Businesses expect interest rates to fall

Kenyan businesses expect lower borrowing rates by the end of the year following the implementation of the Kenya Banks Reference Rate (KBRR), a new report by Standard Chartered shows.

In the monthly survey conducted by StanChart and London-based research firm MNI Indicators, 200 business executives report that there has been both easing of interest rates and improvement in availability of credit compared to 2013.

The indicator tracking interest-rate payments, which is weighted up to 100 points, eased to a four-month low of 68.1 — indicating lower rates — while that tracking the expected direction of interest rates in the fourth quarter of the year dropped below 50.

“This signals that most respondents expect interest rates paid to fall even further in the next quarter. Only two months into the introduction of KBRR businesses reported a significant easing in interest rates paid and a simultaneous improvement in the availability of credit,” said Razia Khan, StanChart head of research in Africa, in the report.

The KBRR was put in place beginning July and is pegged at 9.13 per cent until January 2015 when it is set to be reviewed. It is meant to improve transparency in the way banks price their loans.

Central Bank of Kenya said in a report following the Monetary Policy Committee (MPC) meeting last month that initial data from 22 banks and six microfinance banks showed Sh43 billion worth of new and existing loans covering 182,731 loan accounts had benefited from the KBRR framework by end of August 2014.

“The average premium that commercial banks charged above the KBRR on commercial mortgages was 3.05 per cent while that on corporate loans (one to five years) was 4.09 per cent,” said CBK.

READ: Why bank clients are not keen on Base Rate and KBRR

The business executives interviewed for the survey are drawn from different sectors including manufacturing, services, construction and agriculture. They were interviewed on the current and future economic conditions.

On the shilling, the executives reported concerns over the weakening exchange rate, fearing an impact on profits due to the high cost of bringing in raw materials.

A weaker shilling means paying more in dollar terms which for exporters, though, translates to increased earnings on sales.

The survey found the executives’ greater optimism on business performance in the last quarter of the year draws from increased export sales and orders.

Slowdown in inflows

The recovery in exports would come at an opportune time for the economy, which has seen a slowdown in foreign inflows from agriculture and tourism.

Sentiment on employment, however, remains subdued. “Businesses are still slow to hire, despite the optimism around future prospects. It may take a sustained period of growth before we see more employment creation,” said Ms Khan.

Some sectors of the economy have been shedding jobs. They include tourism, due to the lower number of visitors as a result of security concerns.

There are fears that jobs may be lost in the horticulture industry due to rising costs associated with failure to reach an Economic Partnership Agreement with the European Union, which means that Kenyan exports to the EU will attract additional taxes.