Kenya manufacturers ask banks to lower interest rates on loans

Local manufacturers have asked banks to boost competitiveness by lowering interest rates on loans following the drastic drop in inflation in the past couple of months.

The capital-intensive manufacturing industry was one of the sectors that defied the surge in interest rates from 15 per cent on average to more than 25 per cent when the Central Bank of Kenya (CBK) tightened fiscal policy to shield the shilling from weakening.

“High interest rates will discourage companies from borrowing for increasing capacity of their businesses”, Kenya Association of Manufacturers (KAM) CEO Betty Maina said in a statement sent to the Business Daily.

Data from CBK, however, indicates that manufacturing sector increased its borrowing under the high interest rates regime, signing loans worth Sh748 billion in the first five months of 2012.

This was a 39.2 per cent increase over the Sh537.2 billion they borrowed in a corresponding period last year.

“In general terms, manufacturers have been borrowing a lot lately to finance their expansion into East Africa and Comesa markets,” Mr Vimal Shah, the managing director of Bidco Oil Refineries, told the Business Daily.

Mr Shah said manufacturers were also being driven to borrow due to Kenya Revenue Authority’s failure to settle Value Added Tax refund claims on time. “High cost of industrial inputs and petroleum products also left most manufacturers with little option but to boost their working capital through bank loans,” he said.

Yesterday, manufacturers pushed for lower interest rates saying inflation, which had peaked to 19.72 per cent by November last year had dropped to 7.74 per cent and the shilling stabilised around 84 against the dollar, from Sh107 in October last year.

Last month, CBK took the initial step towards cheaper credit by lowering its benchmark rate by 150 basis points, from 18 per cent to 16.5 per cent. Most banks are yet to follow suit, causing widespread anger in the market.

Banks have, however, rebuffed blanket condemnation, saying interest rates were a case-by-case issue.

“Our records show that banks that had increased their lending rates following the upward adjustment of CBR have been lowering their rates since last month,” Mr Jacob Oduor, the head of Kenya Bankers Association’s research unit, said.

He said some banks were waiting for their cost of funds to come done before they could reduce their rates.

The search for lower interests has seen calls for specialised sector lenders despite the risk of high credit concentration making such banks unstable.

In its Industrial Business Agenda 2012, KAM called for the creation of a national industrialisation fund to recapitalise institutions that provide finance such as Kenya Industrial Estates and Industrial and Commercial Development Corporation.

Despite the high cost of servicing credit, first quarter figures prepared by Kenya Bureau of Statistics show that manufacturing grew by 3.8 per cent in the first quarter supported by strong expansion in the food manufacturing sub-sector, which grew by 14.4 per cent.