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

Private sector borrowing has slowed down to its lowest point in more than a decade as banks become reluctant to lend under the law regulating interest rates.

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 a similar period last year.

The deep contraction in credit in the September data followed a cap on commercial lending rates imposed by the government in the same month, a move that is expected to further shrink credit levels.

The 4.8 per cent credit increase is below what the central bank says is ideal loan growth of 12 per cent to 15 per cent.

Banks lent Sh103 billion less to the private sector this year than in 2015, prompting the Treasury to cut next year’s growth forecast. The credit growth is slower than that recorded in 2007/2008 tumultuous election period, which recorded a low of 7.5 per cent.

“Domestic credit slowed to an annual growth of Sh66.4 billion (2.4 per cent) in the year to September 2016 compared with a growth of Sh526.0 billion (23.3 per cent) in September 2015,” said the National Treasury in its Budget Policy Statement.

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.

Lending in September — when the interest caps were effective — increased at a slower pace than August’s 5.4 per cent.

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Some of the lenders have reported a dip in loan books for the three months between June and September. Equity Bank, CFC and NIC reported contractions of their loan books despite high liquidity ratios. 

“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 Bill.

Central bank had raised the red flag over the slow growth in credit as it means the private sector is deprived of finances to fund 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. 

“A contraction in credit flows was experienced in the trade, mining and business services sectors,” said the Treasury. Contraction of credit to a number of  sectors indicates their loans repaid were more than the amount borrowed.

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 six per cent. Before we were very optimistic it would get to 6.5 percent,” Geoffrey Mwau, the director general of fiscal and economic affairs, told Reuters.