Markets

Businesses cut credit uptake as rate cap uncertainty bites

cash

Shrinkage of trade loans indicates total loans repaid were more than the amount borrowed. PHOTO | FILE

Summary

  • Credit to the productive sector expanded by only 5.4 per cent in August compared to 21 per cent in a similar month last year.
  • Bankers have attributed the slow uptake to a wait-and-see approach taken by traders during debate on regulation of interest rates.

Businesses reduced their borrowing from banks by Sh103 billion in August following passage of a law regulating interest rates.

Latest data from the Central Bank of Kenya (CBK) shows a drop in amount of cash lent to business services, trade and manufacturing, with credit to the private sector growing at the slowest rate in over a decade.

Credit to the productive sector expanded by only 5.4 per cent in August compared to 21 per cent in a similar month last year.

Lending to the trade sector recorded the largest drop of Sh53.4 billion to Sh348.5 billion while loans classified under business services shrunk to Sh170.8 billion from Sh200 billion in July. Credit to manufacturers shrunk to Sh279.9 billion from previous Sh301 billion.

Bankers have attributed the slow uptake to a wait-and-see approach taken by traders during debate on regulation of interest rates.

“The debate on capping of interest rates started late last year and the public took a wait and see approach” said Equity Bank chief executive James Mwangi during an investor briefing.

Initially banks had said they will pass on the benefits of the reduced rate to new borrowers only, making it economically sensible to clear outstanding debts and apply for fresh loan so as to benefit under the new law.

Shrinkage of trade loans indicates total loans repaid were more than the amount borrowed.

The 5.4 per cent credit growth was attributable to new borrowing in real estate, finance and insurance sector and household consumption. Total loans increased by Sh2 billion to Sh2.26 trillion from Sh2.258 trillion.

READ: SIB tells lenders to ease loan terms on interest rate caps

Households borrowed an additional Sh8.2 billion to increase their portfolio to Sh374.6 billion, making consumption the key reason for borrowing in the country, overtaking trade.

Trade has been the largest borrowing sector of the economy, but has now been overtaken by households, which have been growing in number and average size of debt.

The CBK had raised the red flag over the slow growth in credit as it means the private sector is deprived of finances to fund their expansion plans.

Persistent high interest rates had been cited as a major hindrance to new borrowing and a contributor to piling up of bad loans.

The government hopes recent capping of interest rates will reignite borrowing and fan economic growth.

Total volumes issued by banks have remained stagnant at Sh2.2 trillion since late last year with bad loans quickly rising to a decade high of Sh176 billion, 8.4 per cent of the loan book.

Commercial banks have turned to lending to the government which is offering lucrative returns with minimal risk of default.