Bank loans rise by Sh37bn after interest rate cut

Commercial banks’ loan book increased by Sh37 billion between July and September, reversing an almost flat growth recorded in the past 12 months due to a rapid rise in lending rates towards the end of last year.

The latest data from the Central Bank of Kenya (CBK) shows that total loans taken by the private sector stood at Sh1.32 trillion at the end of September, up from Sh1.29 trillion in June.

In the same period customer deposits grew to Sh1.71 trillion, up from Sh1.66 trillion.

However the number of borrowers who have buckled under the weight of high interest rates continued to grow with the non-performing loans rising to Sh60.3 billion as at end of August up from Sh57.5 billion in June.

“This indicates momentum (for borrowing) has started to pick up but banks are yet to cut their lending rates, which means they could register higher earnings. However, a rise in non-performing loans could dampen their net performance,” said Francis Mwangi, an analyst with Standard Investment Bank.

The CBK records show that banks had earned Sh71 billion in profits before tax in the eight months to August, a 28.4 per cent increase from Sh55.3 billion reported in a similar period last year.

The growth in profits was attributed to higher revenue margins as the difference between what banks charged on loans and paid for deposits widened.

Banks have benefited from a reduction in their cost of funds after a cut of the Central Bank Rate (CBR) from 18 per cent in June to the current 13 per cent, but have been slow to drop base lending rates by a similar margin.

High interest rates

The average industry lending rate stands at 20.13 per cent, according to CBK records.

The rise in non-performing loans, attributed to high interest rates and a slowdown of the economy, is a dark spot in the sector’s performance as it will be forced to increase its provisioning for the doubtful repayments.

Analysts said the growth in the deposit base was an indicator of uncertainty in the direction of interest rates, which has forced investors to finance new projects using cash rather than borrow loans.

“Inflationary and high interest rate regime have discouraged consumption while growing savings and bank holdings. If the macroeconomic dynamics do not reverse, this is a signal of a possibility of an approaching recession,” said Sterling Capital.

Holding of cash savings indicates less is being reinvested into the economy, which blunts growth.

Private investors had turned their backs on commercial loans since the second half of last year after Central Bank’s decision to tighten the monetary policy in a bid to support a then depreciating shilling and control the cost of goods which was rising.

This saw the industry lending remain at Sh1.2 trillion for over six months as lending rates touched highs of 32 per cent. Non-performing loans also went up to Sh56 billion from Sh57.5 as at June from Sh53 at the end of last year.

Analysts expect banks to benefit from a further cut in the CBR early next month following a stabilisation of the macro-economic environment.

“We expect a rate cut based on the fact that growth of the economy has slowed down vis a vis government estimates. The factors which prompted the high rate –shilling and inflation- have stabilised which makes growing the economy a key target for the government,” said Eric Munywoki an analyst at Old Mutual Securities.
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