Private sector loans growth at slowest pace in over a decade

Private sector borrowing last year slowed to its lowest level in over a decade as banks become reluctant to lend under the law regulating interest rates.

Treasury data indicate that lending to businesses and homes grew just 4.3 per cent in the year to December, down from 20.6 per cent in similar period in 2015.

The deep slowdown in credit in the September data followed a cap on commercial lending rates imposed by the government in September.

The 4.3 per cent credit increase is below what the Central Bank of Kenya (CBK) says is ideal loan growth of 12 to 15 per cent that is required to support economic growth and job creation.

Additional loans to the private sector fell to Sh94.6 billion last year compared to Sh335 billion in 2015, prompting the Treasury to cut this year’s growth forecast.

Lending to businesses in the services industry shrunk by Sh35 billion compared to a growth of Sh14 billion in 2015 while loans borrowed by manufacturers contracted by Sh23 billion against an expansion of Sh60 billion in 2015.

Agriculture, transport and real estate sectors recorded a slowdown in credit uptake during the period compared to 2015.

Contraction of credit to a number of sectors indicates that the loans repaid were more than the amount borrowed.

The 2016 credit growth is slower than that recorded in 2007/2008 tumultuous election period which recorded a low of 7.5 per cent.

“Most sectors of the economy except trade and consumer durables experienced a slowdown in credit uptake compared to the same period in 2015 due to tight market conditions,” says the Treasury in an economic update report tabled in Parliament yesterday.

Commercial banks were required, from September 14, 2016, to apply a new cap that limited their lending rates to four percentage points above the central bank’s benchmark interest rate—which currently stands at 10 per cent.

The law also requires banks and financial institutions to pay a minimum interest rate of 70 per cent of the CBK’s base rate on deposits.

Commercial banks chief executives who fail to comply face a fine of Sh1 million, a year in jail, or both.

Banks had, before the law was passed, indicated that introduction of interest caps would force them to be more stringent in their lending in what has locked out those perceived to be risky borrowers.

Some lenders have reported a dip in loan books for the three months between June and September.

Equity Bank, CFC and NIC reported contractions of their loans books despite high liquidity ratios. They are yet to report quarter four data.