High interest rates may haunt banks for nine months

Kenya’s financial sector is set to experience three difficult consecutive quarters as high interest rates delay borrowing decisions while increasing default rates, analysts at Old Mutual Securities have said.

The macroeconomic outlook for Kenya forecasts that from January to September the banking sector and the economy are likely to face lean times as the high rates regime takes its toll.

Brenda Kithinji, a research analyst at Old Mutual Securities and one of the report’s authors said that they expect the situation to affect the market until the Central Bank of Kenya (CBK) reduces its base rate.

She predicts this would happen as we approach the second-half of the year.

The CBK late last year sharply increased its base rate to tame the spiralling inflation.

However, as the rise in cost of living starts to fall from the 18.32 per cent to single digit levels it wouldn’t be necessary to maintain the Central Bank Rate (CBR) at 18 per cent.

The increase in the CBR has seen commercial banks raise their base lending rates but to reduce chances of default they have varied the loan terms, which will see borrowers pay more instalments although value of each payment remains the same. (READ: Treasury's loan servicing deal staves off risk of mass default)

“There will be more scope for lending if the CBK moves to loosen liquidity but even if banks extend loans we will still see less people coming to take up new loans,” said Ms Kithinji adding that loan extension does not apply to all products such as mortgages, which are mostly taken on an adjustable rate and whose length cannot be extended.

As a result Old Mutual Securities predicts that the banking sector will record a 1.62 per cent growth this year.

“We have recommended a neutral in the financial intermediation sector, which is likely to be affected by a slowdown in credit growth due Central Bank’s actions,” says the report.

By the investment firm’s definition, a neutral recommendation means that the growth in this sector is forecasted not to exceed three per cent but can fall below three per cent.

The high rates also mean that there will be a slowdown in the industry’s loan book, which currently stands at Sh1.205 trillion as at last December and will mostly affect banks that target the mass market.

The firm says that the only reprieve for borrowers such as small and medium enterprises is specially designed credit from international financiers, which are using local banks to offer cheaper loans.

German Development Bank and the International Finance Corporation have partnered with Equity Bank and Kenya Commercial Bank, respectively to disburse industry specific loans. (READ: Banks turn to global lenders for cheaper cash)

However, Francis Mwangi, a research analyst at Standard Investment Bank, believes that while the sector might take a hit from non-performing loans the appetite for borrowing is still there and would be maintained.