Njoroge says banks expect lending rates to fall further

Bankers expect lending rates to fall further in coming months, a forecast that looks set slow down bank borrowing further.

Central Bank of Kenya Governor (CBK) Patrick Njoroge said top banks expect low lending rates in coming months under the law regulating interest rates.

“Banks we have surveyed actually see the lending rates continue to fall,” said Dr Njoroge, a day after the central bank held its benchmark lending rate at 10.0 per cent.

Banks had indicated that introduction of interest caps would force them to be more stringent in their lending in what has locked out those perceived to be risky borrowers.

Treasury data indicate that lending to businesses and homes grew just 4.8 per cent in the year to September, down from 20.6 per cent in similar period last year—making it the slowest growth more than a decade.

A law that came into effect in mid-September capped commercial loan rates at 400 basis points above the benchmark rate.

Banks strongly opposed the law, saying they needed high interest income to offset the risks of lending.

“If the interest rate is capped, then borrowers who have a higher risk profile will be pushed out from banks to unregulated lenders such as shylocks,” Kenya Bankers Association chief executive Habil Olaka had warned before signing of the B ill. The 4.8 per cent credit increase is below what the central bank says is ideal loan growth of 12 to 15 percent.

Banks lent Sh103 billion less to the private sector this year than in 2015, prompting the Treasury to cut next year’s growth forecast.

READ: Private sector borrowing slows down to 10-year low as rate cap law bites

The credit growth is slower than that recorded in 2007/2008 tumultuous election period which recorded a low of 7.5 per cent. “The reason for the slowdown is structural in banks and not a monetary policy issue,” said Dr Njoroge.

“We see the 4.6 per cent rate of expansion as at September as the bottoming out of the slowdown that has persisted since last December.”

Equity Bank, CFC and NIC reported contractions of their loan books despite high liquidity ratios. 

Contraction of credit to a number of sectors indicates their loans repaid were more than the amount borrowed, prompting the Treasury to revise growth forecast downwards.

Lending to business services shrunk by Sh29 billion compared to a growth of Sh25 billion last year while loans classified under trade contracted by Sh21 billion against an expansion of Sh82 billion last September. Credit to mining and quarrying shrunk by Sh10 billion.

Private households, consumer durables and manufacturing sectors recorded a slowdown in credit uptake compared to the same period in 2015 leaving only finance, real estate and transport as the sectors taking up credit at a faster pace.

“We have moderated our growth (forecast) in 2017 to slightly over 6 percent. Before we were very optimistic it would get to 6.5 per cent,” Geoffrey Mwau, the director general of fiscal and economic affairs, told Reuters.