Opinion and Analysis

Banks must cut lending rate to spur economy

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Posted  Wednesday, January 23  2013 at  16:30

For a long time, Kenya’s economic fortunes have been tied to the performance of the agriculture sector, but not in recent months.

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Agriculture is billed as the biggest employer and contributor to about a quarter of country’s wealth hence it has become the centre piece of policy makers.

But last year’s GDP numbers unveiled a co-driver of the country’s economy: the rate of bank credit.

This became apparent in quarter one of last year when the economy slowed down to 3.5 per cent compared to 5.1 per cent in 2011, and the culprit was not the agriculture sector, but expensive bank credit.

Interestingly, agriculture defied the dry weather in quarter one to post a 2.3 per cent growth compared to a measly 0.2 per cent a year earlier. But the rest of key sectors like manufacturing, retail, construction and tourism recorded drops that weighed down on the economy.

This was a pointer that the cash generated by the agro sector was not adequate to boost Kenyans’ purchasing power and prop up the private sector through increased demand for goods and services.

The subdued consumer demand for goods and services has slackened the capacity of many Kenyan firms to boost production that will offer some room for fresh hiring and stop executives mulling over cutting jobs to preserve cash and profits.

This outlook prompted the Central Bank of Kenya’s Monetary Policy Committee (MPC) from mid last year to act and re-looked policies that were geared at inflation and lending rates.

At the time, the benchmark lending had been increased to 18 per cent to shield the shilling against renewed pressure from foreign currencies, prompting commercial banks to raise their average lending rate to 25 per cent from about 18 per cent.

The monetary policy honchos have since cut the key rate to 9.5 per cent, representing a drop of 8.5 percentage points.

Commercial banks, especially the top players that account for nearly 70 per cent of the country’s lending book, have not matched the CBK in their rate cut despite slashing deposit rates.

Therefore commercial banks are emerging as the missing link in the drive to step the recovery of the Kenyan economy at a moment when are preparing to unveil super profits

What Kenya needs now is cheaper credit to spur consumer lending.