Columnists

Direct bank lending to priority sectors

loan

One of the biggest policy choices we will have to make is how to direct credit to the real sectors. FILE PHOTO | NMG

I picked up the latest bank supervision report by the Central Bank of Kenya and here is what stood out for me.

First, I looked at statistics on sectoral distribution of loan accounts to see which sectors are getting the loans and to figure out whether our banking sector is an engine of development as it is supposed to be.

In the Foreword, the governor of the Central Bank, Patrick Njoroge, makes it clear that the CBK’s overarching ambition and vision is a banking sector that is ‘for Kenya and with Kenyans’.

On page 27 is a table on the sectoral distribution of loan accounts, which shows the following. The tourism sector, one of the leading foreign exchange earners, only gets 2.5 per cent of total credit.

How can our economy grow sustainably when such a key sector continues to be starved of credit?

The allocation of credit to agriculture — the mainstay of the economy — contributing 24 per cent of GDP and 80 per cent of merchandise exports follows the same trend.

According the statistics on loan accounts, agriculture only gets three per cent of total credit. Perversely, the banking system also starves the financial services sector of credit. This sector that contributes seven per cent of GDP only gets three per cent of total credit.

So, which sector hogs the credit from the banking system? The statistics from the CBK show that far too much credit — by number of loan accounts and by value— goes to the category called personal households and consumption that received 24 per cent of total credit, nearly eight times what was lent to agriculture.

Our banking system concentrates on funding consumption.

Clearly, one of the biggest policy choices we will have to make is how to direct credit to the real sectors. In the days of yore, under the regime of the policy of directed credit, we had a policy that stipulated that the banking system was obliged to allocate 17 per cent of total credit to agriculture. Whether it worked or not is a different question.

We dropped the idea because we were coerced by the Washington Consensus to let credit be allocated by the logic of scarcity. But what I read is that South Korea took off, in part, because virtually all bank lending was directed by policy towards the real sector dominated by manufacturing powerhouse — the so called Chabols.

We surely can’t expect to restore the engine of growth when our banking system continues to starve priority sectors of credit.

READ: SMEs battle for survival in late payments crisis

The second thing that stood out for me in the latest version of the supervision report of the Central Bank of Kenya is what the report says about Credit Reference Bureaus.

The statistics show that subscribing banks have requested a total of 19.6 million credit reports since the inception of the programme. But what I found more revealing is the statistics that demand for reports by customers increased by 56 per cent during 2017. The explanation given to the spike of customer-originated credit reports is that it was an election year.

Indeed, individuals seeking political offices were required to produce CRB certification of clearance before being allowed to run for political office. The statistics record a spike in issues of certificate of clearance to 131,000 in 2017.

Clearly, we have reduced credit reference bureaus to vehicles for vetting people who want political office. Yet as we all know, CRBs were not created to vet politicians.

We created them to prove default data, but most importantly, to report on credit history of a customer to be used in pricing of loans. The intention was to have an arrangement whereby good customers would get cheaper loans.

I think the time has come for the Governor of the Central Bank to crack the whip and make banks use credit scores in pricing loans.

If the system was working as planned, we would not be having this noisy and irrelevant debate about interest rate caps.