The Kenya Bankers Association (KBA) wants a freeze on further monetary policy tightening by the Central Bank of Kenya (CBK) in the wake of a rise in the stock of bad loans for the fifth straight month to a record Sh635.8 billion as of the end of November.
The apex bank December raised its Central Bank Rate (CBR) from 10.5 percent to 12.5 percent—the highest in 11 years and will be having another meeting next week Tuesday with a cut least likely, especially as the shilling continues to weaken against the dollar.
The banks’ lobby warned that further raises on the key indicative rate would pile pressure on defaults in an environment of elevated interest rates as one of the reasons they want the regulator to not shock the market with another rise.
“We argue for a maintenance of the current stance of monetary policy— in keeping the CBR unchanged, allowing the 200 basis points upward adjustment effected in December 2023 to be fully transmitted in the market and protect the fragile economic activity,” said KBA in a research note.
The KBA had in December asked CBK not to raise the rate, warning of increased loan defaults.
However, the regulator raised the rate, explaining that there was a need to curb inflation and stop the shilling from depreciating. The country’s inflation jumped to 6.6 percent for January, up from 6.4 the previous month—a position that could shape decisions when the CBK monetary policy team meets next Tuesday (February 6).
Latest CBK data shows gross non-performing loans (NPLs)— loans for which no interest or principal has been received for at least three months—have grown for five straight months from Sh576.1 billion in June to Sh635.8 billion at the end of November.
The Sh59.7 billion or 10.4 percent growth in NPLs in the five months came in the period the loan book expanded by 5.3 percent to Sh4.189 trillion, meaning the defaults have been rising at a faster pace than fresh loans.
The rising defaults kept NPLs ratio at 15.2 percent compared with 14.5 percent in June, forcing lenders to increase provisioning for more defaults. At 15.2 percent, the rate of defaults is closer to the 15.4 percent that the sector posted in June 2007.
Increased provisioning for loan defaults has slowed the 11-month pre-tax profit of banks by 5.2 percent to Sh212.1 billion compared with Sh223.7 billion posted in a similar period last year.
CBK’s monetary policy committee raised the CBR on December 5 when the shilling was averaging 153.28 units to the dollar but has since lost 4.9 percent to an average 160.75 units. Inflation has increased from 6.6 percent to 6.9 percent.
KBA expects the committee to consider the inflationary pressure, softening economic activity, rising market interest rates, sustained credit growth, rising NPLs in the banking sector, and protracted vulnerabilities in the external sector in deciding whether to vary the CBR.
The lobby says interbank and lending interest rates continue to rise, reflecting the policy signal communicated in the December decision. For instance, the average interbank rate rose from 10.5 percent on December 4 to 13.7 percent on January 26, indicating tight liquidity conditions.
