assessment of credit demand from their perspective, during the two months before the MPC meeting (that is February and March 2024), and their expectations for April and May 2024.
It targeted chief executives and other senior officers of 354 private sector firms comprising 38 commercial banks, 14 micro-finance banks and 302 non-bank private firms, including 84 hotels, through questionnaires administered online, and via email and hard copies.
The overall response rate to the March 2024 Survey was 73 per cent of the sampled institutions, according to CBK.
The respondents comprised 34 commercial banks, eight micro-finance banks, and 217 other non-bank private sector firms.
Meanwhile, respondents expect economic growth to be driven by enhanced agricultural production supported by the more than average rainfall across the country and government interventions in the sector.
A resilient private sector led diversified economy supported by healthy, albeit diminishing consumer activities due to slowing incomes, and tourism sector recovery with increasing international travel, are also expected to drive growth.
However, the high cost of borrowing, constraining disposable incomes for consumption and investments by households and MSMEs and high taxation, remain risks to economic activities.
