CBK sees growth in private sector demand for credit

The Central Bank of Kenya is betting on rising credit demand to support the ongoing economic growth.

In its latest market survey, CBK indicates that banks and the private sector’s perception of credit has improved considerably, an indication of firming up economic recovery.

CBK found that 75 per cent of banks expect credit to the private sector to grow by up to 20 per cent, while 60 per cent of private sector firms expect their demands for credit to increase by up to 20 per cent.

Compared to the previous survey carried out in May, the CBK findings showed that 52 per cent of banks and 30 per cent of private sector firms had expected credit to grow by up to 20 per cent.

“Commercial banks expect to grow credit in the remainder of the year, while the private sector’s expectations for increased demand for credit has improved hence the convergence of the optimism is expected to maintain the economic growth momentum for the remainder of the year,” said governor Njuguna Ndung’u.

According to bankers, the ongoing economic recovery is fuelling demand for credit as businesses seek to enhance production to meet growing demand both locally and in the expanded East African region.

“Increased lending to the private sector is due to the positive economic and business outlook which is allowing businesses to borrow to expand their production capacity,” said CBA Bank managing director Isaac Awuondo.

Prof Ndung’u said the trend is driven by low and stable inflation and declining interest rates.

“The need to raise working capital is to ramp up production to meet growing demand, especially for houses, as more people seek to own their own homes which is driving demand for paints and other accessories,” said paint manufacturer Crown Berger’s executive officer Rakesh Rao.

Recently, the company issued a Sh300 million commercial paper with the proceeds expected to enhance production capacity.

Demand for credit

The KCB survey found that banks view high demand for credit as driven by factors such as credit rating which will improve the quality of borrowers hence lower risk exposure, increased demand for mortgages, and credit demand by small and medium enterprises.

Financial analysts said low interest rates on government securities will increase credit provision to the private sector.

“The continuing trend of low interest rates, which is expected to persist until the end of the year, will push banks to increase lending to the private sector to protect their margins from being eroded,” said David Achungo, an investment manager with PineBridge Investments.

In its Monthly Economic Review for May, CBK indicated that credit to the private sector rose to Sh787.9 billion from Sh671.9 billion in a similar period last year.

Whereas credit extended to the private sector decreased marginally to 17.3 per cent in the year to May 2010 from 17.9 per cent in the year to May 2009, it accounted for 74.5 per cent of total lending by banks by end of May.

According to the CBK report; trade, private households, and transport were the leading borrowers.

For instance, trade, private households, manufacturing, and real estate received Sh127.2 billion, Sh121 billion, Sh95.9 billion and Sh70.1 billion respectively between January and end of May.

Heavily focus

Other sectors such as business services received Sh71.3 billion, consumerables Sh52 billion, building and construction Sh33.7 billion, agriculture Sh38 billion, and finance and insurance Sh25.1 billion.

However, the report notes that banks have continued to heavily focus on government securities due to their risk free status.

With the prevailing low interest rates, financial analyst said that such investment will aid growth of private credit.

“Commercial banks cannot continue on the path of negative rate of return hence will focus on private lending where they can obtain better returns,” said Einstein Kihanda, a fund manager with Sanlam Fund Management.