Bank credit exceeds CBK target for seventh month

Lending to the private sector overshot Central Bank of Kenya’s target for the seventh consecutive month last March as analysts sounded an alert on the gathering inflationary pressures.

Borrowing in the year to March exceeded the target by Sh70 billion to stand at about Sh1.6 trillion. This means Kenyans were borrowing Sh6 billion over and above the target each month.

The Monetary Policy Committee (MPC) reported after its latest meeting that credit grew by 22.66 per cent in March, over a comparable month last year, breaching the set target of 17.3 per cent.

In February, credit grew by 21.46 per cent against a target of 15.3 per cent while in January it expanded by 20.47 per cent against a 15.5 per cent target.

“I think one begins to worry about inflationary pressures when credit expansion exceeds the target for several months. Perhaps it might be time to tighten, but I know CBK may also be thinking about economic growth,” said Vimal Parmar, head of research at Burbidge Capital, an investment and advisory firm.

The position was supported by another analyst from a commercial bank who preferred anonymity so as to comment freely.

“If the growth in credit is above 20 per cent year-on-year, we begin to tread on dangerous grounds. We might need some tightening pretty soon,” said the research analyst.

The credit growth was behind target for a number of months before last September as interest rates remained relatively high due to the tightening approach by MPC since late 2011.

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MPC set the Central Bank Rate, which is the policy and base rate, at the highest ever level of 18 per cent in December 2011 as it fought to stabilise the shilling and inflation.

MPC has linked banking credit expansion not only to the financial institutions themselves but also to the increase in mobile money transections. Several banks are channelling loans through mobile phones.

“The annual growth in private sector credit stood at 22.66 per cent in March 2014 compared with 21.46 per cent in February 2014. This is an indication of a pickup in domestic economic activity and was supported by the continued integration of mobile phone services and banking platforms,” said MPC in their statement.

MPC, however, said the credit expansion was being monitored closely to ensure it does not end up triggering price escalation.

“The private sector credit growth is being monitored carefully to ensure that it does not trigger any demand inflation pressure or adverse inflationary expectations,” said MPC chair Njuguna Ndung’u in the statement.

Tightening rates

Prof Ndung’u struggled to control the inflation monster in late 2011 and part of 2012, before eventually managing to do it in mid-2012.

Other analysts, however, warned against tightening rates too early in view of the weak growth of 4.7 per cent in 2013 and current risks to the economy such as unfavourable weather and insecurity.

Eric Munyoki, a research analyst with Old Mutual Securities, though said that the credit growth should not be exaggerated given that the economy is still performing below expectations and the fact that many borrowers are looking for base-lending rates that are lower than the current level averaging 17 per cent.

“As long as the level of inflation are at single digits and the exchange rate is stable, there is no reason to be too worried. If we tighten interest rates too early, it will defeat the purpose of encouraging investment especially when our economic growth is only 4.7 per cent,” said Mr Munywoki.

As at March the credit issued was Sh1.69 billion, including that which had been given to the “other” public sector — such as parastatals. For the private sector alone the credit stood at a total Sh1.6 trillion.