A sharp increase in interest rates has slowed down the uptake of new loans, setting up commercial banks for less profit in the last quarter of the year.
Official data shows that bank loans and advances stayed flat at Sh1.2 trillion in September, reflecting the negative impact that the steep rise in the cost of loans has had on borrowing.
The Central Bank of Kenya has in the past three months shocked the market with aggressive interest rate increments that have forced lending rates up by an average of 10 percentage points.
The banking sector last recorded such a flat growth in loans at the peak of the global financial crisis in February and March of 2009.
Banks issued Sh22 billion fresh loans in August compared to July and grew the market by Sh60 billion in September all adding up to a flat total of Sh1.2 trillion in the third quarter.
Reuben Marambii, the National Bank of Kenya managing director, said the uptake of loans had “almost stopped,” projecting that the returns for the last two months of the year were likely to show stagnant growth.
Growth in the loan book is expected to have slowed down even further in October when the CBR hit the double digit range of 11 per cent for the first time before rising to 16.5 per cent in November and 18.00 per cent on December 1.
Banking executives said stagnation of growth in the loans market was partly behind Tuesday’s decision to cap the rise in monthly loan repayments at 20 per cent to reduce chances of default.
Kenya Bankers Association announced that day that its members had agreed to cap the increase in monthly instalments, extend the repayment period and absorb the December 1 CBR hike of 1.5 percentage points for existing customers.
The average monthly loan book growth stood at Sh6.8 billion at the peak of the global financial crisis in 2009 and rose to Sh12.08 billion in 2010 before peaking at Sh28 billion in the first half of this year.
“Banking-sector profitability is likely to be impacted initially by increased provisioning and then subdued credit demand in response to the rise in lending rates,” said Ms Razia Khan, head of research on Africa at StanChart.
Central Bank of Kenya insiders said the slowdown in credit expansion was in line with the MPC’s intentions when it raised the policy rate.
CBK has been accused of fuelling inflation with a low interest rate regime that helped loans growth to spiral out of control. The credit market expanded by 36 per cent in the year to September compared to 21 per cent the previous year – a development that has been partly blamed for the steady rise in inflation for the 13 consecutive months to 19.72 per cent in November.
Jeremy Ngunze, the business development manager at Commercial Bank of Africa, said that though many potential borrowers would think twice before taking new debt, loan book growth for each bank would depend on customers’ ability to pay.
“I think most customers will be a bit more cautious before incurring new debt,” Mr Ngunze said.
The slowdown in loan uptake signals less investment and opportunities for employment creation but the MPC says further price shocks could undermine growth prospects.
Analysts said investors had begun to factor in the slow loan book growth, which may stretch into the first quarter of 2012.
“We are likely to see slower growth in loans and advances this quarter and the first quarter of the coming year, but investors have factored this. Banks stocks will also probably be affected by the general market situation ahead of the general election,” said Chris Munene, head of sales trading at African Alliance.
Banks holding foreign exchange that was acquired during the strong dollar months also face forex losses if they are forced, for operational reasons, to sell off forex as it becomes increasingly expensive to get cash through the CBK discount window that stood at 24 per cent Thursday.
Analysts at Standard Investment Bank (SIB) also said that investors had already revalued the banking sector stocks downwards “on account of the current high interest rates and the new 5.25 per cent cash reserve ratio.”
The CRR has ensured that up to Sh7.5 billion of deposits are locked away at the Central Bank of Kenya as from Thursday.
Some analysts believe the Monetary Policy Committee is likely to go on an easing cycle by the second half of 2012, giving impetus to economic growth.
“The resumption of an easing cycle in the second half of 2012, helped by Kenyan shilling gains, should limit the macroeconomic fallout,” said Ms Khan. According to her, there were no long term risks to the industry from the slow profit growth.
“Kenya’s liquidity shock is likely to be short-lived,” she said, adding that the law grants the Central Bank the authority to institute corrective measures before banks experience any solvency issues.