Banks exceed CBK loan targets, spur inflation rate rise

Commercial bank lending grew at a brisk pace in the 2014/15 fiscal year exceeding the regulator’s targets of private sector credit expansion in nearly every month.

The lenders only remained within target or slightly below target in February and March, according to a report Central Bank of Kenya governor Patrick Njoroge submitted to the Treasury pumping Sh200 billion into the economy over six months.

As the financial year came to a close, the commercial banks exceeded target in May and again in June by two percentage points in each month, the highest deviation from target since December 2014.

The report said the credit growth contributed to some demand pressures in the economy resulting in the rise in non-food non-fuel (NFNF) inflation, also called core inflation. The other factor in the higher inflation was the falling shilling.

“The trend in the growth of private sector credit was reflected in the 12-month NFNF during the period. The rise in NFNF inflation from March 2015 was partly explained by pass-through effects of the depreciation in the Kenya shilling and moderate demand pressure in the economy,” said report.

The NFNF rose to 4.6 per cent in June from 3.5 per cent in January “indicating demand-driven inflationary pressure in the economy,” the CBK said.

The report covering monetary policy in the first six months of the year shows the banks increased their loans to clients by 20.9 per cent in May and 20.5 per cent in June against the targets of 18.9 and 18.2 per cent, respectively.

However, during the financial year the largest deviation — amounting to 6.1 percentage points — from target was recorded last December when the loans rose by 22.2 per cent. The target was 16.1 per cent year-on-year.

As at the end of last December, private sector credit stood at Sh1.87 trillion but by the end of June it was Sh2.07 trillion — an increase of about Sh200 billion.

READ: Banks defy CBK, load profit margins on cost of loans

The report to Treasury secretary Henry Rotich also outlines the direction of monetary policy this fiscal year. The governor is required by the Central Bank of Kenya Act to make such a report every six months.

The CBK intends to grow credit by between 18.4 and 20.4 per cent during this financial year.

Vimal Parmar, head of research at Nairobi-based financial advisory firm Burbidge Capital, said the CBK still risks inflation rate rising if it consistently lets the credit growth go beyond targets for too long.

“If we go beyond the target too much we will have the threat of inflation. There is no particular optimum level of credit growth, but it is good for the CBK to use interest rate to try and keep within the targets it has set,” said Mr Parmar.

Despite exceeding targets, the CBK report said, most of the credit went to the key sectors of the economy including agriculture and manufacturing.

“The growth in private sector credit in the period was channelled largely towards key sectors of the economy. These sectors include agriculture, manufacturing, trade, transport and communication, finance and insurance, real estate, construction and business services,” said the CBK.