Partnerships that’ll unlock cash flow and cut bad loans

Central Bank of Kenya
Central Bank of Kenya. FILE PHOTO | NMG 

The economic disruption that has been visited upon Kenyans has shaken many. For the third consecutive month, many Kenyan households will be going without an income to pay rent, much less to service loans.

Lifestyles have been turned upside down and for some it feels a bit like Adam and Eve’s hopeless exit out of a familiar paradise, and into an uncertain world as captured in John Milton’s epic Paradise Lost.

Perhaps the only difference today is the world has the trifecta of government, commercial banks and the private sector which can save the country from its largest ever economic crisis. They will, however, need to collectively and urgently work to promote cash circulation.

Data from the Central Bank of Kenya (CBK) shows that the ratio of non-performing loans rose from 12.5 percent to 13.1 percent, the highest level in nearly 13 years. This has seen banks slow down on lending which could lead to a further reduction in commercial activity and leading to a rise in bad loans.

It is a vicious cycle that if unchecked will leave a trail of collapsed businesses, triggering mass unemployment and the attendant socio-economic costs. A three-pronged economic recovery strategy can pull Kenya out of the grips of recession.


The first step will need to be taken by the government. There is little evidence to suggest that the initial Sh53.7 billion stimulus plan has had a major effect on boosting the economy. The challenge with fiscal stimulus measures around tax cuts is that they often exclude the millions of Kenyans in the informal sector.

Estimates show that the total required stimulus for the Kenyan economy is approximately Sh367 billion. For the next round of stimulus, the CBK should inject around half of this, or approximately Sh200 billion directly into the economy through a monetary stimulus.

The simplest way to conduct such a monetary stimulus would be by crediting the M-Pesa accounts of 20 million working Kenyans with Sh10,000 to jumpstart demand.

The next step of the recovery will need to be implemented by the private sector. They need to create new business models as well as generate new forecasts which could be submitted to financiers for capital injection.

The recovery strategy will be complete when commercial banks fully resume lending to the private sector. Their singular focus of investing in government securities, which are deemed to be risk-free, has ended up creating a challenge.

It has skewed liquidity, leading to a situation in which the banking industry is awash with cash while the real economy is starved of credit.

More profoundly, it has exposed a strange pricing scenario, in which the risk-free interest rate on government securities is higher than the yields in the property market which carries inherent risk.

A deeper engagement between commercial banks and industry associations could help unlock much needed liquidity.

The harmonious execution of this strategy by these three institutions will resolve the cash flow problem and lead to a sharp drop in bad loans.